Terms of trade, ecologically unequal exchange and environmental problems in developing economies

Feng, Zhixuan; Liu, Fengyi Article Terms of trade, ecologically unequal exchange and environmental problems in developing economies China Political Economy (CPE) Provided in Cooperation with: School of Economics, Nanjing University Suggested Citation: Feng, Zhixuan; Liu, Fengyi (2024) : Terms of trade, ecologically unequal exchange and environmental problems in developing economies, China Political Economy (CPE), ISSN 2516-1652, Emerald, Leeds, Vol. 7, Iss. 2, pp. 244-268, https://doi.org/10.1108/CPE-12-2024-047 This Version is available at: https://hdl.handle.net/10419/319482 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Terms of trade, ecologically unequal exchange and environmental problems in developing economies Zhixuan Feng Economics and Management of School, Wuhan University, Wuhan, China, and Fengyi Liu School of Marxism, Nankai University, Tianjin, China and National Research Center for Political Economy of Socialism with Chinese Characteristics, Nankai University, Tianjin, China Abstract Purpose –Utilizing the Marxist theory of unequal exchange to explain the terms of trade between nations, this paper elucidates one possible mechanism that gives rise to ecologically unequal exchange between developed and developing economies. Design/methodology/approach –We propose a two-sector linear production model and demonstrate that a decrease in the organic composition of capital and an increase in the rate of surplus value in a sector will lead to a relative price decrease and value transfer out of that particular sector, as well as increasing the environmental costs of trade. Furthermore, we measure the levels of unequal exchange (value transfer) and ecologically unequal exchange of 40 economies and empirically validate their relationship. Findings –The findings suggest that an important cause of the ecologically unequal exchange is the value transfer between economies caused by the international division of labor and real wage disparities. The inequality in international trade is a significant factor contributing to the gap in the ecological environment level between developed and developing economies. Originality/value –By introducing the theory of unequal exchange or value transfer into the analysis of ecological unequal exchange, we provide a mathematical framework for analyzing ecological unequal exchange and a method for calculating the scale of ecological unequal exchange and value transfer, thereby enhancing the theoretical depth and practical significance of the ecological unequal exchange theory. Keywords Ecologically unequal exchange, Unequal exchange, Terms of trade Paper type Translated paper 1. Introduction In recent years, many developing economies, exemplified by China, have experienced rapid industrialization and economic growth, accompanied by increased resource exploitation and mounting environmental pressures, while developed economies have significantly improved their ecological environments during this period. Neoclassical economists have introduced several theoretical perspectives, including the Environmental Kuznets Curve (EKC) and the “Pollution Haven” hypothesis, to address the widening environmental disparities between the Global North and South, all of which tend to view environmental problems in developing economies as intrinsic to those economies, whether it is the EKC’s view on the developmental stage of the developing economies or the pollution haven hypothesis’s emphasis on the lack of stringent environmental regulation in developing economies. However, some Marxist economists hold divergent perspectives. They argue that these neoclassical theories overlook CPE 7,2 244 © Zhixuan Feng and Fengyi Liu. Originally published in Simplified Chinese in The Journal of World Economy in 2019: Feng, Z. and Liu, F. (2019), “Ecological Unequal Exchange, Value Transfer and Environmental Problems in Developing Economies”, The Journal of World Economy, Vol.42 No.4, pp 3-28. DOI: 10.19985/j.cnki.cassjwe.2019.04.002 The work described in this paper is funded by the Philosophy and Social Science Foundation of China (No. 17AJL001). This is a translation of an article original post at: https://doi.org/10.19985/j.cnki.cassjwe.2019.04.002 The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2516-1652.htm Received 30 September 2024 Accepted 30 September 2024 China Political Economy Vol. 7 No. 2, 2024 pp. 244-268 Emerald Publishing Limited 2516-1652 DOI 10.1108/CPE-12-2024-047 the crucial “center-periphery” structure under economic globalization in the capitalist world system (Prebisch, 1959;Dos Santos, 1999). When examining the environmental disparities between the Global North and South within the framework of the center-periphery structure, it becomes evident that environmental degradation in developing economies cannot be attributed solely to their characteristics; developed economies also play a significant role in this phenomenon. The EKC hypothesizes that changes in the ecological environment are primarily attributed to the varying stages of economic development. Economies undergoing industrialization experience environmental degradation due to the rise of manufacturing activities, while economies that have completed the industrialization process tend to have less environmental pressure due to improvements in manufacturing environmental efficiency and a gradual shift towards a service-based economy (Beckerman, 1992;De Bruyn et al., 1998;Dinda, 2004;Lin and Jiang, 2009;Xu and Song, 2010;Sheng and Lyu, 2012). This model describes the trajectory of developed economies; however, it remains uncertain whether developing nations can replicate this process (Røpke, 1994;Clark and Foster, 2009;Bonds and Downey, 2012). The increase in environmental efficiency in the production processes within developed economies is not solely attributable to technological progress, as a significant portion of this improvement is due to the transfer and outsourcing of highly polluting sectors to developing economies. Besides, the servitization of the economy gains resulting from “deindustrialization” are partially due to the offshoring of low-end manufacturing. These processes are not easily replicable in developing economies (Andersson and Lindroth, 2001; Lynch, 2016). In comparison, the pollution haven hypothesis seems to capture the core issue by emphasizing the relocation of polluting sectors, which