One of the primary reasons that economic freedom has a positive correlation with other important human and societal quality metrics is because economically free countries have higher levels of per capita income. Citing a literature review of the role economic freedom has had on wealth, the Fraser Institute’s report emphasizes that, “Virtually without exception, these studies have found that countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and a more rapid reduction in poverty rates.”
More wealth provides more resources to devote to environmental protection. Greater levels of prosperity mean people will place a higher priority on environmental protection because they can afford to do so after more immediate needs (energy, food, drinking water) are met. Higher levels of income are imperative to better environmental outcomes for many reasons. Richer countries have more funds to invest in public services such as sanitation and garbage collection. There is a greater imperative to regulate and spend on pollution abatement to internalize the social costs.
More wealth provides more resources to devote to environmental protection. Greater levels of prosperity mean people will place a higher priority on environmental protection because they can afford to do so after more immediate needs (energy, food, drinking water) are met.
As Yale’s report emphasizes, “wealth, which enables investments in environmental protection, leads to higher EPI scores by allowing countries to upgrade environment-related infrastructure and adopt better pollution-control technologies.”
The report goes on to say:
A consistent finding across Environmental Performance Index reports and other environmental analyses is that wealthy democracies rise to the top of rankings. The 2022 EPI results reflect this pattern. Countries that perform well have demonstrated a commitment to all areas of sustainability, supporting policy goals with strong regulations and financial investments that lead to real-world gains in environmental performance.
The visual depiction of wealth’s positive impact on the environment is the environmental Kuznets curve (EKC). The EKC is an inverted-U relationship between both pollution and economic development where growth from industrialization initially results in higher levels of pollution. Over time, however, that wealth means more resources are available for environmental protection. Through policies, accumulation of knowledge and technological progress, public and private sectors reduce unwanted environmental byproducts and internalize the external costs of pollution.
Environmental Kuznets Curve
The environmental Kuznets curve (EKC) is a hypothesized relationship between various indicators of environmental degradation and per capita income.
Greater wealth and free economies contribute to environmental progress in other meaningful ways. Societies gather more knowledge, which helps gain a better understanding of risks and costs that pollution and environmental threats cause as well as a better understanding of the trade-offs that must be made.
More wealth spurs investment in cleaner, more efficient processes and products. Innovation and economic growth beget more innovation, technological progress, and growth.
In addition, more wealth spurs investment in cleaner, more efficient processes and products. Innovation and economic growth beget more innovation, technological progress, and growth. A cousin of the EKC, called the environmental transition curve, emphasizes the role of technological improvements in bending pollution curves backward.
While technological advancements drive gross domestic product, studies have shown two-way causality. For example, a March 2022 study in Sustainability:
[S]howed that an increase in technological innovation indicators (such as spending on education, number of patents for residents and non-residents, R&D expenditures, number of researchers in R&D, hightech exports, and scientific and technical research papers.) leads to an increase in economic growth in the short term and the long-run with a long-run and two-way causal relationship between technological innovation and GDP, and short-run causation spanning from technological innovation to GDP.
The study also concluded that technological innovation has a direct impact on the sustainability of a country’s economic growth, which is why it is crucial to adopt strong policies that encourage international investors to allocate capital for development in developing countries and thus encourage more research and development.
Peer reviewed literature has demonstrated the EKC exists for several ecological variables. The moment when the inverted U in the Kuznets curve starts bending downward depends on many factors and does not uniformly apply to all emissions or to all countries. With respect to the EKC and greenhouse gas emissions reductions, a 2020 Research of Industrial Economies paper found encouraging results. The paper combines emissions growth, GDP per capita and rankings on the Fraser Institute’s Economic Freedom of the World Index to find that “available data from 155 countries observed in five-year periods between 1975 and 2015 indicate that economic freedom not only reduces overall CO2 emissions but also shifts the top point of the EKC to the left. As such, the evidence suggests that the transition to lower emissions technology appears at an earlier stage in economically free societies.”
Arguably the most effective way to bend emissions curves is to make the price of cleaner resources and technologies, also known as the green premium, less expensive.
The latter point is especially important. Arguably the most effective way to bend emissions curves is to make the price of cleaner resources and technologies, also known as the green premium, less expensive. That could be cleaner-burning natural gas (as America’s shale revolution has demonstrated), rapidly declining prices for solar panels, cheaper batteries, or an innovative, less polluting new manufacturing process. If greener industrialization is more cost-effective, developing countries will have the economic incentive to pursue those technologies as opposed to their higher-emitting counterparts.
- James Gwartney, Robert Lawson, Joshua Hall, and Ryan Murphy, 2022 Economic Freedom of the World: 2022 Annual Report. Fraser Institute. https://www.fraserinstitute.org/sites/default/files/economic-freedom-of-the-world-2022.pdf. The literature review Fraser’s Index cites is: Joshua Hall and Robert Lawson (2014). Economic Freedom of the World: An Accounting of the Literature, Contemporary Economic Policy 32, 1: 1–19. ; and Robert Lawson, Economic Freedom in the Literature: What Is It Good (Bad) For?, pp. 187–200 in this edition.[↩]
- Wolf, M. J., Emerson, J. W., Esty, D. C., de Sherbinin, A., Wendling, Z. A., et al. 2022 Environmental Performance Index. New Haven, CT: Yale Center for Environmental Law & Policy, https://epi.yale.edu/epi-results/2022/component/epi[↩]
- Originally, Kuznets examined the relationship between GDP and income inequality. See, Bruce Yandle, Maya Vijayaraghavan, and Madhusudan Bhattarai, “The Environmental Kuznets Curve: A Primer,” The Property and Environment Research Center, May 2002, https://www.perc.org/wp-content/uploads/2018/05/environmental-kuznets-curve-primer.pdf.[↩]
- Indur M. Goklany, Affluence, Technology, and Well-Being, 53 Case W. Rsrv. L. Rev. 369, 2002, https://scholarlycommons.law.case.edu/caselrev/vol53/iss2/9[↩]
- Maha Mohamed, Alsebai Mohamed, Pingfeng Liu and Guihua Nie, “Causality between Technological Innovation and Economic Growth: Evidence from the Economies of Developing Countries,” Sustainability, 2022, https://www.mdpi.com/2071-1050/14/6/3586/htm[↩]
- For instance, see: Recep Ulucak and Faik Bilgili, “A reinvestigation of EKC model by ecological footprint measurement for high, middle and low income countries,” Journal of Cleaner Production, Vol. 188, pp. 144-157, July 1, 2018, https://www.sciencedirect.com/science/article/abs/pii/S095965261830862X[↩]
- Bjørnskov, Christian (2020) : Economic Freedom and the CO2 Kuznets Curve, IFN Working Paper, No. 1331, Research Institute of Industrial Economics (IFN), Stockholm, https://www.econstor.eu/bitstream/10419/240474/1/wp1331.pdf[↩]