Capitalism, Democracy and Environmental Quality

July 31, 2012

Free Market Foundation

Both capitalism and democracy improve a society’s quality of life, measured by such things as infant mortality and literacy. Suppose, however, that beyond improving the basic conditions of human life, the most important goal is to improve environmental quality. In that case, asks Michael D. Stroup, professor of economics at Stephen F. Austin State University and a senior fellow with the National Center for Policy Analysis, which should be more strongly encouraged in other countries: capitalism or democracy?

Data on members of the Organization for Economic Cooperation and Development (OECD), a group of developed countries, shows that additional income, or gross domestic product (GDP), is linked to lower emissions. Over the period 1985 to 1995:

A 10 per cent increase in per capita income reduced daily sulphur oxides emissions per billion dollars of GDP by 7 metric tons.

The income increase reduced nitrous oxide emissions per billion dollars of GDP by 2.2 metric tons.

The higher income also reduced discharges of organic water pollutants by 464 kilograms.

The Fraser Institute’s economic freedom index and Freedom House’s political rights index can each be used to evaluate the relative impacts on environmental quality from increases in economic freedom and political rights. Using the OECD data on emissions of pollutants in the same analysis as above reveals the impact of an increase in democracy when holding economic freedom constant:

A one-unit increase in the democracy index reduces sulphur oxides emissions per billion dollars of GDP by 42 metric tons per day.

The same increase in democracy reduces discharges of organic water pollutants per billion dollars of GDP by 21 kilograms daily.

However, a one-unit increase in democracy increases nitrous oxide emissions per billion dollars of GDP by 28 metric tons.

By contrast, holding political freedom constant reveals that increased capitalism reduces all three types of pollutants:

A one-unit increase in the economic freedom index reduces nitrous oxide emissions per billion dollars of GDP by 162 metric tons per day.

The increase in economic freedom reduces discharges of organic water pollutants per billion dollars of GDP by 154 kilograms daily.

It also reduces sulfur oxides by 131 metric tons.

Developing countries with limited natural and institutional resources can improve air and water quality more efficiently by increasing the amount of economic freedom in society rather than by expanding democratic control over collective resource allocations, says Stroup.

Source: Michael D. Stroup, Capitalism, Democracy and Environmental Quality, National Center for Policy Analysis, September 2, 2010.

For text: http://www.ncpa.org/pub/ba721

For more on Environment Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=31

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 07 September 2010