posits that the lack of stringent environmental regulation in developing economies makes these regions more attractive to high-pollution sectors. Such theories highlight that the environmental disparities between the Global North and South result from environmental burden redistribution (Brunnermeier and Levinson, 2004;Kheder and Zugravu, 2008;Wagner and Timmins, 2009;Leiter et al., 2011; Yang and Tian, 2017). However, these theories do not adequately address the underlying question: What causes these underdeveloped economies to be more inclined to provide a lenient regulatory environment for polluting enterprises? If there is a systematic disparity in regulatory stringency between the Global North and the South, it may suggest endogeneity of environmental regulation (Goldman, 2006;Brand et al., 2008). Eco-Marxist scholars, such as Hornborg (1998,2009,2014),Andersson and Lindroth (2001),Rice (2007), and Roberts and Parks (2009), have moved beyond this line of thinking that attributes ecological disparities between the Global North and South solely to the inherent characteristics of individual economies. Instead, they directly point to the structural of the world market as the primary explanatory factor. They argue that although international trade adheres to the principle of equivalent exchange, the environmental costs associated with a given trade volume measured in monetary terms differ significantly between developed and developing economies. This suggests that developed economies exchange goods produced at a lower environmental cost for goods with a higher environmental cost from developing economies. This phenomenon mirrors the Marxian concept of “unequal exchange,” where developed economies exchanging less labor for more labor in developing economies in international trade. Similarly, the trade dynamics in which developed economies benefit from its goods with lower environmental costs at the expense of higher environmental costs in developing economies is called “ecologically unequal exchange.” The phenomenon of ecologically unequal exchange appears closely related to the technological disparity between the Global North and the Global South. If developed economies employ cleaner technologies, the environmental costs embedded in their products will naturally be lower. Consequently, these economies would trade lower environmental costs for higher environmental costs of developing economies. However, some ecological Marxist scholars argue that this seemingly reasonable explanation is insufficient. Consider that when China Political Economy 245 developed and developing countries produce homogeneous products, there is indeed a difference in environmental efficiency for the same product. Developed economies can manufacture a product with lesser environmental costs, suggesting that ecologically unequal exchange merely reflects technological differences between the Global North and the Global South. However, in most cases, international trade between these regions often involves heterogeneous products, and the technologies used to produce different products are not directly comparable, necessitating a common unit of measurement: money. Whether a product is resourceor environmentally intensive can essentially only be measured by the amount of resources and environmental cost per monetary unit of it. If the price of a kind of product is systematically suppressed, the ecological cost inherent in a given amount of monetary output inevitably increases. Thus, pricing plays a crucial role in determining whether a production technology is “clean”. Numerous studies indicate that products from developing economies are priced lower, resulting in a greater ecological burden for these economies in trade exchanges (Andersson and Lindroth, 2001;Røpke, 2001;Shandra et al., 2009;Frey et al., 2019). In addition to the acknowledged technological gap, ecological Marxist scholars also identified a crucial correlation between the price issue in the trade and the ecological disparities between the Global North and South. The ecologically unequal exchange reveals the relationship between sectoral price factors and the resource or environmental intensity of the sectors. This relationship also elucidates a critical source of the endogeneity of regulatory stringency posited by the pollution haven hypothesis. Despite similar technical levels between the Global South and North, industries in developing economies may exhibit relatively inferior environmental performance and higher resource intensity due to their generally lower product prices than those from developed economies. Consequently, it is not a matter of developing economies tolerating more polluting sectors per se. As long as the terms of trade between the North and South remain unchanged, the pollution levels of firms in developing economies, when measured in monetary terms, will always surpass those in developed economies regardless of how stringent their regulations might be. This implies that developing economies are simply compelled to “tolerate” their local industries. However, merely identifying the relationship between ecologically unequal exchange and price factors is insufficient. The definition of ecologically unequal exchange implies that the environmental costs in equivalent monetary amounts differ in different countries. The crux of the issue lies in understanding why prices fail to adequately reflect environmental costs or why the product prices in developing economies are systematically lower than those in developed economies. There are two main perspectives in the literature addressing this issue. One follows the Prebisch-Singer hypothesis, utilizing the technological nature of the international division of labor to explain the deterioration of terms of trade for developing economies (P� erez-Rinc� on, 2006). The primary challenge with this explanation is that the Prebisch-Singer hypothesis assumes that core economies supply industrial goods and peripheral economies provide raw materials and primary products. However, as previously noted, we are currently dealing with the rapid industrialization of developing economies and the accompanying environmental problems. Therefore, these assumptions no longer fully apply to the present global system. An alternative perspective involves leveraging the monopolistic power of developed economies in the global market, positing that distortions in terms of trade stem from such market power (Andersson and Lindroth, 