Environmental policies and mergers' externalities.

Extract

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Environmental policies and mergers' externalities.

Introduction

Greenhouse effect, acid rain, and the change in the temperature of the oceans are only a few adverse consequences derived from pollution. In this sense, pollution is blamed for the increase in the social and economic costs caused by natural disasters like hurricanes, twisters and floods. According to the Extreme Weather Sourcebook (2001), hurricanes, twisters and floods have cost the US government a yearly average of 11,370 million dollars in the 1955-1999 period, at 1999 constant prices. Even in some years the cost reached >100 billion U.S. dollars. Moreover, the effect of pollution on people's health has reached alarming levels mainly in big cities, where respiratory diseases increased 200%, intestinal diseases 110%, auditory diseases 75% in the last 10 years, according to the Report of the World Health Organization (1997).

These devastating effects of pollution call for a coordinated effort to be made by governments worldwide. An example of this attempt is the unsuccessful Rio Conference in Brazil 1992 and the 2002 Johannesburg Summit. Intensive use of natural resources and polluting production processes are underscored as the main causes of pollution. If this is so, why are governments reluctant to apply pollution controls? Because they may be afraid of facing a decreasing international competitive advantage.

In this regard, there is an ongoing debate between the conventional wisdom that environmental regulations have large adverse effects on competitiveness, as considered by Pethig (1975), Siebert (1977), Yohe (1979), and McGuire (1982) among others, and the revisionist hypothesis in which environmental regulations stimulate innovation and improve competitiveness, as considered by Porter (1991). (1) Empirical evidence shows that there is no general causality between competitiveness and environmental regulations. (2) However, we will assume the former approach in which governments appear not to be willing to apply policies to reduce pollution because these policies may increase industrial costs and undermine the international competitiveness of domestic industries.

Additionally, in a globalized world the use of trade policies for strategic purposes has been increasingly ruled by the World Trade Organization (WTO). As a result, many countries employ environmental policies as strategic instruments in trade and investment. These regulations are seen as barriers to trade and at present this is extensively discussed in the free trade agreements. (3) Trade and investment liberalization are alleged to have created pollution havens, moving firms to developing countries with lax pollution restrictions. Countries can affect the flow of federal direct investment (FDI) and trade by setting the best pollution policy. (4)

In this context, developing economies face fierce competition in obtaining substantial benefits from trade and for attracting FDI. Employment, growth, and development are some benefits of trade and investment. Once subsidies and tariffs have been banned from trade agreements, strategic use of environmental policies appears crucial for these purpo...

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