Internal trade and environmental policy effectiveness in developing countries: A binary endogenous growth model with regional Heterogeneity

Abstract

The shift of environmental pollution from developed to developing countries is largely induced by global labor and trade trends. Unlike their developed counterparts, developing countries face more pronounced regional disparities in social development within the realm of environmental governance. This paper proposes a binary endogenous model to assess the implications of environmental policies on such developing nations with sizable regional disparities. The model enhances the precision in simulating real-world ramifications of environmental policy implementation. It reveals that the 'pollution haven' effect extends beyond just the relocation of pollutant-generating industries to less developed regions; it also leads to the shipment of products fabricated using environmentally-degrading processes from less developed to developed regions, thereby undermining environmental regulation. Furthermore, the model's results were juxtaposed with China's increasingly stringent national environmental protection policy, adopted since 2000. The study confirms that environmental degradation has a substantial spatial spillover effect positively correlated with internal trade volume. The paper's conclusions assist in offering a new evaluative framework for the ensuing examination of environmental policy practicality in developing countries. It also recommends policy-making tools for enhancing the effectiveness of environmental regulations in these regions, such as limiting internal trade of polluting products alongside environmental levies and subsidies.