2001;Røpke, 2001;Taylor et al., 2016). While it is true that developed economies possess monopolistic power in the global market, this view only applies to very limited situations. Contemporary political economy theories predominantly assert that the global market remains highly competitive. Lenin (2015) pointed out that the development of capitalism into its monopoly stage does not eradicate competition but creates new competition at a higher level. This view has been consistently upheld by subsequent scholars studying monopoly capitalism. Even the Monopoly Capital School, which focuses heavily on issues of monopoly, posits that monopoly is a domestic characteristic of developed economies post-World War II, which cannot be directly applied to CPE 7,2 246 the global market, and argues that monopolists from various economies face even fiercer competition in the international arena (Baran and Sweezy, 1977;Sweezy, 1997;Foster et al., 2011). Fundamentally, as Gao (1996) noted, exploitation and competition are capitalism’s two fundamental relationships. Competition among different capitals, each pursuing capital proliferation, is inevitable. Empirical research on contemporary capitalism also supports the reality of a highly competitive global market (Brenner, 2003,2006;Sheppard, 2012;Seretis and Tsaliki, 2016;Tsaliki et al., 2017). The approaches above fail to fully explain the disparity in commodity prices between the Global North and South on the global market and thus fail to provide a complete and solid theoretical explanation for ecologically unequal exchange. The primary contribution of this paper lies in proposing a novel framework that differs from the previous two, thereby offering a sound explanation for the relationship between ecologically unequal exchange and pricing. This paper integrates the theories of unequal exchange and value transfer into the analysis of ecologically unequal exchange. This approach has two significant advantages over the prior approaches: First, it is grounded on weaker and more realistic assumptions of the international division of labor, as it attributes the commodity price differences between Global North and South to disparities in the organic composition of capital and surplus value rates of the north and the south, avoiding the specific industry assumptions inherent in the Prebisch-Singer hypothesis. Second, it is based on the theory of profit equalization; thereby, the theoretical foundation is based on competitive global markets rather than monopolistic ones. First, this paper provides a mathematical framework for analyzing ecologically unequal exchange. It is the first to rigorously describe ecological unequal exchange under OkishioMorishima’s linear production framework, using deviations between production prices and values to characterize value transfer. Based on it, this paper explains the conditions under which value transfer and ecologically unequal exchange occur and elucidates their theoretical interconnection. Furthermore, this paper presents an enhanced measurement methodology for assessing value transfer and ecologically unequal exchange. On this basis, it firstly uses introduces regression analysis to empirically validate the real-world association between value transfer and ecologically unequal exchange between the Global North and South. The structure of the paper is as follows: the second section elaborates on the theoretical framework and model construction; the third section explores the methods for assessing value transfer and ecologically unequal exchange; the fourth section details the regression model specifications and data sources; the fifth section analyzes the regression results; and the final section concludes the study. 2. Theoretical framework 2.1 The theoretical connection between value transfer and ecologically unequal exchange As stated in the first section, a significant cause of ecologically unequal exchange is the price disparity between the Global South and North. Traditional unequal exchange theories explain this systematic price disparity through the labor theory of value. According to the fundamental principles of the labor theory of value, if goods are exchanged at their value, i.e. the socially necessary labor time, enterprises with labor productivity equal to the sector average should have equivalent per capita output or value-added. However, in a perfect competitive market with unrestricted capital mobility between sectors, the unimpeded flow of capital will result in profit equalization across sectors. Consequently, sectors with a higher organic composition of capital or a lower rate of surplus value will have prices that exceed their values, while the opposite will be true for other sectors. This deviation of price from value generates a value transfer. The value transfer implies that even if the relative labor productivity levels of enterprises in each sector are similar, the per capita value added of enterprises in the valuereceiving sector and those in the value-transferring sector are completely different. Workers in the latter sector have to exert more labor to achieve the same value added as those in the former sector (Marx, 2004a,b). China Political Economy 247 The theory of unequal exchange leverages the concept of value transfer. Bauer (2000) and Grossmann (1992) posited that developed capitalist economies hold advantageous positions in the international division of labor due to their capital abundance, engaging in sectors with a higher organic composition of capital and thereby benefiting from this value transfer. Emmanuel (1988) argued that real wages in developed economies are higher, implying a lower rate of surplus value. Following these lines of thought, subsequent scholars have conducted extensive theoretical and empirical research and confirmed the existence of unequal exchange (Gibson, 1980;Foot and Webber, 1983;Nakajima and Izumi, 1995;Tsaliki et al., 2017). Consequently, when labor productivity levels are similar, enterprises in developing economies generate lower per capita added value compared to those in developed economies and need to invest more labor to achieve the same monetary returns as those in developed economies. Therefore, developed economies utilize less labor in exchange for more labor from developing economies (Feng, 2016a). According to the logic of ecologically unequal exchange mentioned above, if there are international differences in prices, then it is evident that developing economies