Accumulation of Capital for Pollution Abatement and Immiserizing Growth—A Theoretical Result for Developing Economies

Abstract

Concerns for the environment in an economy have received articulated attention by economic analysts in recent years, who point to the various forms of externalities that pollution or environmental degradation of any form emits either through consumption or through production. These externalities have opened up the cases for different forms of domestic distortions and the trade interventions and environmental interventions reflecting alternative forms of lobbying by the interested group, and the scope for devising an optimum framework for resolving such conflicts. In an open economy, when growth is driven by factor accumulation, the economy gains by way of expansion of domestic income at constant terms of trade (TOT), but the post-growth equilibrium international TOT may go against the growing nation if its growth is concentrated heavily in its exportable sector (ultra-export-biased growth), and the level of national welfare of the growing economy in the post-growth scenario may turn out to be less than its pre-growth scenario, if the loss in TOT is stronger than the income gains due to growth for such an economy. This is the phenomenon of immiserizing growth. In this chapter, we shall use a two-sector general equilibrium framework for an open economy with environmental pollution acting as an externality to examine the conditions of immiserizing growth in developing countries under two situations: (1) domestic capital accumulation for pollution abatement purposes and (2) foreign capital accumulation for pollution abatement purposes.