Air pollution and 'dirty' industries:: How and why does the composition of manufacturing output change with economic development?

This paper examines the impact on air pollution of changes in the composition of manufacturing output in developed and developing countries. Pollution emissions from manufacturing output are estimated in a manner which holds constant the effect of technology and regulations allowing the impact of compositional changes alone on pollution to be estimated. The paper has three main findings; (1) the inverted-U estimated between per capita income and the pollution intensity of GDP arises due to both the composition of manufacturing becoming cleaner and the share of manufacturing output in GDP falling. Compositional changes alone are not responsible for the inverted-U between per capita income and per capita emissions; (2) changes to the composition of manufacturing output are consistent with the pollution haven hypothesis, however there is clear evidence that rising per capita incomes are associated with a falling income elasticity of demand for 'dirty' products. This fact may explain the compositional changes that occur with development; (3) in addition to the income elasticity effect, the analysis suggests that land prices and to a lesser extent the prices of labour and capital, determine the proportion of dirty industry within a country's manufacturing sector.