incur higher costs in these exchanges. Given similar efficiency in the production environment of products, developing economies need to use a larger quantity of their products — because of lower per capita value added — to exchange for fewer products from developed economies. Consequently, this exchange results in exchange for a larger environmental cost in developing countries for a smaller environmental cost in developed countries. Therefore, regarding equivalent monetary outputs, developing economies exhibit poorer environmental efficiency. In summary, differences in the organic composition of capital and wage lead to international value transfer. When such value transfers occur, ecologically unequal exchanges accompany them. This paper aims to test this theory by constructing a model that addresses two key questions: First, does an increase in the organic composition of capital and real wages lead to value transfer? Second, if value transfer occurs under these conditions, does ecologically unequal exchange also occur? If the answer to both questions is yes, then we can identify a theoretical link between value transfers and ecologically unequal exchange. While the answers to these questions may seem straightforward, they are more complex. At least two points of ambiguity are present. First, though the rise in the organic composition of capital does lead to an increase in production prices, it also signifies a relative growth of materialized labor compared to living labor. Therefore, although production prices go up, the value embodied in the commodities also increases. If the newly added value exceeds the increase in production price, an increase in the organic composition of capital may also lead to a transfer out of value. Similarly, in the context of ecologically unequal exchange, the rise in the organic composition of capital implies that the ecological costs embedded in the means of production increase relative to direct ecological costs, thereby increasing the overall ecological cost of the product. If the change in terms of trade resulting from the rise in production prices fails to offset the increased ecological costs, it may indicate that the increased organic composition of capital does not enable the sector to exchange lower ecological costs for higher ones. Second, an increase in real wages not only leads to a decline in the rate of surplus value, resulting in a rise in the production price relative to value but also exerts an additional impact by reducing the organic composition of capital, which may lower production prices. Therefore, it is imperative to construct a mathematical model to analyze which of these two opposing effects of the organic composition of capital and the rate of surplus value is dominant under various conditions, thereby determining the specific conditions under which the organic composition of capital and real wages can lead to value transfer and ecologically unequal exchange. 2.2 Basic settings of the model For the sake of clarity and simplicity of the model, we construct an Okishio–Morishima model characterizing 2 sectors 32 products 32 economies. Assume there are 2 sectors and 2 CPE 7,2 248 economies, with each economy engaging in one sector, and each sector produces one type of product. To discuss value transfer and ecologically unequal exchange, we need to establish three sets of equations to represent the value system, environmental input and production price system, respectively. The value system is defined by a11λ1þa12λ2þl1¼λ1(1) a21λ1þa22λ2þl2¼λ2(2) or in matrix form: Aλ þl¼λ where aij represents the intermediate input coefficient, i.e. the means of production, denoting the quantity of product jrequired to produce one unit of product i;lithe direct labor input coefficient, indicating the amount of living labor required to produce one unit of product iand λithe unit value of product i. The intermediate input and the direct labor input coefficients are exogenously determined by the respective sector’s technology (Morishima, 1973). Based on equations (1) and (2), the unit values of the two commodities are derived as: λ1¼ ½l1ð1�a22Þþa12l2�jI�Aj−1 λ2¼ ½l2ð1�a11Þþa21l1�jI�Aj−1 where Iis the second-order unit matrix. The environmental input system can be represented similarly to the value system in an input-output framework as follows: a11e1þa12e2þf1¼e1(3) a21e1þa22e2þf2¼e2(4) or represented in matrix form: Ae þf¼e where fidenotes the direct environmental input coefficient, representing the amount of direct environmental input required to produce one unit of product i. To maintain generality, we have not specified what type of environmental input fiis. The total environmental input required to produce one unit of product iis denoted by ei. The intermediate input and direct environmental input coefficients are exogenously given technological variables. Similarly, we can determine the total environmental input per unit of product for the two sectors by solving equations (3) and (4): e1¼ ½f1ð1�a22Þþa12f2�jI�Aj−1 e2¼ ½f2ð1�a11Þþa21f1�jI�Aj−1 Regarding the production price system, we assume that the quantity of consumption goods required per unit of labor time is exogenously given according to the theory of the value of labor (Marx, 2004a), thus: China Political Economy 249 ½ðaj j11þb11l1Þp1þða12 þb12l1Þp2�ð1þrÞ ¼ p1(5) ½ðaj j21þb21l2Þp1þða22 þb22l2Þp2�ð1þrÞ ¼ p2(6) where bij represents the quantity of consumption good jrequired per unit of labor for the production of product i;Pjbijpjthe wage obtained by the worker per unit of labor under the production price conditions (bij is exogenously given); pithe production price of one unit of product in sector i; and rthe average profit rate. Since we are only concerned with the relative prices of the two sectors, i.e. p¼p1=p2, we can eliminate one unknown variety with the relative price, resulting in a perfectly-identified model. For simplicity, we define the total quantity of product jrequired for one unit of product ias cij ¼aij þbijli. Based on the above points, equations (5) and (6) are reorganized into: ðc11pþc12Þð1þrÞ ¼ p(7) ðc21pþc22Þð1þrÞ ¼ 1 (8) According to equations (7) and (8), the economically meaningful relative price can be expressed as [1]: p¼�ðc11 �c22Þþ ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q��2c21 2.3 Conditions for value transfer and ecologically unequal exchange In this section, we explore how the change in the organic composition of capital and the rate of surplus value impact