Pollution Haven and Factor Endowment Hypotheses Revisited: Evidence from India

The relationship between trade expansion and environmental protection has been characterised by two extreme viewpoints – promoting trade worsens environmental conditions and higher environmental standards impose an economic cost. Two conflicting hypothesis emerge from the debate. One manifestation of the above-described trade off is the hypothesis that increasing trade may encourage developing countries with weaker environmental protection to specialise in industries that create more pollution. This claim is referred to as the pollution haven hypothesis; the first competing hypothesis. The second hypothesis, the factor endowment hypothesis (FEH), predicts that trade liberalisation will result in trade patterns consistent with the Heckscher-Ohlin-Samuelson (HOS) theory of comparative advantage based on factor endowment differentials. Rich countries are typically well endowed with physical capital. Since capital-intensive goods are often also pollution-intensive, factor-endowment theories of international trade predict that rich countries specialize in polluting goods. However, rich countries might have a higher willingness to pay for environmental quality and thus set higher environmental standards. From the general premise that pollution intensive goods are relatively capital intensive (Antweiler et al 2001 and Cole and Elliott 2001), it is assumed that pollution-intensive industries will relocate production from countries in the relatively labour abundant South to those in the relatively capital abundant North. The manifestation of the PHH, in direct conflict with the FEH, is that dirty industries may relocate from the North to the South, or simply that, dirty industries from the developed world become displaced from the world market by similar industries from developing countries. The present paper aims at contributing to test both the hypotheses (PHH and FEH) for India during 1990s. In addition the paper also tests the same hypotheses for the case of India and EU (15). The input-output method is used and suitably modified to test both the hypotheses. It is clear from the results that import related pollution is much larger than the export related pollution for India. The findings of the present work challenge the pollution haven hypothesis (PHH) arguing that liberalization of trade policy in India has not been associated with pollution intensive industrial development. On the other hand the study supports the factor endowment hypothesis