🤑 New research: Freer economies grew without harming the environment

• A study of 49 economic liberalizations shows that GDP per person rose 16 percent within ten years.
• Total greenhouse gas emissions did not increase, and deaths from air pollution declined.
• After the year 2000, emissions fell both per person and per dollar of economic output.

Growth without environmental decline

Economists Vincent Geloso, Justin Callais, and Alicia Plemmons examined what happens to the environment when countries make their economies freer. The results are published in the journal Structural Change and Economic Dynamics.

The researchers studied 49 cases of large-scale liberalization between 1970 and 2015. By liberalization they mean policies that promote international trade, strengthen property rights, and reduce the tax and regulatory burden. To identify the countries, the researchers used large upward jumps in an index of economic freedom.

The countries that liberalized were compared with similar countries that did not. GDP per person rose 16 percent within ten years among the liberalizers. At the same time, the environment did not deteriorate.

Lower emissions and fewer deaths

Deaths from air pollution declined after the reforms. Total greenhouse gas emissions were not affected by liberalization. Emissions per dollar of economic output fell clearly and consistently.

Countries that liberalized after the year 2000 also showed lower emissions both per person and per dollar. The increase in total emissions appeared only in the period before 2000. After 2000, no such effect was seen.

The results held across two methods

The researchers used two methods. The first compares liberalizers with non-liberalizers. The second builds a constructed comparison country for the three largest liberalizers: Hungary, Peru, and the United Kingdom. Both methods produced the same pattern. The liberalizations either had no effect on carbon dioxide emissions or reduced them.

The researchers also examined the country that moved in the opposite direction during the period, Venezuela. There, emissions per dollar of economic output rose clearly, and no other environmental measures improved.

The explanation lies in the incentives

Behind the results are several forces that counteract the tendency for more economic activity to mean more emissions. As countries grow, they shift from industry to services, which produce lower emissions. Growth also requires firms to use less energy and fewer resources to create more value. And as people become better off, they are willing to pay more for a clean environment.

Secure property rights and open markets lead firms to take responsibility for the pollution they cause. Those who are harmed can seek compensation, which pressures firms to change in advance. Open markets also let prices show how scarce resources are, which drives frugality and new solutions.

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