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Environment, Economic growth, and Poverty

Yong-seong Kim
Korea Development Institute

2010. 11.

Abstracts

In this paper, the relationship among environmental issues, economic growth and
poverty is examined. This paper shows that environmental regulations may not be
necessarily growth-reducing. Taxing on environmental pollution may increase the
capital accumulation, resulting in higher economic growth. In addition, to ensure the
effect of green growth on poverty reduction fully utilized, a government cautiously
selects distributive policies which can improve income distribution. Like previous
empirical researches suggested, policies assisting human capital investment (education
and public health) and promoting work incentives (such as unemployment benefits) are
helpful.
Introduction
One of the most controversial issues in economics is about the environmental
impacts on in the global economy, income inequality and poverty. A traditional
approach treats environmental matters as a market failure so that public policies
need to be introduced in order to correct it. In this approach, environmental issues
are treated as peripheral one.
Currently, however, environmental issues emerge as one of the essential
components for economic sustainability. Numerous attempts have been made to
incorporate environmental matters into a central element that each individual
country needs to address within its market systems.
There is no doubt that environmental issues will change substantially the
behaviors of economic participants such as individuals, households, firms, and
governments in a way that we had not experienced before. Unlike the past,
environmental regulations and incentives now come to play an active role as a
constraint in the process of economic decision making. For example, with
environmental regulations, a firm’s production method should be different from the
cases without them. Environmental standards might change the prices of goods and
services so that individual’s consumption and saving patterns should be affected.
Despite rising concerns and interests, academic scholars and policymakers
make little consensus on the directions and the size of the impacts the
environmental issues might have on an economy. Those who are proponents of
environment argue that economic welfare will increase thanks to clean air and
pleasant environmental surroundings. They also assert that environmental
awareness leads economic participants to search for new innovative pro-
environmental technologies, which eventually help the economy to continue to
grow.
On the contrary, others express their concerns that drastic measures for
environmental protections might cause economic distortions and instability, which
are harmful for an economy as a whole. Without due preparations for environmental
regulations, firms may face rising costs of productions and try to reduce the use of
capital. Consumers who used to pay less for a certain products may need to pay
more due to environmental tax. Consequently, they argue that economic growth is
likely to slow down and economic welfare declines as well.
Due to the limited scope of this paper, we narrowly focus on the impact of
environmental issues on economic growth, income distributions (income inequality
and poverty) from a macro economic perspective. More specifically, the paper first
examines the relationship between economic growth and poverty. If environmental
issues have to do something with poverty, it primarily goes through economic
growth. Given the relationship between economic growth and poverty, it is
important to investigate how environmental issues affect economic growth. Our
interest is to find a channel though which environmental issues, economic growth
and poverty reduction form a virtuous circle, namely ‘Green Pro-poor Growth’.

2
 The next section deals with the relationship between economic growth and
inequality. As discussed later, the nature of economic growth crucially determines
poverty rate by way of income distribution. In order to ensure that economic growth
yields poverty reduction, considerate and appropriate government policies are
required.
The results of the paper can be briefly summarized as follows. Economic
growth, in general, appears to be beneficial to poverty reduction. Green or
environmental features can not be necessarily harmful for economic growth. Under
a certain circumstance, it rather promotes economic growth by encouraging capital
accumulation. However, green economic growth is not a sufficient condition for
poverty reduction. In fact, only inequality-reducing economic growth turns out to
ensure poverty reduction. Hence it is important for a government to introduce
considerate and appropriate redistributive measures.
This paper is organized as follows. In the next section, we briefly review the
relationship between economic growth and poverty. Previous studies and Korean
experiences are introduced as evidence. In the section II, we will investigate the
relationship between environmental issues and economic growth from various
empirical findings and a theoretical model. The aim of this section is to find a way
that environmental issues and economic growth can get along each other. The next
section is about government roles to lead the green growth to poverty reduction.
This section extensively reviews findings from the previous empirical literatures
and presents a result from the OECD experiences. Section IV concludes this paper.

