Trade openness and the changing water polluting intensity patterns of ‘dirty’ and ‘clean’ industrial sectors

Abstract

This study analyzes the economic activity–BOD (Biochemical Oxygen Demand) relationships of the so-called ‘dirty’ and ‘clean’ water polluting industries, during the period of 1995–2005. The results indicate that the economic activity–environment trade-off of ‘dirty’ and ‘clean’ industrial sectors has been altered during the period of study. On average, pollution-intensive ‘dirty’ industries in the poorer nations were found to benefit – in terms of BOD emissions – from extra exports and openness to trade. The opposite was true for ‘clean’ sectors where increased trade openness seems to have contributed to a wider gap between poorer and richer nations' pollution intensities. With openness to trade skewing innovations away from the ‘clean’ industries – industrial sectors in which the poorer countries specialize – the classical model of opening the economy and lifting barriers to technology adoption will not be enough to improve the poorer nations' water quality. Policies that induce innovation by reducing the cost and increasing the return on innovation, particularly on R&D activities in which the poorer countries have a comparative advantage, will be necessary in order to improve their economic activity–environment relationship.