value transfer and unequal ecological exchange. Under the current model framework, the representations of the organic composition of capital and surplus value rate are fairly intricate, and their relationships with value, environmental input and production price expressions are rather indirect. Therefore, we need to seek new ways to express changes in the organic composition of capital and the surplus value rate. In theory, change in the organic composition of capital essentially results from the variation in materialized labor, i.e. the means of production relative to living labor. In our model, the means of production are represented by intermediate inputs. Hence, ceteris paribus, change in the intermediate input coefficient, aij, indicates the change in either materialized labor or constant capital. An increase in aij implies an increase in materialized labor, whether relative to the value of labor power or the total living labor. Therefore, to study the organic composition of capital, we focus on the change in aij. Regarding the rate of surplus value, given a specific level of labor productivity, both the amount of direct labor input and the value of labor power will impact it. Since the theory of unequal exchange primarily attributes the price level disparities between developed and developing economies to wage disparities, we mainly consider the impact of labor power value on the rate of surplus value. Obviously, under the ceteris paribus condition, the higher the number of consumption goods included in the value of labor power, i.e. the real wages, the higher the value of labor power and the lower the rate of surplus value. Therefore, for the rate of surplus value, we primarily consider the change in bij. (1) Value transfer We define v¼p−λ1=λ2as the variable representing value transfer. Obviously, the larger v, the greater the relative production price of commodity 1 compared to its relative value, putting its producer in a more advantageous position in the value transfer process. First, to examine the impact of the change in the consumption goods of workers, we have CPE 7,2 250 vv�vb11 ¼l10 B @1þc11 �c22 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q1 C A,2c21 and vv�vb12 ¼l1�ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q Obviously, vv=vb12 >0. Moreover, given that c11 −c22∨ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q, then −1<ðc11 −c22Þ=ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q<1and vv=vb11 >0. Therefore, we have the following inferences. Inference (1). Given a sector, all else being equal, an increase in the actual wages of its workers will lead to a rise in the production price relative to the value in that sector. Next, we consider the impact of means of production aij. The first to consider is the change in a11. Due to the highly complex structure of vv=va11, to avoid unnecessary complexity, we examine a monotonically increasing function v0of v:v0¼p=ðλ1=λ2Þ, under the conditions p>0and λi>0. Since the derivate of function v0and vhave the same sign, we have vv0 va11 ¼½ðc11 �c22Þþ ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q�a21l1þl2ð1�a11Þ�l2ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q� 2c21½a12l2þl1ð1�a22Þ� ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q Obviously, except for a21l1þl2ð1−a11Þ−l2ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q, all terms in the above equation are greater than 0, so the sign of vv0=va11 is decided by the sign of this expression. In addition, the impact of a12 should be considered, then we have vv va12 ¼a21l1þl2ð1�a11Þ�l2ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q ½a21l1þl2ð1�a11Þ� ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 �c22Þ2 q We have found that the sign of vv=va12 also depends on the expression a21l1þl2ð1−a11Þ −l2ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q, which indicates that a rise in the proportion of means of production in sector 1 will lead to a rise in the production price relative to the value only if this expression is greater than zero. Given that the inequality is not intuitively clear, we provide a sufficient condition for it to hold, thereby elucidating its potential economic significance. Proposition (1). If c21=c22 <c11=c12, and l1=l2>ð1−a22 −c11 −c22Þ=a21, then a21l1 þl2ð1−a11Þ−l2ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q>0. The implication of proposition (1) is that given a higher proportion of the output of the Sector 1 used by Sector 1 relative to Sector 2, the ratio of the coefficients on labor inputs in Sector 1 to those in Sector 2 should not fall below a given value if the increase in the means of production is to raise the price of production relative to its value. The Sector 1 uses a higher proportion of its own products that is almost certainly true if one considers that the two sectors are produced China Political Economy 251 The vector of control variables is denoted as CX. As previously discussed, the ecologically unequal exchange is also affected by other factors. Drawing on existing literature (Jorgenson, 2009;Li and Qi, 2011;Jing and Zhang, 2014), we primarily control for the following factors: (1) The logarithm of gross domestic product (GDP) per capita (ln gdp) and its square term (ln gdp 2 ) According to the logic of the EKC, the level of economic development can affect the ecoefficiency of an economy’s production through its technical efficiency and industrial structure, and thus its degree of ecologically unequal exchange. This effect may be in an inverted U-shape. (2) The degree of economic openness (open) We measure the degree of economic openness by the ratio of total imports and exports to GDP. Ecologically unequal exchange is a process that relies on the global market. Economies deeply integrated into the global market and relatively closed ones should exhibit different degrees of ecologically unequal exchange under similar conditions. (3) The rate of urbanization (urban) We measure the degree of urbanization by the proportion of the urban population to the total population. Urban and rural areas exert different pressures and have different demands on the environment. Furthermore, the process of urbanization can alter the industrial structure of an economy. All of them may affect the input and consumption regarding the environmental costs of the economy. (4) Labor quality (education) We measure the average quality of the labor force using high school enrollment rates. Labor quality can potentially