Literature Review on EKC and the Effects of FDI on the Environment

Abstract

The relationship between economic growth and the environment was first observed by Grossman and Krueger (1991) in their investigation of the environmental impacts of a North American Free Trade Agreement. They found that the relationship between economic growth and environmental quality ‘may change sign from positive to negative when a country reaches a level of income at which people demand and afford more efficient infrastructure and a cleaner environment’.¹ Such an inverted-U relationship between environmental degradation and economic growth is known as the Environmental Kuznets Curve (EKC), analogous to the income-inequality relationship hypothesised by Kuznets (1955).