I. Economic growth and poverty

At the Millennium Summit in 2000, the leaders of the international community set
and adopted eight goals (the Millennium Development Goals; MDGs) that need to be
addressed urgently in the twenty-first century. The presented goals are: 1) reducing
poverty and hunger, 2) enhancing of educational opportunities, 3) improving health
conditions of HIV, child mortality and mental disease, 4) ensuring environmental
sustainability and 5) global partnership for development. The MDGs proposed the
reduction of poverty by half until 2015 as a measurable indicator. In the spirit of the
MDGs, policymakers and scholars investigate a feasible strategy for sustainable
economic growth known as the ‘Pro-poor growth’. The concept of the ‘Pro-poor
growth’ is generally understood by the notion that economic growth should be
accompanied by poverty reduction.
Currently the Secretary-General of the UN proposed the MDGs and green growth
as a main agenda for the G20 meeting held in Toronto in 2010. From his remark,
environmental issues are key ingredient of a sustainable growth which contributes to
poverty reduction. This issue will certainly be brought up on the table as a main topic in
the coming Seoul G20 meeting in November 2010.
This section starts by asking two questions of “What is the Pro-poor growth?” and

3
“Is economic growth always helpful to poverty reduction?”
To answer the first question, let’s consider the following figure. The figure shows
various cases of the rate of GDP growth and the rate of income growth of the poor. A
possible definition of the ‘pro-poor growth’ is the case where the rate of income growth
of the poor is higher than the rate of GDP growth (Kakwani & Pernia, 2000). According
to this definition, points A and E can be the candidates for ‘pro-poor growth’. Another
definition focuses on the status of the poor (Ravallion & Chen, 2003). Specifically, as
long as an economic growth improves the income of the poor, it could be regarded as
the ‘pro-poor growth’. By this definition, point A, B, C, and D are relevant to the ‘pro-
poor growth’. It is difficult to say which definition is superior to the other because both
definitions themselves have pros and cons.

[Figure 1] The Concept of ‘Pro-poor growth’

rate of income
growth of the poor

A C

D
45
5
0 �
rate of GDP Growth
E GDP growth

“Is economic growth always helpful to poverty reduction?” The answer for this
question critically depends on the nature of economic growth. It is known that economic
growth has two conceptually separable effects on poverty. The first effect is so-called
‘pure growth effect’ which always reduces poverty. Figure 2 shows the ‘pure growth
effect’ that the impact of economic growth on poverty, holding income distribution
constant. Note that the area left to the poverty line, Z, is the proportion of poor
population. Since economic growth shifts the income distribution rightwards with
increasing the average per capita GDP increases from µ0 to µ1 , the proportion of poor
population decreases.
In reality, an economic growth to some extends changes the shape of income

4
distribution simultaneously. Figure 3 shows the distributional effect of economic
growth, holding income growth constant. Note that if the nature of economic growth is
to increase the dispersion of income distribution, then economic growth raises the
proportion of poor population. In contrast, if the dispersion of income distribution
decreases as a result of economic growth, the distributional effect of economic growth
can reduce the proportion of poor population.

[Figure 2] Effect of Growth on Poverty

incom
Z µ0 µ1 e

[Figure 3] Effect of Income Distribution on Poverty

Z µ0
Although the effects of economic growth on poverty are theoretically inconclusive,
it is still possible to draw several stylized facts from many empirical findings. First, it is
known that economic growth tends to reduce poverty rate in the long-run. This implies
that economic growth is a necessary condition for poverty reduction. Second, it is
observed that attempts to lower income inequality reduce poverty rate in the short-run.
This implies that economic growth of itself is not enough for the reduction of poverty

5
and that appropriate efforts to reduce income inequality must be accompanied in order
for growth to make poverty reduction sustainable.
The experiences of Korea are instructive to many countries. Figure 4 illustrates the
trend of the absolute poverty since early 1980s. Based on the poverty line of year 2000,
the proportion of households below the poverty line appears to be 82% in 1982. Since
then the proportion of household below the poverty line had dramatically decreased to
9.2% in 2007.

[Figure 4] Absolute poverty: Korea 1982~2007

100

80

60

40

20

0
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source: National Statistical Office, Family Income and Expenditure Survey, various years

There is no doubt that a rapid economic growth during those periods is a main
determinant in the reduction of the poverty rate in Korea. In fact, the poverty rate
increased in the late 1990s when the rate of economic growth recorded below zero due
to the financial crisis. From the figure, it is obvious that economic growth is an
important factor in reducing the poverty in the Korean case.
The relationship between the relative poverty rate and income inequality of Korea is
presented in Figure 5.1 First of all, there is a salient comovement between relative
poverty rate and income inequality. For example, the relative poverty rate continuously
declined until early 1990s when the income inequality measured by the Gini coefficient
decreased. Since 1992, the relative poverty and the Gini coefficient rose together. In
2000s, the Gini coefficient rapidly rose, implying that the income distribution of Korea
deteriorated. In those periods, however, the relative poverty rate rather remained stable.
The reason for divergence between the relative poverty rate and income inequality is
that in those periods the progressive party took the power and introduced massive and
various welfare systems. This phenomenon supports the stylized fact that policy

1
The relative poverty is defined as those whose total income is less than 50% of the median income for
each year.

6
intervention to lower income inequality could reduce poverty rate in the short-run.

