Economic growth, environmental constraints and convergence

This paper aims to model the connection between economic growth and the environment, assuming that developing economies face an environmental constraint that developed economies did not suffer when they started their processes of economic development. Following the model of Lucas (2000), this paper simulates world income dynamics since the year 1800, setting up the parameters such that the model accurately describes the world economy by the year 2020. The original model is enriched by adding an environmental constraint so that follower economies face a declining growth premium after 1970. The model also forecasts income dynamics until the end of the 21st century, which allows testing the effects of the environmental constraint on followers in the future. The simulations predict that convergence to upper-middle and high-income per capita levels will slow down and so will the pace of reduction of across income inequality worldwide. These results suggest that a strategy of “grow first, then clean up”, typically derived from the existence of an environmental Kuznets curve (EKC), is not necessary valid for today developing countries. Instead, the results would suggest the implementation of a policy of “clean up in order to grow”, but growing less.