The Role of Regulation in Mitigating the Impact of International Capital Flows on the Environment

A Dynamic Modeling Perspective
  • By Tim Gulden
October 23, 2002 |

The large scale movement of capital in the form of financial flows and foreign direct investment is a relatively recent phenomenon despite the fact that international trade has been an important part of commerce throughout the industrial era. Such flows have constituted a major and perhaps defining part of the process of globalization over the past two decades. At the same time, the environmental problems created by industrialization have also grown to have global range, particularly as they are replicated around the world, largely as a result of international capital and technology flows. What were once local problems of resource depletion, air pollution, etc. have grown to include truly global problems such as biodiversity loss and global warming. The impact of international trade on the environment has received significant attention, but the impact of international financial flows has received less. This paper seeks to provide a framework for thinking about the relationship between international investment and the environment, and for identifying areas which may require new types of regulation. This framework is based on a dynamic modeling perspective, where the global economy is seen as a series of nested and interacting systems, governed by dynamic feedback loops.

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