Eq. 5 is a reduced form specification for pub- lic environmental expenditure suitable for testing
the hypothesis that other moments of the income distribution function besides its mean may be
relevant to explain the relationship between public environmental care and economic growth in high
income countries. In the next section I explore this hypothesis empirically by investigating the
impact of income inequality upon environmental expenditure in economically advanced societies.
4. Environmental protection policy and income distribution: An empirical investigation
Empirical analyses involving income inequality as a dependent variable or as an explanatory
variable have usually encountered the problems of missing time series, non-comparability and low-
quality of data Ruttan, 1971; Shafik, 1994; Antle and Heidebrink, 1995; Deininger and Squire,
1996; Torras and Boyce, 1998. My empirical analysis of the determinant of the public policy
for environmental protection uses a new data set on inequality put together by Deininger and
Squire 1996. Deininger and Squire report the Gini index and the income shares by quintile for a
wide group of countries. The Gini index GINI and the ratio of the income shares of the first and
the fourth quintile of the income distribution RATIO, allow me to assess the impact of in-
come inequality on environmental policy. The first index GINI offers the advantage of being
widely reported in official sources that are based on primary data. It has a disadvantage, however,
in common with any aggregate measure of in- equality, that it may change of the same amount
and in the same direction following very different changes in income distribution. The second index
RATIO better uncovers possible movements in the income received by individual groups that
could be obscured by the use of an aggregate index such as the Gini coefficient.
Data on environmental policy are rare Shafik, 1994. The OECD Environmental Program pro-
vides information on environmental protection that satisfy the criteria of reliability and interna-
tional comparability. Information on public RD expenditure intended to protect the physical envi-
ronment from degradation is collected for OECD countries in all years between 1980 and 1991. The
countries included in the sample are: Canada; USA; Japan; Australia; New Zealand; Belgium;
Denmark; Finland; France; Germany; Greece; Ireland; Italy; Netherlands; Norway; Portugal;
Spain; Sweden; United Kingdom. Environmental protection includes all research relating to pollu-
tion: study of origins and causes, diffusion and transformation and the effects on human beings
and the environment, but excludes research on changes in the production process that result in
the generation of less pollution. Environmental charges and taxes have multiplied over the last
decades in OECD countries. To the extent that environmental policy requires knowledge of its
impact, expenditure for environmental RD is here used as proxy for the intensity of public
engagement in environmental problems.
The regression equation is: e
it
= a + b x
it
+ b
1
x
it 2
+ b
2
r
it
+ b
3
x
it
r
it
+ b
4
t +
u
it
9 where the error term u
it
= o
it
+ m
i
is decomposed into a country effect m
i
, which captures unobserv- able country-specific characteristics, and a white
noise component o
it
. In Eq. 9 the dependent variable e
it
is the logarithm of per capita RD expenditure for environmental protection. Ex-
planatory variables are per capita income GDP x
it
, converted at purchasing power parity into real 1985 US dollars, an income inequality index r
it
GINI or RATIO, and a time trend t. The Gini index is a measure of inequality, while the vari-
able RATIO measures income equality. By propo- sition 1, the effect of income inequality on
environmental expenditure depends on the level of per capita income. I allow for such a non-linear
effect by including the interaction x
it
r
it
among the explanatory variables. Furthermore, the anal-
ysis carried out in the previous section predicts that the overall effect of income inequality on
public environmental protection expenditure is negative, i.e. b
2
+ b
3
x
it
B 0, if the income elasticity
of the preference for environmental quality is ‘large’ proposition 1. Finally, if the income elas-
ticity condition is satisfied, the net effect of per
Table 1 Public RD expenditure for environmental protection in OECD countries: Summary statistics
S.D. Min.
Max Variable
Number of obs. Mean
361.2 Public abatement expend
a
78 69.5
89.08 0.6
18 339 4382
GDP per capita
b
3004 171
10 526 41.8
Gini coefficient 79
33.0 3.93
24.9 0.29
Ratio
c
74 0.18
0.05 0.1
a
Data refer to government research and development RD budget appropriation OECD, 1993. Public expenditure for environmental protection is measured in million PPP US at 1985 price levels.
b
Gross domestic product at purchasing power parities 1985 US dollars.
c
The ratio between the percentage of the income share held by the first quintile of the population and the income share of the fourth quintile of the population. The raw income inequality data are from Deininger and Squire 1996.
capita income on environmental policy, i.e. b +
2b
1
x
it
+ b
3
r
it
, is greater than zero provided in- come inequality decreases with economic growth
proposition 2. Table 1 contains some summary statistics.
4
.
1
. The empirical results Tables 2 and 3 illustrate random effect RE,
fixed effect FE and pooled cross section PCS observation results obtained with the inequality
indexes GINI and RATIO, respectively. Specifica- tions I, III and V do not contain a time
trend, while specifications II, IV and VI do. The functional form for per capita GDP is
quadratic, although the results are robust to a linear specification in per capita income. The hy-
pothesis of no systematic difference between ran- dom effect and fixed effect results is tested and
not rejected by the Hausman test in all specifica- tions.
