Although, current policies support the 'industrial flight hypothesis' but it also leads to the relaxed environmental regulations turning Pakistan a 'Pollution Haven
' for the foreign investors and multinational companies.
The first hypothesis is "pollution haven
hypothesis" (PHH), in which it is presumed that there will be high pollution in developing countries after entering into a FTA because of the country's non-restrictive environmental regulations.
These concerns have strengthened the well-known pollution haven
hypothesis, where environmental standards and regulations play a key role in the reallocation of polluting industries with poor environmental regulation.
(2009), "An Empirical Investigation of the Pollution Haven
Effect with Strategic Environment and Trade Policy," Journal of International Economics 78(2): 242-255.
From 1977 to 1986, industries whose pollution abatement costs increased the most experienced the largest relative gain in imports of that industry's products, probably because of the "pollution haven
" effect--the expansion of producers in places that have less stringent environmental regulation.
Therefore the first studies empirically assessing the impacts of environmental regulations on trade dealt with local pollution issues and tested the pollution haven
hypothesis/effect (Kalt, 1988; Tobey, 1990; Grossman and Krueger, 1993; Jaffe et al., 1995).
FDI and the capital intensity of "dirty" sectors: a missing piece of the pollution haven
However, several recent studies that use panel data to control for unobserved heterogeneity, or instruments to control for endogeneity, do find statistically significant pollution haven
effects of reasonable magnitude.
The author found that the trade openness had a negative impact on several air pollutants including S[O.sub.2], and found mixed evidences for the pollution haven
hypothesis depending on the pollutants examined.
The supportive view is "hypothesis of pollution haven
" (Walter and Ugelow, 1979).
The pollution haven
effect (PHE) predicts that more stringent environmental regulation in a country would decrease domestic production and increase imports in the regulated markets.