[Figure 5] Relative Poverty and Income inequality: Korea

1982~2007

Source: National Statistical Office, Family Income and Expenditure Survey, various years

Table 1 decomposes the effects of economic growth on the poverty into the ‘pure
growth effect’ and the ‘distributional effect’ for the case of Korea (Yoo, 2008). As
shown in the table, the ‘pure growth effect’ is dominant in reducing poverty over time in
Korea. In the past, economic growth appears to have a favorable ‘distribution effect’ in
poverty reduction. However, currently, the ‘distributional effect’ operates in a direction
to raise poverty rate. A change in the direction of the ‘distribution effect’ deserves
additional attentions from both policymakers and researchers.
In summary, not only economic growth (or ‘pure growth effect’) but also income
distribution (‘distributional effect’) crucially affects the poverty rate. To be specific,
economic theory and empirical findings indicate that economic growth is an important
necessary condition for poverty reduction. Moreover, in order to fully utilize economic
growth to serve poverty reduction, an improvement in income distribution must be
accompanied.
In the next section, we will examine the channel through which environmental
measures promote economic growth, the first necessary condition for poverty reduction.
And then we will discuss the directions of policies to alleviate income inequality, the
second condition for poverty reduction later.

[Table 1] Decomposition of Growth impacts on the poverty rate:

Korean Case
Elasticity of poverty
Year Pure growth effect Distributional effect
rate

7
 82/83 -0.55 -0.54 -0.01
83/84 -0.66 -0.67 0.01

84/85 -0.67 -0.76 0.10

85/86 -0.97 -0.94 -0.03

86/87 -1.17 -1.19 0.02

87/88 -1.46 -1.55 0.09

88/89 -2.16 -1.98 -0.18

89/90 -3.31 -2.50 -0.18

90/91 -2.92 -2.65 -0.28

91/92 -3.46 -3.12 -0.33

92/93 0.94 -2.99 3.93

93/94 -3.26 -2.67 -0.58

94/95 -1.87 -2.63 0.75

95/96 -3.32 -2.77 -0.55

96/97 3.04 -3.24 6.27

97/98 -4.11 -2.52 -1.59

98/99 0.36 -2.10 2.46

99/00 -5.48 -2.49 -2.99

00/01 -1.27 -2.61 1.35

01/02 -3.38 -2.87 -0.51

02/03 -6.99 -1.50 -5.49

03/04 -1.15 -1.79 0.63

04/05 3.70 -1.80 5.50

05/06 -1.02 -2.18 1.16

06/07 -0.96 -1.64 0.68

Source: Yoo (2008)

8
II. Environment and Economic growth
1. What do empirics tell us about environment and economic growth?

Many studies have been done on the relationship between environment and
economic growth. A famous conjecture is known as an ‘Environmental Kuznets
Curve(EKC)’ i.e., inverse U-shaped relationship between environment and economic
growth(see Figure. 6). The hypothesis tells us that environmental pollution first
increases and then decreases with development

[Figure 6] Environment and economic growth: EKC

Environmental pollution

0
Economic development

The results of empirical studies are inconclusive. In a support of EKC, Shafik &
Bandyopadhyay(1992) analyzed the data of time series and cross countries and
report that: “But many indicators tend to improve as countries approach middle
income levels, as evidenced by the negative signs on the quadratic income
terms”[p.21]. Grossman & Krueger(1995) also found air pollutants(such as sulfur
dioxide, heavy particulates) generally reach a peak in the level at low per capita
GDP range and then decrease with an increase in per capita GDP.2
On the other hand, several studies cast doubts on the EKC. Stern &
Common(2001) reported that the quadratic relationship between environment and

2
For other empirical researches supporting the EKC, see Panayotou(1993), and Hilton & Levinson(1998)

9
economic development cannot be observed when the various samples are used.
Later, Harbaugh, Levinson & Wilson(2002), using the same data of Grossman &
Krueger(1995), insisted that the relationship between environment and economic
growth is sensitive to econometric specifications, pointing out that the quadratic
form can not be vindicated.
In summary, empirical relationship between environment and economic
development is ambiguous. Depending upon the econometric specifications and the
data used in analyses, the conclusions are different without showing consistent
patterns.
2. What do theory tell us about environment and economic growth?

