According to the OECD report, economic globalization will reduce the ability of national governments to act unilaterally and intensify pressures for both economic performance and economic policies in different countries to become more alike (i.e., market convergence). The forces leading to economic policy convergence will also work in the direction of increased pressure for environmental policy convergence. It will be a challenge for environmental and other policy makers to introduce adequate governance structures to address additional market failures stemming from economic policy convergence which potentially can occur with economic globalization. Already now often markets do not capture environmental externalities at all. In addition, it is likely that market-driven policy convergence will reduce competitiveness problems which often "condition" environmental policy responses. However, the OECD experts state that there is no clear empirical evidence that high environmental standards are having a systematically negative impact on competitiveness, either at the macroeconomic level or the microeconomic level. In contrary, many companies are becoming increasingly aware that pollution and over-use of natural resources is a sign that their existing production processes are inefficient.

Economic globalization will of course have an impact on the scale and distribution of capital flows of foreign investment. One issue here is what impact foreign investment has on the environment. The OECD experts state that there is little evidence for the "pollution havens" hypothesis and that very few companies invest abroad with reduced environmental compliance costs as their primary goal. Evidence suggests that foreign investors more often meet the environmental standards of the countries in which they operate than domestic companies do. This may largely be because foreign investors often anticipate being subjected to a greater degree of scrutiny than local companies. Privatization can be a major magnet for foreign investment and can yield significant environmental benefits as privatized companies are often better managed and can be more concerned about reducing waste and pollution. Recent experience in CEE countries has shown that adequate pollution liability rules are not only important from an environmental point of view but can also influence significantly the choice of the FDI destinations.

OECD's view is that in general terms, economic liberalization (freer trade) will have a positive effect on the environment by improving the efficient allocation of resources, promoting economic growth and increasing general welfare, provided that effective environmental policies are implemented. OECD governments view trade liberalization as a positive agent which could provide resources for environmental improvement, particularly for developing countries and countries in transition. But in the absence of effective environmental policies, including those aiming at internalizing environmental costs, or when distortionary domestic policies exist, increased economic activity generated from trade liberalization can contribute to environmental problems. Trade liberalization might also result in increased freight traffic volumes potentially causing significant environmental effects. The OECD experts also think that in the longer term transportation prices across most modes will decrease. Here again, the challenge will be to limit negative environmental impacts through adequate governance measures. In agriculture, decreased trade protectionism may contribute to increased input use and to the use of monoculture technologies.

Economic Globalisation and the Environment, OECD 1997, 88 pages, US$12. OECD Mail Orders, 2, rue Andre-Pascal, 75775 Paris Cedex 16, France. Tel: +33-1-45248200, Fax: +33-1-49104276, E-mail: Compte.PUBSINQ@oecd.org.