Temporary prosperity or sustainable development: the long-run impact of developing pollution-intensive industries

Abstract This paper proposes a dynamic model to capture the interaction among the environment, human capital accumulation, and economic growth. We emphasize the mechanism that pollution stock depresses human capital accumulation, which has received increasing support from empirical studies. The model predicts that the development of pollution-intensive industries can help an economy gear up a short-run prosperity, but it impairs the capability for long-run economic growth, trapping the economy at a low development level. The cost for a dirty economy to switch is expensive and even infeasible if the environmental degradation is irreversible. Policy interventions, such as tax on pollution and subsidy on human capital, can help alleviate but cannot eradicate the economic stagnation.