There are series of debates over environment-economic relationship in the filed

of economic theory. In a conventional setting, most of theoretical models predict
that measures for environmental protection make an economy to operate below its
production possibility frontier, causing a decline in economic growth (Ligthart &
van der Ploeg, 1994). Furthermore, environmental regulations may lower the rate of
return of input factors such as capital by raising the cost of production.
In contrast, a few theoretical model shows the possibility that environmentally
oriented economy can not necessarily experience a slowdown in economic growth
(Gradus & Smulders, 1993; Bovenberg & Smulders, 1995, 1996). Gradus &
Smulders(1993) model predicts that clean environment enhances an individual’s
learning capacity which enables more human capital to accumulate. Bovenberg &
Smulders(1996) presented a model showing that raising tax on environment and
lowering distortive taxes may stimulate economic growth.
The model considered in this paper is based on Persson & Tabellini(1994), and
later extended by Kim(2009). Kim(2009) introduced pollution tax in a setting of the
overlapping generation model in which an individual lives two periods(young and
old) maximizing his/her lifetime consumptions. The idea can be mathematically
written by the following problem:
(1) max c.d U (cti−1 , d ti ) ,
where cti−1 and d ti denote an individual’s consumption when young(t-1) and
old(t), respectively. The consumption when young is totally financed by his/her

10
 labor earnings( y ti−1 ) with a budget constraint cti−1 + k ti = y ti−1 where k ti is a
capital(or saving) and y ti−1 = ( w + e i )k t −1 . Thus, earnings are determined by the
average wage, w, and an individual heterogeneity, e i , coupled by the capital stock
of the previous generation, k t −1 . On the other hand, the consumption of the old is
determined by the rate of return on capitals, and tax on capital income and pollution
tax such that d ti = r[(1 −θt )k ti + θt k t ] − δ t xti . Note that θt is an adjustment
parameter for a tax on privately accumulated capital. With a higher value of θt , a
capital(hence consumption of the old) is more evenly distributed around the average
level of capital stock ( k t ). The pollution tax is levied on the amounts of pollutants
produced by the use of capital.
The optimal path of consumption in the overlapping generation model is
characterized by the ratio of marginal utility of consumptions in two periods being
equal to a function of r , θ, and δ . Let d ti / cti−1 = D(r , θ , δ ) , where Dr > 0
Dθ < 0 Dδ < 0 .

Solving the optimization problem, and rearranging the terms yields the rate of
economic growth given by the following:
D(r , θ , δ ) w δ t xt
(2) g t = G ( w, r , θt , δ t ) = k t / k t −1 − 1 = + −1
D( r , θ , δ ) + r k t −1 ( D( r , θ , δ ) + r )
Couple of things merit to note in (2). First, the above equation indicates that the
higher a wage the higher the economic growth rate (i.e., G w > 0 ). Second, the effect
of the rate of return on capital is ambiguous because of its substitution and income
effect (i.e., Gr > 0 or Gr < 0 ). Third, tax on capital( θ ), or a government’s
redistributive policy has a negative effect on economic growth (i.e., Gθ < 0 ), which
is consistent with the result of Persson & Tabellini(1994).
A distinctive feature of the model is the effect of pollution tax on economic
growth. According to the model, a pollution tax may or may not assist economic
growth. Given that ∂cti−1 / ∂δt ≤ 0 , a pollution tax has positive impact on economic
growth3.
In words, environmental tax lowers the ratio of marginal utility of
consumptions in two periods (i.e., Dδ < 0 ), implying that the consumption of the
old should decrease more than the consumption of the young. Facing this situation,

3
For formal presentation and proof, see the Appendix in Kim(2009)

11
 an individual needs to restore the optimal consumption path by accumulating
additional capital stock to prevent future consumption from a sharp decline. As a
result, environmental tax may serve to increase the capital stock(i.e., ∂k t / ∂δt > 0 ),
which leads an economy to grow.
The implication of the model is quite striking. Note that in the model suggested
by Persson & Tabellini(1994), a policy for equity inevitably reduces an economic
growth(i.e., Gθ < 0 ). However, in the model with an environmental tax, an
appropriately chosen environmental policy together with a distributive policy may
attain economic growth and fair distribution at the same time.

