Chapter 28. Economic Growth and the Environment: A Review of Theory and Empirics

The relationship between economic growth and the environment is, and will always remain, controversial. Some see the emergence of new pollution problems, the lack of success in dealing with global warming and the still rising population in the Third World as proof positive that humans are a short-sighted and rapacious species. Others however see the glass as half full. They note the tremendous progress made in providing urban sanitation, improvements in air quality in major cities and marvel at the continuing improvements in the human condition made possible by technological advance. The first group focuses on the remaining and often serious environmental problems of the day; the second on the long, but sometimes erratic, history of improvement in living standards. These views are not necessarily inconsistent and growth theory offers us the tools needed to explore the link between environmental problems of today and the likelihood of their improvement tomorrow. This review articles discusses and evaluates the theoretical literature linking environmental quality to economic growth. We focus on three questions. These are: (1) what is the relationship between economic growth and the environment? (2) how can we escape the limits to growth imposed by environmental constraints? and (3) where should future research focus its efforts? For the most part, we discuss the link between industrial pollution and growth, but also show how this most recent work is related to earlier contributions on exhaustible resources and growth. While no review can settle the perennial debate over the limits to growth, this review moves the literature forward by identifying important unresolved theoretical questions, reports on the results of recent empirical work, and provides an integrative assessment of where we stand today.