Economic Complexity and the Environment: Evidence from Brazil
5
to improve environmental indicators (see also IBRD 1992; Arrow et al. 1995; Stern
2002 and Dasgupta et al. 2002).
Concomitantly with the debate in the policy sphere, the empirical evidence has
been far from unambiguous. Numerous researchers have tested the EKC hypothesis
for a variety of countries, environmental degradation indicators and econometric techniques. Some studies find evidence for an inverted U-shaped relationship between
urban pollution—for instance due to sulphur dioxide and suspended particles—and
income (e.g. Grossman and Krueger 1991; Shafik and Bandyopadhyay 1992; Panayotou 1993; Selden and Song 1994). Other studies, however, find these local pollutants
to be positively correlated with income (e.g. Stern and Common 2001; Stern 2002;
Perman and Stern 2003; Liu et al. 2017). A positive relationship with economic
development is also found for carbon dioxide emissions, deforestation, and alternative indicators of environmental degradation (e.g. Shafik and Bandyopadhyay 1992;
Holtz-Eakin and Selden 1995).
This paper adds to the EKC literature by considering a new possible driving
force of environmental quality: economic complexity. The underlying motivation
for analysing the relationship between economic complexity and the environment is
the consideration proposed by Hausmann et al. (2014) that economic development
is driven by knowledge. Hausmann et al. (2014) show that economic complexity is
a highly accurate predictor of growth. According to the authors, economic complexity reflects the amount of knowledge that is embedded in societies, consequently
mirroring the productive structure of an economy. Differences in economic complexity account for the diversity and sophistication of the products exported by each
country. In complex economies, individuals build large networks that enable them
to combine knowledge more easily and ultimately produce an extensive variety of
knowledge-intensive goods.
Contrary to the traditional EKC hypothesis, which relies on the notion that environmental quality is a luxury good, the rationale for exploring the relationship
between economic complexity and the environment relates closely to the technical capabilities of a country’s industry. We hypothesize that, after a threshold level of
economic complexity has been reached, increasing economic complexity is accompanied by knowledge embedded in technology and human capital which is necessary to limit environmental degradation. Simple economies usually focus on the
production of raw minerals or elementary agricultural goods and, accordingly, cause
only limited environmental degradation. With the take-off of industrialisation and
the diversification of production, economies become gradually more complex. At
the same time, however, environmental degradation soars. Finally, at higher levels
of economic complexity, structural changes towards knowledge-intensive industries
takes place. This rise in economic complexity provides the knowledge and, hence,
the technology needed for economies to become “green”. Examples are the production of energy-efficient goods and electric cars; the generation of energy with
renewable resources such as photovoltaics, wind, or biomass; or innovations such
as recycling, energy grid integration, and cradle-to-cradle design. A high level of
productive knowledge is necessary for technological breakthroughs like these to get
5
to improve environmental indicators (see also IBRD 1992; Arrow et al. 1995; Stern
2002 and Dasgupta et al. 2002).
Concomitantly with the debate in the policy sphere, the empirical evidence has
been far from unambiguous. Numerous researchers have tested the EKC hypothesis
for a variety of countries, environmental degradation indicators and econometric techniques. Some studies find evidence for an inverted U-shaped relationship between
urban pollution—for instance due to sulphur dioxide and suspended particles—and
income (e.g. Grossman and Krueger 1991; Shafik and Bandyopadhyay 1992; Panayotou 1993; Selden and Song 1994). Other studies, however, find these local pollutants
to be positively correlated with income (e.g. Stern and Common 2001; Stern 2002;
Perman and Stern 2003; Liu et al. 2017). A positive relationship with economic
development is also found for carbon dioxide emissions, deforestation, and alternative indicators of environmental degradation (e.g. Shafik and Bandyopadhyay 1992;
Holtz-Eakin and Selden 1995).
This paper adds to the EKC literature by considering a new possible driving
force of environmental quality: economic complexity. The underlying motivation
for analysing the relationship between economic complexity and the environment is
the consideration proposed by Hausmann et al. (2014) that economic development
is driven by knowledge. Hausmann et al. (2014) show that economic complexity is
a highly accurate predictor of growth. According to the authors, economic complexity reflects the amount of knowledge that is embedded in societies, consequently
mirroring the productive structure of an economy. Differences in economic complexity account for the diversity and sophistication of the products exported by each
country. In complex economies, individuals build large networks that enable them
to combine knowledge more easily and ultimately produce an extensive variety of
knowledge-intensive goods.
Contrary to the traditional EKC hypothesis, which relies on the notion that environmental quality is a luxury good, the rationale for exploring the relationship
between economic complexity and the environment relates closely to the technical capabilities of a country’s industry. We hypothesize that, after a threshold level of
economic complexity has been reached, increasing economic complexity is accompanied by knowledge embedded in technology and human capital which is necessary to limit environmental degradation. Simple economies usually focus on the
production of raw minerals or elementary agricultural goods and, accordingly, cause
only limited environmental degradation. With the take-off of industrialisation and
the diversification of production, economies become gradually more complex. At
the same time, however, environmental degradation soars. Finally, at higher levels
of economic complexity, structural changes towards knowledge-intensive industries
takes place. This rise in economic complexity provides the knowledge and, hence,
the technology needed for economies to become “green”. Examples are the production of energy-efficient goods and electric cars; the generation of energy with
renewable resources such as photovoltaics, wind, or biomass; or innovations such
as recycling, energy grid integration, and cradle-to-cradle design. A high level of
productive knowledge is necessary for technological breakthroughs like these to get