Balancing Development and the Environment

HKUST IEMS Working Papers No. 2017-43

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Guojun He, Yang Xie, Bing Zhang

When productivity changes, how would an economy re-balance economic production and environmental preservation? We develop a conceptual framework to analyze the question, and predict that a productivity shock can have heterogeneous impacts on environmental quality and income. Exploiting a quasi-experiment provided by the dramatic expansion of China’s national expressway system, we find empirical evidence that is consistent with the model’s predictions: expressway access increases both pollution and GDP in initially poor counties, decreases pollution and GDP in initially rich counties, and decreases pollution while increasing GDP in counties with moderate levels of initial income. These findings cannot be fully explained by alternative theories such as the pollution haven hypothesis and home market effect. 

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