Economic Complexity and the Environment: Evidence from Brazil

Abstract

Brazil is a heterogenous country with respect to, among others, economic complexity, economic development and environmental quality. This paper examines the relationship between economic complexity and key environmental variables in Brazil. We deviate from the Environmental Kuznets Curve (EKC) literature by focusing on economic complexity instead of economic development alone to explain cross-section and time-series variation in a range of environmental variables. Our motivation for considering economic complexity as a main explanatory variable lies on the consideration that low economic complexity is associated to products which are peripheral on the product space. These are products which are less connected to other products, limiting the opportunities for other economic activities, and therefore limiting the impact on the environment. As economic complexity increases more opportunities are created, the product space becomes denser, and pollution increases. However, at a high enough level of economic complexity, the structural changes bring knowledge-intensive industries, which demands higher-skilled labour force and wider skills of occupations. At this point, economic complexity is associated to decreasing environmental degradation. Using panel data for Brazil we find that waste generation decreases, but forest fires increase with rising complexity. Complexity is not associated to more deforestation or air pollution.