impact an economy’s technical efficiency, industrial structure, implementation of environmental protection policies and the formation of ecological awareness, thereby influencing the economy’s environmental cost input and consumption. (5) The logarithmic values of average temperature (ln temp) and average precipitation (ln precip) The natural conditions represented by the climatic factors of an economy can impact the technical and ecological efficiency of its production processes and its consumption behaviors, thereby affecting the amount of environmental cost it uses. Therefore, we control for climate factors by using the logarithmic values of average temperature and average precipitation as control variables. The data for the control variables mentioned above, i.e. GDP per capita, the ratio of total imports and exports to GDP, the proportion of the urban population to the total population and the high school enrollment rate, are sourced from the World Bank. The data for average temperature and precipitation are sourced from Weather.org. The fixed effects of region and time are denoted by δσand δt, respectively, controlling for the unobservable factors regarding region and time. 4.2 A preliminary description of value transfer and ecologically unequal exchange After identifying the main explanatory variables, dependent variables and control variables, our primary objective is to determine whether the main explanatory variables and the dependent variables align with theoretical expectations, i.e. developed economies act as value recipients while developing economies serve as value transferors; furthermore, developed economies benefit from ecologically unequal exchange and developing economies are disadvantaged by it. CPE 7,2 258 Figures 1 and 2 exhibit the degree of value transfer of economies calculated under two different measures, respectively, and ranked the economies from highest to lowest. Figure 1 is based on the assumption of complete non-substitutability between sectors, while Figure 2 assumes complete substitutability between sectors. These figures show that regardless of the measure used to calculate value transfer, developing economies in Asia, Latin America and Eastern Europe exhibit a higher ratio of the total value to total market price, which exceeds 1, identifying them as net value-transferring regions, while most developed regions display relatively low ratios less than 1, categorizing them as net value-receiving regions. Overall, the Figure 1. Value Transfer ratio: broad measure (1995–2009 average) Figure 2. Value Transfer ratio: narrow measure (1995–2009 average) China Political Economy 259 ranking of economies does not significantly differ between the two calculation methods, with only a few economies changing positions. However, there is a substantial disparity in the numerical values of the degree of value transfer calculated under the two measures, as expected. Figures 3 and 4 illustrate the degree of ecologically unequal exchange in terms of carbon dioxide emissions and water resources for 40 economies from 1995 to 2009, ranked by magnitude, respectively. It can be observed that, firstly, most developing economies in Asia and Eastern Europe remain on the disadvantaged side of ecologically unequal exchange, while the most developed capitalist economies occupy an advantaged position. This pattern is analogous to the situation of value transfer. Secondly, compared with the value transfer, the relation between the rankings of the degree of ecologically unequal exchange and the positions of global northern and southern economies is not strictly correlated. Although relatively less developed economies predominantly face disadvantages in ecologically unequal exchange, many developed economies are also adversely affected, while many developing economies benefit from such exchanges. As previously discussed, ecologically unequal exchange is influenced by numerous factors, particularly industrial structure. We note that most developing economies disadvantaged by Figure 3. Degree of ecologically unequal exchange regarding CO 2 (1995–2009 average) Figure 4. Degree of ecologically unequal exchange regarding water resources (1995–2009 average) CPE 7,2 260 ecologically unequal exchange are undergoing rapid industrialization, while many of those benefiting have relatively low levels of industrialization. Consequently, the environmental pressures exerted by the production systems of these two types of economies differ significantly. Similar dynamics are observed with other actors. Therefore, establishing the relationship between value transfer and unequal exchange requires the use of adequate control variables. 5. Empirical analysis 5.1 Baseline regression: ecologically unequal exchange of CO 2 emissions Table 1 presents the regression results with the degree of ecologically unequal exchange in terms of CO2 emissions as the dependent variable. Columns (1) to (3) use the broad measure of the degree of value transfer (vt1) as the main explanatory variable, while columns (4) to (6) employ the narrow measure of the degree of value transfer (vt2). In terms of method selection, we adopt the model through ordinary least squares (OLS) estimation as the baseline reference model and correct the standard errors of the OLS coefficients based on heteroskedasticity-robust standard errors. We employ a regional fixedeffects model (FE1) to control for fixed effects between regions and use a two-way fixedeffects model (FE2) to further control for both regional and temporal fixed effects, forming a set of regression models from simple to complex to ensure the reliability of the regression methods and results. We conduct three regressions for each of the two main explanatory variables: pooled OLS, the FE1 and the FE2. Due to significant multicollinearity issues between the degree of value transfer under the narrow measure and both the logarithm of GDP per capita and its squared term, it is infeasible to address these under OLS conditions. Table 1. Regression of ecologically unequal exchange of CO 2 emissions (1) (2) (3) (4) (5) (6) Variables OLS FE1 FE2 OLS FE1 FE2 vt1 0.024*** 0.018*** 0.021*** (0.006) (0.004) (0.004) vt2 0.103*** 0.128*** 0.143*** (0.019) (0.023) (0.023) ln gdp 0.224** 0.360*** 0.504*** 0.145*** 0.225*** (0.107) (0.096) (0.107) (0.056) (0.062) ln gdp 2 �0.012** �0.020*** �0.029*** �0.008*** �0.014*** (0.005) (0.005) (0.006) (0.003) (0.004) open 0.023*** 0.039*** 0.037*** 0.021*** 0.041*** 