III. Economic growth and Income inequality

1. The relationship between economic growth and income inequality

Does economic growth reduce or raise income inequality? Kuznets(1955) first

attempted to address this question and argued that economic growth raises income
inequality at early stage of development then it reduces income inequality as an
economy further develops. This is well known ‘Kuznets Inverse U hypothesis’.

[Figure 7] Kuznets Curve: Economic Development vs. Income Inequality

income inequality

0 Economic development
development

There has been a long history of debates over this issues in the filed of economic
theory. Some argue that someone needs to be rich enough to invest capital and a

12
redistribution policy generally discourages economic agents to do so (Persson &
Tabellini, 1994). According to this view, a government attempt to reduce income
inequality inevitably lowers economic growth. Others mention that in an unequal
society, majority favors progressive tax, which in turn reduces economic growth. In
addition, they argue that income inequality brings socio-political instability, reducing
investment (Alesina & Rodrik(1994)
Empirically, early studies based on cross-sectional cross-country analyses such as
Kravis(1960), Paukert(1973) and Aldelman & Morris(1973) confirmed the Kuznets
Inverse U hypothesis Recently, however, many studies cast doubt on the Kuznets view.
Using cross-sectional and time series data, empirical results appear to be no clear
patterns observed between economic growth and income inequality when the
characteristics and heterogeneity of each country are accounted for. This makes many
scholars think that economic growth is distribution neutral on average and country’s
individual heterogeneity does matter in determining the shape of income inequality in
the course of economic development. (Fields & Jakubson, 1994; Denniger & Squire,
1998; Ravillion & Chen 1997)
Using extensive data and previous researches, Benabou(1996) summarizes various
aspects in the relationship among income inequality, economic growth and capital
accumulation. Table 2 summarizes his findings. The result in the first column of the
table shows that the coefficient of initial inequality on economic growth (or investment)
is consistently negative (and statistically significant), meaning that unequal distribution
is detrimental to economic growth and capital accumulation.4
It is worth noting that an initial human capital (in the form of school enrollment
rate) has a strong positive effect on economic growth in some studies. Moreover, the
effect of inequality on economic growth becomes statistically insignificant when the
initial human capital variable is controlled.5 This result implies that there is a link
among economic growth, income inequality and human capital. A potential explanation
is that high income inequality limits an individual’s chance of investing human capital
up to the level that he/she wants to have, and hence lowers the rate of economic growth.

4
Benabou(1996) mentioned that “a one standard deviation decrease in inequality raises the annual growth
rate of GDP per capital by .5 to .8 percentage points.”
5
See Benhabib & Spiegel(1994) and Deininger-Squire(1995)

13
 A notable example is the Korean case. In early 1960s, the socio-economic situations
are very similar to those of the developing countries in Southeast Asia and Africa. One
of distinctive differences is that Korea has continued to have a high school enrollment
rate and a low illiteracy rate. It is believed that a qualified labor force through high
educational attainment is one of important sources of economic growth and fair income
distribution.

[Table 2] Determinants of growth and investment

(1) (2) (3) (4) (5)
INEQ on GR, DEM on GR, HUMCAP on INEQ on INSTAB on

INV INV GR, INV INSTAB GR, INV

1. Alesina-Rodrik (94)
2. Alesina-Perotti (96)
3. Alesina et al (96)
4. Barro (96)
5. Benhabib-Spiegel (96)
6. Bourguignon (94)
7. Brandolini-Rossi (95)
8. Clarke (92)
9. Deininger-Squire (95)
10. Easterly-Rebello (93)
11. Keefer-Knack (95)
12. Levine-Rebello (93)
13. Lindert (96)
14. Perotti (92)
15. Perotti (94)
16. Perotti (96)
17. Persson-Tabellini (92)
18. Persson-Tabellini (94)
19. Svensson (93)
20. Venieris-Gupta (86)
 
⊕
 ⊕ -
M=⊕ F= 
(-) ⊕ ⊕ 
 ⊕ ⊕ (-)

 ⊕
(-) (±) +
⊕ (±)
 (-) ⊕ ⊕ 
-
⊕
 + ⊕ 
 
  M=⊕ F= ⊕ 
 ⊕
 - ⊕
⊕ + 
 

Note: symbols: ⊕,  : consistent, sign and generally significant; +, -; consistent sign, sometimes significant; (+), (-):

consistent sign but generally not significant, (±): inconsistent sign with significant coefficient; : inconsistent sign or

close to zero, and not significant; : inverse U-shaped, significant. INEQ: Measures of inequality DEM:

