Going Green versus Economic Performance

Abstract

The purpose of this paper is to elucidate some information on what impact pro environmental actions have on countries’ global economic performances. Is there really a trade-off on a macro scale between “going green” and economic performance?

The world economy has significantly expanded within the last four decades and started to exceed the Earth’s resources capacity. Many forms of environmental degeneration such as soil erosion, aquifer deficiency, rangeland deterioration, air pollution, and climate change have huge negative impact on the ecosystem. If the world continues to move in this direction, it will eventually destroy its natural support system. The long-term solution to this problem is to apply ecological principles of sustainable economic development. It is commonly known that factors such as decreasing CO2 emission, water maintenance, forestry and agriculture preservation as well as properly managed production processes help preserve our planet’s natural habitat and its climate, but how these activities are related to businesses?

During 1960s and 1970s, organizations have mostly rejected their impact on the environment. However, after experiencing international ecological problems, countries came up with a variety of regulations to prevent further environment degradation. Many organizations were forced to accept the responsibility to protect the surroundings they were operating in. Therefore, prevailing assumption appeared that there is a fixed trade-off between ecology and economy. Social benefits that come from strict environmental regulations are placed versus private costs, which are spent for prevention and cleanup activities. Succeeding in one field has to result in other’s failure.

In the last decade, however, this view has been increasingly challenged. Moreover, in recent years there has been an increasing advocacy towards a notion that turning green is actually good for the business and thus for the whole economy. By preserving natural resources and creating new quality of environmentally aware management systems, a given country increases its productivity. This in turn allows achieving higher production output given inputs in relation to its less environmentally aware neighbour.

In order to check the validity of this theory we apply Bayesian frontier analysis to macroeconomic production function, and incorporate key environmental indicators as explanatory variables of productivity distribution. Our model is estimated based on data from 13 EU countries over the period of 1998-2007. The use of Bayesian inference allows us to check straightforward what explanatory power those indicators have on countries’ productive efficiency and thus on their economic performance.

DOI: http://dx.doi.org/10.5755/j01.ee.23.2.1546