Environmental Policy and International Competitiveness in a Globalizing World: Challenges for Low-Income Countries in the UNECE Region

This paper addresses a set of conflicting national objectives, that between economic competitiveness and environmental quality. In lower-income economies, the perceived benefits of improved environmental quality may be valued less than in richer economies while the perceived opportunity costs of abatement or compliance may be valued higher especially when they impact employment levels or result in lower wages and profits. There is also the fear that more stringent standards might negatively impact foreign investment as multinationals seek out locations where operating costs are low. As such, these countries are therefore quite concerned about mandating environmental regulations that could impose significant costs on their enterprises and thereby reduce their global competitiveness. In addition there is a free rider problem regarding transboundary pollution as a country can benefit from the higher environmental standards negotiated amongst its neighbours while avoiding all the costs by deciding not to participate themselves. This paper examines environmental policy in the former transition economies. In these countries environmental institutions, especially the government ministries, are weak, regulations are often inadequate, and enforcement efforts need to be improved. At the same time these economies attach a high priority to increasing living standards and view that this can only be achieved by increasing their global competitiveness in a number of non-traditional industries. Nevertheless it is argued that high environmental standards are only a minor factor in determining cost competitiveness for most industries and locational decisions for multinationals. Even to the degree that they might be a competitive disadvantage in the short-run, they can actually turn out to be an advantage in the longer-term as they promote technological upgrading, the efficient use of resources, and can reduce adjustment costs involved with future trade policy initiatives or integration into production-sharing networks. In addition there are other benefits external to the firm including improved public health, increased tourism and additional recreational resources. Furthermore, the costs of undoing degradation, which will be desired at some future date as national incomes rise, can be avoided altogether. Thus in essence, when these dynamic factors are combined with the social benefits, the real costs of setting high environmental standards are much less than what their current costs might suggest.