Racing to the Bottom?Foreign Investment and Air Pollutionin Developing CountriesDavid Wheeler*Development Research GroupWorld Bank* The author is Lead Economist in the Infrastructure/Environment Team of theDevelopment Research Group. Many thanks to Ashoka Mody for useful commentson a previous draft of this paper.AbstractCritics of free trade have raised the specter of a "race to the bottom," in whichenvironmental standards collapse because polluters threaten to relocate to "pollutionhavens" in the developing world. Proponents of this view advocate high, globally-uniform standards, enforced by punitive trade measures that neutralize the cost advantageof would-be pollution havens. To test the race-to-the-bottom model, this paper analyzesrecent air quality trends in the United States and the three largest recipients of foreigninvestment in the developing world, China, Brazil and Mexico. The evidence clearlycontradicts the model's central prediction: The most dangerous form of air pollution hasactually declined in major cities of all four countries during the era of globalization.Citing recent research, the paper argues that the race-to-the-bottom model is flawedbecause its basic assumptions misrepresent the political economy of pollution control indeveloping countries1Racing to the Bottom?Foreign Investment and Air Pollution in Developing Countries1. IntroductionCould globalization trigger an environmental "race to the bottom," in whichcompetition for investment and jobs relentlessly degrades environmental standards?Since billions of people subsist on less than two dollars a day, it would be cavalier todismiss this threat lightly. Indeed, the race-to-the-bottom model provokes widespreadconcern because its underlying assumptions have an air of plausibility.1 In the race-to-the-bottom world, decent environmental standards impose high costs on polluters in high-income economies. To remain competitive, these firms relocate to low-income countrieswhose people are desperate for jobs and income. Local governments ignore regulation topromote investment and economic growth, allowing businesses to minimize costs bypolluting with impunity. Driven by shareholders to maximize profits, international firmsfollow suit. Rising capital outflows force governments in high-income countries to begin 1 Daly (2000) has recently provided a forceful statement of the race-to-the-bottom model. In the US,political opponents of NAFTA and the WTO frequently invoke elements of the model. For example,Congressman David Bonior has recently offered the following critique of the WTO: ".... many of theworld's political and economic leaders have adopted our ways of discussing the global economy. They'rewarning against 'a race to the bottom.' They calling for 'putting a human face on the global economy.' Andthey say they're supporting labor and environmental standards in trade agreements .... Make no mistakeabout what is at stake in the deliberations and decisions of the WTO. ... The WTO, as currently structured,threatens to undo internationally everything we have achieved nationally - every environmental protection,every consumer safeguard, every labor victory." (Bonior, 1999) In a similar vein, the Nader-for-President campaign has offered this statement on Trade andEnvironment at its Website (http://www.votenader.com/issues/environment.html): "Among the most fetidexamples of political cowardice and collusion between elected representatives and big business of the pastthirty-five years are the passage of the North American Free Trade Agreement (NAFTA) and the revisedGeneral Agreement on Tariffs and Trade (GATT) into federal law. These agreements have little to do withthe benefits of trade for citizens of member countries. The agreements were designed, largely by corporatelobbyists, as a "pull-down" mechanism and to facilitate the movement of capital across national boundaries.Such one-dimensional monetized logic tramples long-standing efforts around the world–some verysuccessful–to protect the environment because environmental safeguards are very often considered 'non-tariff barriers to trade' and thus become targets for removal. Five years of WTO operation have made clearwhat a grave threat the trade organization is to the world environment."2relaxing environmental standards, but this proves fruitless because the poorest countrieshave no environmental standards at all. As the ensuing "race to the bottom" accelerates,all countries converge to the hellish pollution levels that afflict the poorest.Proponents of this catastrophe model have a straightforward preventiverecommendation: High, globally-uniform environmental standards and, for countries thatare unwilling or unable to enforce them, tariffs or other restrictions on imports of theirpollution-intensive products that neutralize their cost advantage as pollution havens.Proponents of free trade naturally view these prescriptions as anathema, arguing that theirmain impact would be denial of jobs and income to the world's poorest people.2. A Simple Test of the Race-to-the-Bottom ModelIf the race-to-the-bottom model is correct, then globalization will ultimately provokea strong backlash in high-income countries as business relocation threatens jobs, wagesand environmental standards. Fortunately, the potential for this reversal is easy to gaugebecause the simple structure of the race-to-the-bottom model yields an equally simple,robust prediction: After decades of increasing capital mobility and economicliberalization, the race to the bottom should be underway and pollution should beincreasing everywhere. It should be rising in poor countries because they are pollutionhavens, and in high-income economies because they are relaxing standards to remaincost-competitive. Trends in available pollution data provide a reasonable basis for testingthese propositions.Climatic and economic factors cause pollution to vary considerably from year toyear, so trend analysis requires an extended series of monitoring data. For comparison ofenvironmental conditions in large urban regions, air pollution measures are generally3more reliable and comparable than water pollution data. Among widely-measured airpollutants, the international health community currently believes the most damaging to besuspended particulate matter (dust). Numerous health studies in low- and high-incomecountries have associated high concentrations of suspended particulates with
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