Measures of political rights and degree of democracy HUMCAP: initial stock of human capital INSTAB: socio-

political instability

Source: Benabou(1996), NBER Working Paper No. 5658

14
 Kim(2004) explores the impact of various socio-economic policies on economic
growth(efficiency) and income inequality. Using a stochastic frontier model, economic
efficiency ( E it ) of a country i at time t can be defined by the ratio of its actual
production (GDP) to its maximally achievable level. Income inequality ( Git ) of each
country is measured by it’s the Gini coefficient. Let X be a set of policies that may affect
economic efficiency and inequality (such as social expenditures and tax policy) and Z
be a set of policy that may affect the efficiency only (such as sale tax). One can fit the
following regression equations to see the impact of socio-economic policies on
economic efficiency and inequality.6

Git = γ 11 X it + ε it
(2)
E it = γ 21 X it + γ 22 Z it +ν it

The following table shows the results. First, the trade-off between economic growth
and inequality can be found for welfare policies. For example, welfare policies such as
‘Old age cash benefit’ and ‘Family cash benefits’ lower income inequality but they
reduce economic growth as well. Second, tax policies are detrimental to economic
growth without improving income distribution.

[Table 3] Policies, economic growth and income distribution

Growth Inequality
Social Expenditures
Old age cash benefits -2056*** -0.463
Family cash benefits -0.292 -0.513**
Active labor market -0.419 -1.439
Unemp benefits 1.625*** -1.648***
Health 1.524** 0.237
Tax
Income tax -0.248*** 0.087
Sales & VAT -0.802*** 0.311
R-square 0.770 0.495

Note: *** = 99%, ** = 95%.

6
The data sets used come from the WIID(World Income and Inequality Database), PWT(Penn World
Table), OECD SOCX(Social Expenditure Database) and OECD RS(Revenue Statistics)

15
Source: Kim(2004).

One of interesting results is the effects of ‘Unemployment benefit’ and ‘Public

health expenditures’ on economic growth and inequality. Unemployment benefits turns
out to have a positive impact on economic growth and income distribution. It is easy to
understand that unemployment benefit reduces income inequality for the following
reasons. First, it to some extent supports the loss of income for the unemployed.
Second, it also can raise the attractiveness of getting a job to the unemployed. At the
same time, an effective unemployment benefit system help employers to enhance the
flexibility of their workforce as it reduces the resistance from the workers in the case of
labor adjustment. From these reasons, one may conclude that unemployment benefit is
beneficial to both economic growth and an equal income distribution
It is not surprising to see that Public health expenditures have positive effect on
economic growth. An effective health system enables an economy not only to maintain
the quality of workforce but also for an individual to invest human capital.
The results hint that a country can achieve a virtuous circle of economic growth and
fair income distribution with a well-chosen combination of welfare and tax policies.

IV. Conclusion

In this paper, the relationship among environmental issues, economic growth and
poverty is examined. Based on the observation, we propose the types and the directions
of government policies. First of all, as shown in the theoretical model, environmental
regulations may not be necessarily growth-reducing. Taxing on environmental pollution
may increase the capital accumulation, resulting in higher economic growth.
Can economic growth always reduce poverty? The answer depends on the
magnitude of the ‘pure growth effect’ and the ‘distributional effect’. The ‘pure growth
effect’ generally reduces a poverty rate by shifting income distribution rightward. If
economic growth deteriorates income distribution ( i.e., increasing income inequality),
the ‘distributional effect’ may not work for poverty reduction. Thus, not only economic
growth bur also inequality-reducing economic growth is important for poverty
reduction.

16
 What policies does a government adopt to pursue ‘green pro-poor growth’? As seen
in the theoretical model, tax on capital causes distortions in the efficient allocation of
resources and hence lowers economic growth. In stead, environment tax may lead
individuals to save more for future and hence it encourages capital formation. To ensure
the effect of green growth on poverty reduction fully utilized, a government cautiously
selects distributive policies which can improve income distribution. Distribution
policies should have a positive or neutral impact to economic growth or minimize
negative effect on economic growth at least. Previous empirical researches suggest that
policies assisting human capital investment (education and public health) and promoting
work incentives (such as unemployment benefits) are helpful.
Finally one should have the following in mind: Since the causes and consequences
of elements consisting of economic system can not be indentified in isolation, the
relationship between environmental issues, economic growth, and poverty explored in
this paper is not comprehensive. In other words, the assumptions made and the
conclusions presented in this paper should be tailored on a case-by-case basis for each
country’s distinctive social, cultural, political and economic situations.

17
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