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Trade, Environment, and Development in Mexico Kevin P. Gallagher Global Development and Environment Institute Tufts University www.ase.tufts.edu/gdae Key Points • Mexico is a perfect laboratory to examine trade, environment, and development nexus • Overall, Mexico’s environment continues to worsen and is adversely affecting it’s economy • Economic integration strategies need to directly incorporate strong environmental provisions Environmental Kuznets Curve 250 - Pollution per capita 200 150 100 50 00 5000 10000 15000 GDP per Capita 20000 25000 Limits of the EKC • Empirical evidence is relatively weak – Limited to criteria air pollutants in developed countries – Turning points much higher than original estimates – Hasn’t held for single country trajectories • Damage leading to turning point could be irreversible or too costly to clean up • Drawing single-country development lessons from cross-sectional evidence is questionable Environmental Kuznets Curve for Mexico? 200 175 Pollution: 1985=100 Soil Erosion (tons) Solid Waste (tons) 150 Water Pollution (mi M3) 125 Air Pollution (tons) 100 75 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Environmental Kuznets Curve for SOx? 2,900,000 2,700,000 SOx Emissions (tons) R2 = 0.4748 2,500,000 2,300,000 2,100,000 1,900,000 1,700,000 1,500,000 4700 4800 4900 5000 5100 5200 GDP per capita ($1985 PPP) 5300 5400 5500 Potential Economic Costs of Waiting for Kuznets in Mexico Economic Costs of Future Environmental Damage due to increases in Criteria Air Pollution in Mexico GDP per capita Turning Point Year Damage Costs to Turning Point ($US billions) $7,500 $10,000 $15,000 2028 2057 2097 (r=.06) (r=.03) 79 105 119 114 194 279 Is Mexico a Pollution Haven? Share of Dirty Industry in National Manufacturing Mexico production employment 1988 1994 1998 30.1% 7.9% 23.1% 6.3% 26.5% 5.9% 17.0% 11.3% 15.1% 11.2% 14.7% 11.2% US production employment Mexican environmental policy has been inadequate • Established key environmental laws and institutions • Spending on environmental policy shrinking • Plant-level environmental inspections declining • “Side-agreement” institutions extremely limited Real Spending on Environmental Protection in Mexico 250.00 200.00 1985=100 150.00 100.00 50.00 0.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Plant-Level Environmental Inspections in Mexico 18000 16000 Number of Inspections 14000 12000 10000 8000 6000 4000 2000 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Implications for Policy • Underscores the need to couple environmental policy (at the national and international level) with economic integration • Strong environmental policy will not necessarily deter foreign investment • Ex-post analyses are important to draw lessons for future trade agreements (US approach to ERs ignores this). Environmental Kuznets Curve • Scale Effects: if pollution per unit of output is constant but the scale of output increases then pollution will increase as well • Composition Effects: if pollution per unit of output remains unchanged but the sectoral composition of the economy shifts toward cleaner or dirtier economic activity • Technique Effects: reductions in pollution per unit of output due to technological change and transfer and/or rising incomes Table 7.1: Pollution Intensity of the Mexican Economy 180 160 1985=100 140 soil erosion solid waste 120 water pollution air pollution 100 80 60 1985 1986 1987 1988 1989 1990 1991 1992 Year 1993 1994 1995 1996 1997 1998