0.039*** (0.006) (0.013) (0.013) (0.006) (0.013) (0.013) urban 0.076*** 0.404*** 0.244*** 0.005 0.367*** 0.224*** (0.027) (0.060) (0.078) (0.029) (0.057) (0.076) education 0.000 0.012 �0.011 0.000 0.032* 0.014 (0.0002) (0.019) (0.020) (0.0002) (0.017) (0.018) ln temp �0.077*** �0.051*** �0.016 �0.071*** �0.083*** �0.092*** (0.007) (0.012) (0.016) (0.007) (0.005) (0.006) ln precip 0.070*** 0.074* �0.081 0.082*** 0.245*** 0.314*** (0.010) (0.042) (0.066) (0.012) (0.030) (0.038) Constant term �0.840 �1.684*** �1.134 0.061 �1.903*** �2.497*** (0.568) (0.610) (0.700) (0.104) (0.364) (0.391) Sample size 524 524 524 524 524 524 R 2 0.335 0.916 0.919 0.270 0.919 0.922 Note(s): Values in parentheses represent standard errors. The symbols *, **, *** denote significance levels of 10%, 5%, and 1%, respectively Source(s): Authors’ own work China Political Economy 261 Consequently, we have removed the logarithm of GDP per capita and its squared term from the set of explanatory variables in column (4). From Table 1, we can draw the following conclusions: First, using both narrow and broad measures of value transfer, the regression coefficients are significantly positive at the 1% level across three regression methods: OLS, regional fixed effects and two-way fixed effects, which substantiates our primary hypothesis: ecologically unequal exchange occurs when value transfer takes place, indicating a strong connection in reality between the two phenomena. Second, the coefficient estimators of ln gdp are consistently positive across all regressions, and the coefficient estimators of ln gdp [2] are significantly negative, suggesting the presence of an inverted U-shaped relationship between ecologically unequal exchange and per capita GDP. This finding remains valid even after controlling for value transfer, indicating that the EKC also has explanatory power for ecologically unequal exchange. Hence, the theory of environmental unequal exchange is not merely a substitute for the EKC, contrary to the belief of many eco-Marxists. An economy’s ecological pressure is related both to the value transfer within the capitalist world system and to the economy’s stage of development. Third, other control variables are generally significant across different regressions, align with theoretical expectations and exhibit relative stability. The degree of openness to international markets is positively correlated with ecologically unequal exchange, indicating that the deeper an economy engages with the global market, the greater its exposure to ecologically unequal exchanges. This conclusion is evident given that ecologically unequal exchange inherently relies on the international division of labor and trade. The higher the rate of urbanization, the higher the degree of ecologically unequal exchange may be. Because urbanization is intrinsically linked to industrialization, the expansion of human alteration of natural environments and infrastructure not only enhances the environmental pressure exerted by production systems but also increases the proportion of intermediate goods relative to final goods, consequently increasing the environmental costs spent on intermediate goods and further the ratio of environmental cost inputs to final environmental cost consumption. The coefficients on the logarithm of the average annual temperature over the years are all negative and, in most cases, significant, indicating that warmer economies have lower degrees of ecologically unequal exchange. Meanwhile, the coefficient estimators of the logarithm of the average annual precipitation suggest that regions with less rainfall tend to have lower degrees of ecologically unequal exchange. The only difference from the theoretical expectations is that labor quality does not significantly impact the ecologically unequal exchange, and higher educational attainment does not necessarily result in lower degrees of ecologically unequal exchange. 5.2 Robustness check: ecologically unequal exchange of water resources According to the theory presented in the second section, the relationship between ecologically unequal exchange and value transfer does not depend on the type of environmental cost input involved. Therefore, our conclusion regarding the relationship between CO 2 emissions-based ecologically unequal exchange and value transfer should hold true when other environmental variables are considered. To test this, we replaced the dependent variable — ecologically unequal exchange regarding CO 2 emissions — with ecologically unequal exchange regarding water resources (see regression results in Table 2). If the results remain consistent, this would indicate that our empirical findings are robust and reliable. Table 2 demonstrates that, except for the coefficient on value transfer in the pooled OLS model of value transfer under the broad measure, which is not statistically significant, the coefficients for value transfer in the other five regressions are significantly positive at the 1% level. This indicates that the positive relationship between value transfer and ecologically unequal exchange persists even when carbon dioxide emissions are replaced with water resource inputs. This finding further corroborates the relationship between ecologically unequal exchange and value transfer. CPE 7,2 262 The insignificance of the coefficient on value transfer in the pooled OLS model under the broad measure may be attributed to two factors: strong multicollinearity between value transfer and the logarithm of GDP per capita (with a variance inflation factor exceeding 100) and the omitted-variable bias due to the absence of controlling for fixed effects. By comparing the regression outcomes, we observe that the regression results from the two fixed effects are quite similar, while the results from OLS mostly differ from those of the fixed effects, indicating that the OLS model might suffer from substantial omitted variable bias. Therefore, we primarily focus on the regression results from both types of fixed effects. The insignificance of the OLS coefficient under the broad measure does not affect the overall estimation results. The coefficients on the logarithm of GDP per capita and its square term are both significant under the two fixed-effects models and maintain the same signs as those in the main regression results. The positive coefficient on the logarithm of GDP per capita and the negative coefficient on the squared term indicate that the ecologically unequal exchange