Capitalist countries consistently perform better on environmental markers

When we combine environmental quality data with economic freedom data, we see that the story is very different from what we are usually told. The countries with the most freedom are those with the highest environmental quality. There does not seem to be a trade-off between environmental quality and economic development — rather, it shows the opposite.

If we rank the countries from most to least free (by quartiles), we observe how the countries with the highest economic liberty ranking are the same countries with the highest scores in the Environmental Performance Index.

The scatter plot shows how the relationship between economic freedom and environmental performance is positive. Each point in the diagram represents a different country.

The regression analysis shows that for every one point increase in the Index of Economic Freedom, there is a 0.96 point increase in the Environmental Performance Index. The positive correlation could not be clearer.

However, the relationship between these variables is not static. In the end, environmental quality could deteriorate as a result of laissez faire policies in the long-term. To whether this is true, we examined the Environmental Performance Index with the average of the Index of Economic Freedom for the last 15 years. Once again, each point in the diagram represents a different country.

We can observe how countries with greater economic freedom, throughout time, have a better environmental performance.

Exporting Pollution

One possible criticism of the argument presented here could be the following: the countries with greater economic freedom — and the most prosperous ones — are “exporting” their polluting industries to the less free third world, while keeping non-polluting industries in their country. Large companies based in the first world would take advantage of the failed governments of the developing world, polluting there what they are not able to back home.

To see whether this is true, we would expect that the countries with a large influx of foreign direct investment to have a bad score on the Environmental Performance Index. However, this is not the case.

The criticism seems to lack evidence. The relationship between both variables is non-existent, the level of foreign direct investment fails to determine the level of environmental performance. We cannot confirm that free — and rich — countries export their pollution by relocating companies to less free countries. However, we can confirm that greater foreign direct investment “exports” good environmental practices to developing countries.

If we analyze foreign direct investment from countries with a very high environmental performance — above 85 points in the index — and countries with a very poor environmental performance —below 50 points in the index — we see that the former hardly invests in the latter. Less than 0.1% of foreign direct investment from “cleaner” countries goes to “dirtier” countries. Of the 25 “clean” countries, 14 do not have a single investment in “dirtier” countries. Out of the remaining 11, only one exceeds 5% of its investments towards “dirty” countries. Only two countries allocate more than 1% of their foreign direct investment to the “dirtiest” countries.

In short, countries that destroy the environment do so alone or with the investment of countries that also destroy their environment. Most of the investment of “clean countries” goes towards other “clean” countries. Pollution is not “exported” from rich countries to poor ones.