3
None of the sensitivity tests involving anal- ysis of residuals and leverage I performed have
revealed the existence of particularly anomalous observations that incisively affect the nature of
the relationships uncovered. The Ramsey 1969 test for omitted variables and the Cook – Weisberg
1983 test for heteroscedasticity do not provide evidence of mispecification problems. The statis-
tics for these tests are reported in the tables. In Table 2 the index of inequality is the Gini
coefficient. In all regressions the coefficients for per capita income and for income inequality have
the expected signs. The correlation between per capita GDP and expenditure in environmental
protection, computed at the average income level, b
+ 2b
1
10 526, is positive, while income in- equality is negatively correlated with per capita
expenditure in environmental protection. These results are not affected by the inclusion or exclu-
sion of a time trend, which improves slightly the goodness of fit of some specifications. When I
control for a possible serial correlation in the error term by using pooled cross section observa-
tions [specifications V and VI], I obtain results comparable to the random effect estimates.
Table 3 illustrates the empirical results obtained with the index of income equality RATIO. The
inclusion of a time trend only marginally im- proves the goodness of fit of all specifications. It
also decreases the size of the regression coefficient for RATIO in both specifications II and VI
compared to the corresponding specifications without the time trend. Two empirical results
deserve some attention. Firstly, in all specifica- tions the net average effect of per capita income
on the dependent variable, computed as b
+ 2b
1
x
it
+ b
3
r
it
at the average levels 10 526 and 0.18 for per capita GDP and RATIO, respec-
tively, is positive. The non-linearity in per capita income implies that the correlation with the de-
pendent variable, computed at the RATIO aver- age 0.18, turns negative at relatively high levels of
per capita GDP above 14 000 in the RE specifi-
3
This is not to say that countries’ experiences in terms of pollution emissions and control do not differ widely. See, for
example, De Bruyn et al. 1998.
Table 2 Public RD expenditure for environmental protection
a
and income inequality
Explanatory RE
b
FE PCS
c
var. V
I III
0.002 0.001
Per capita 0.0009
GDP 0.0002
0.0002 0.0004
− 2.9e−08
Per capita −
5.1e−08 −3.5e−08 GDP
2
1.5e−08 9.1e−09
7.4e−09 −
0.03 −
0.06 −
0.035 GINI coeff.
0.05 0.031
0.025 –
– –
Time trend −
11.9 −
15.6 Constant
− 11.3
3.21 1.90
1.52 Hausman
x
2
3 = 5.2 test
d
0.60 0.58
0.63 R
2
N = 17 N = 51
N = 17 Number of
obs. t avg. = 2.1
t avg. = 3.1 r =
0.03 IV
II VI
Explanatory var.
− 0.0013
Per capita 0.001
0.001 GDP
0.0002 0.0002
0.0005 −
4.7e−08 −4e −
3.6e−08 Per capita
GDP
2
− 08
7.3e−09 9.9e−09
1.6e−08 GINI coeff.
− 0.025
− 0.032
− 0.047
0.025 0.055
0.034 Time trend
0.035 0.062
0.053 0.028
0.045 0.022
− 16.77
− 16.2
− 18.1
Constant 3.54
3.03 2.81
x
2
4 = 0.8 Hausman
test R
2
0.63 0.62
0.64 Number of
N = 17 N = 17
N = 52 obs.
r = 0.06
t avg. = 2.1 t avg. = 3.0
a
The dependent variable is the natural logarithm of per capita public expenditure for environmental protection 1980–
1991 in selected OECD countries.
b
Estimation procedure: maximum likelihood estimator.
c
Pooled cross section estimation corrected for serially corre- lated residuals.
d
Other specification tests include the Ramsey test for omit- ted variables, which produce a F3,44 = 0.63, and the Cook–
Weisberg test for heteroschedasticity, x
2
1 = 4.71, which does not allow rejecting the hypothesis of constant variance.
, , Indicate statistical significance at the 1, 5 and 10 levels, respectively. Standard errors are in parentheses.
cations. Interestingly, the only country whose GDP per capita is consistently above this level is
the United States, in which income inequality sharply increased in the 1980s.
Secondly, consistent with the hypothesis that a relative income effect impacts upon countries’
preferences for environmental protection, I find that the net average effect of income equality on
environmental expenditure [b
2
+ b
3
average GDP per capita] is positive in all specifications. Given
the signs of the estimated coefficients b
2
and b
3
negative and positive, respectively, in both ran- dom effect and pooled cross section regressions of
Table 3, there is a critical level of per capita income reported in the table at which income
equality starts having a positive impact upon pub- lic environmental expenditure. The level of GDP
per capita at which the correlation between public environmental expenditure and income equality
becomes positive is given by x
min
= − b
2
b
3
. Us- ing the estimated coefficient of Table 3, such
critical levels of per capita income are x
RE min
I = 9250 and x
RE min
; II = 11 400 in the random ef- fect estimations I and II, respectively. The
interpretation of these results is that for countries with per capita GDP greater than these critical
values of per capita income, a reduction in the gap between the income shares of the first and the
fourth quintile of the population an increase in RATIO unambiguously increases the expenditure
in research for environmental protection.
5. Conclusions
