[Market Economy Guide] Environmental Kuznets Curve

“When the economy and incomes grow beyond a certain level,

both income inequality and environmental pollution decline.”

Simon Kuznets was born in Ukraine. In his twenties, he moved to the United States and studied economics at Columbia University. He became well known for his vast body of research, leaving behind more than 200 papers and books while serving as a researcher at the National Bureau of Economic Research and as a professor at Harvard University.

Developing countries have greater income inequality

Kuznets liked to understand economic phenomena from a historical perspective. He approached economic growth, rising incomes, and the resulting social changes over a fairly long time horizon. The “Kuznets cycle,” which showed that economic growth rates move in cycles of 15 to 20 years, is a prime example. Business conditions rise and fall repeatedly in a regular pattern, and Kuznets derived the “Kuznets cycle” by focusing on the impact of construction cycles on the overall economy. By showing how economics can be used to read changes in social structure, Kuznets won the Nobel Prize in Economics in 1971.

Beyond the Kuznets cycle, his name appears throughout economics textbooks today. The “Kuznets curve,” also named after him, is one such example. The Kuznets curve is a theory that traces how the degree of income disparity has changed according to the stages of economic development in advanced countries. In the early stages of economic growth, income gaps widen in every country. But once the economy grows beyond a certain level, income inequality gradually improves. When this is shown on a graph with the degree of economic growth on the horizontal axis and the degree of income inequality on the vertical axis, it takes the shape of an inverted U.

The Kuznets curve was later developed into a formal theory through empirical verification by many scholars. In particular, World Bank economist Ahluwalia is well known for testing the Kuznets curve through multiple regression analysis based on economic statistics from 62 countries. According to Ahluwalia’s findings, income inequality is greater in developing countries than in advanced countries, and among developing countries, middle-income countries are more unequal than low-income countries.

Environmental pollution in the early stages of industrialization

The idea behind the Kuznets curve can also be applied directly to the environment. This is called the “environmental Kuznets curve.” As the name suggests, it is the environmental version of the Kuznets curve.

The core of the Kuznets curve is that the relationship between economic growth and income disparity is proportional in the early stages of growth, but after a certain amount of time it becomes inversely proportional. The relationship between economic growth and environmental pollution, it is argued, is similar. In the early stages of economic growth, environmental pollution worsens, but once economic development surpasses a certain level, pollution actually declines and the environment becomes cleaner.

The environmental Kuznets curve is also fairly intuitive. Before industrialization, wastewater would have been generated through farming and livestock raising, and forests would have been damaged to secure firewood. Once industrialization begins, a variety of pollutants are emitted mainly from factories and power plants. Population also grows, and the larger population concentrates in cities where jobs are available. In this process, people come to feel the seriousness of environmental pollution in their daily lives. It is the familiar process of industrialization and urbanization. Then, once income surpasses a certain level, the environment becomes cleaner. This is because the accumulation of capital that comes with economic development leads to investment in environmental preservation and improvement. Environmental technologies improve, and public interest in the environment rises.

The more the economy develops, the more environmental investment increases

When these changes are drawn as an environmental Kuznets curve, the result is an inverted U-shaped graph with the degree of economic growth on the horizontal axis and the degree of environmental pollution on the vertical axis. It is the same form as the original Kuznets curve. The development of environmental science, the rise in public environmental awareness, and the growth of wealth that supports them bring about this change.

The water of Germany’s Rhine River is cleaner than that of Egypt’s Nile River, and the air in New York is cleaner than the air in Kabul, Afghanistan. The Taehwa River in Ulsan, once called Korea’s version of a river of death, has now regained first-grade water quality and has become clean enough to host a nationwide swimming competition every year. These are changes that cannot be explained by the claims of some environmentalists that the more highly industrialized an advanced industrial country is, the worse its environment becomes and the more severe environmental diseases are. The environmental Kuznets curve offers us a new insight into the relationship between economic development and the environment.

■ Please remember

The water of Germany’s Rhine River is cleaner than that of Egypt’s Nile River, and the air in New York is cleaner than the air in Kabul, Afghanistan. The Taehwa River in Ulsan, once called Korea’s version of a river of death, has now regained first-grade water quality and has become clean enough to host a nationwide swimming competition every year. These are changes that cannot be explained by the claims of some environmentalists that the more highly industrialized an advanced industrial country is, the worse its environment becomes and the more severe environmental diseases are. The environmental Kuznets curve offers us a new insight into the relationship between economic development and the environment.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 환경 쿠즈네츠 곡선

Author: Sung-no Choi

Date: 2019-03-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=14&idx=20060