Racing to the bottom?: foreign investment and air quality in developing countries

This article looks at whether globalisation could trigger an environmental "race to the bottom", in which competition for investment and jobs relentlessly degrade environmental standards. The "race to the bottom" theory is tested by examining firstly, air quality data in industrialised countries and selected developing countries (China, Mexico, Brazil). Secondly, data on foreign investment into the developing countries is noted.

The main findings of the report are:

• There is no environmental "race to the bottom" as, communities in developing countries are neither passive agents nor focused exclusively on material gain. Empowered with good information about the benefits and costs of environmental protection, they will act to protect their own interests.
• The theory is also flawed given that consumers and investors assign significant value to environmental performance and, if they are well informed, their market decisions will provide powerful incentives to reduce pollution.
• While this is positive in the long-run, adjustment to a cleaner world is not likely to be smooth. Countries whose economic policies induce a rapid expansion of income and employment may also experience severe environmental damage unless direct measures are taken.
• The basic assumptions of the race-to-the-bottom model are contradicted by a large body of empirical research. Abandoning this theory, however, does not imply that poor countries must resign themselves to bad environmental quality for an extensive period.

Recommendations on how environmental quality can by improved in the era of globalisation:

• Sustained support for programmes that provide public, easily-accessible information about polluters, pollution damages, local environmental quality and the cost of pollution abatement.
• Sustained support for development of stronger regulatory institutions and cost-effective measures to reduce pollution.
• Rejection of trade and aid sanctions as levers to force closure of the regulatory gap between low- and high-income countries.
• Willingness by the World Bank, the IMF and other institutions to take explicit account of environmental risks in the design and implementation of adjustment operations and other economic reform programmes.

[adapted from author]