of water resources also has an inverted U-shaped relationship with GDP per capita. The degree of openness to international markets and the urbanization rate are significant in results other than the OLS regression and maintain the same signs as those in the main regression results. The amount of precipitation is consistent with the main regression results in the FE1. Unlike the main regression results, the coefficient on labor quality is significantly negative, suggesting that improving labor quality can considerably reduce the degree of ecologically unequal exchange of water resources. This may be related to the fact that the primary consumption of water resources comes from agriculture, and since agriculture in the major developing economies among the sample is operated by individual agricultural laborers, improving the quality of these laborers can more directly improve the efficiency of water use in Table 2. Regression of ecologically unequal exchange of water resources (1) (2) (3) (4) (5) (6) Variables OLS FE1 FE2 OLS FE1 FE2 vt1 0.021 0.121*** 0.122*** (0.043) (0.040) (0.041) vt2 0.465** 0.616*** 0.711*** (0.183) (0.206) (0.213) ln gdp 0.767 5.592*** 4.986*** 0.544** 3.846*** 3.217*** (0.836) (0.991) (1.087) (0.256) (0.626) (0.689) ln gdp 2 �0.046 �0.281*** �0.237*** �0.030** �0.190*** �0.140*** (0.042) (0.051) (0.058) (0.013) (0.034) (0.040 open �0.121** 0.228** 0.267*** �0.100* 0.236** 0.276*** (0.053) (0.093) (0.096) (0.053) (0.093) (0.096) urban �0.402* 1.429** 1.981** �0.339* 1.221* 1.909** (0.208) (0.659) (0.814) (0.197) (0.660) (0.813) education 0.308** �0.578*** �0.584*** 0.323** �0.467*** �0.446** (0.135) (0.167) (0.182) (0.136) (0.167) (0.179) ln temp �0.503*** 0.857*** 0.216 �0.504*** 0.881*** 0.0786 (0.046) (0.324) (0.491) (0.044) (0.323) (0.491) ln precip 0.060 2.497*** 0.607 0.111** 3.078*** 0.804 (0.056) (0.772) (1.297) (0.056) (0.768) (1.298) Constant term 0.100 �45.010*** �29.550** �0.124 �41.230*** �23.310** (4.405) (7.592) (11.820) (1.576) (7.164) (11.030) Sample size 524 524 524 524 524 524 R 2 0.260 0.843 0.848 0.268 0.843 0.849 Note(s): Values in parentheses represent standard errors. The symbols *, **, *** denote significance levels of 10%, 5% and 1%, respectively Source(s): Authors’ own work China Political Economy 263 agriculture, reduce the cost of water per unit of product, and thus reduce the degree of ecologically unequal exchange. Another difference from the main regression results is the coefficient on the logarithm of temperature, of which estimators indicate that higher temperatures are associated with higher degrees of ecologically unequal exchange. This is intuitive, as regions with higher temperatures generally experience higher evaporation levels, which can lead to an increase in overall water usage. However, once time-fixed effects are controlled for, the coefficient is no longer statistically significant, although the direction of the coefficient remains unchanged. Therefore, it is difficult to draw definitive conclusions regarding the impact of different climates on the ecologically unequal exchange in terms of water resources based on the current results. 6. Conclusion This paper employs the concept of ecologically unequal exchange to explain the growing ecological disparities between developing and developed countries. It also connects ecologically unequal exchange with traditional theories of unequal exchange and value transfer. By constructing a two-sector, two-economy Okishio-Morishima model, we demonstrate that the high organic composition of capital and high real wages in developed economies can lead to international value transfer under fairly relaxed conditions and similarly lead to ecologically unequal exchange under analogous conditions. Subsequently, we used WIOD data to calculate the degrees of value transfer and ecologically unequal exchange for 40 economies from 1995 to 2009 and verified their relationship using regression analysis. The existence of ecologically unequal exchange indicates that the increasing consumption of resources and environment in developing countries is not solely a consequence of their factors, such as the degree of regulation, developmental stages or technological levels, as the developed economies also play a significant role in this process. When developed economies import products from developing economies at very low prices, they exchange lower environmental costs for higher environmental cost inputs of developing economies. It can be said that through ecologically unequal exchange, developed economies transfer their regional environmental costs to developing economies. Consequently, developed economies should be held accountable for the high greenhouse gas emissions, high energy consumption and high pollution prevalent in many developing economies today. The relationship between ecologically unequal exchange and value transfer indicates that the mechanism of transferring environmental costs is deeply rooted in the production structure of the capitalist world system. As long as developed countries have a higher organic composition of capital and wages, value transfer and ecologically unequal exchange can occur on the global market, even in perfect competition. The higher organic composition of capital and high wages are also the results of the accumulation process in the capitalist world system, particularly with the trend towards higher capital intensities being self-reinforcing, which implies that value transfer and ecologically unequal exchange are also self-reinforcing. As long as the production structure of the capitalist world system remains unchanged, developing economies will find it challenging to break free from the pattern of bearing the environmental burden for the production of goods consumed by other countries, and hence, it will be difficult for them to improve their ecological environment fundamentally. This is particularly evident in China. As demonstrated by the data presented in Section 4, China exhibits a significantly higher level of ecologically unequal exchange compared to other economies in the sample. This phenomenon is closely intertwined with China’s reliance on inexpensive labor and environmental degradation for exporting cheap goods within the current global production system. Consequently, while the volume of exports has surged, environmental challenges have simultaneously intensified. These environmental issues are not solely a domestic concern of China but are inherently linked to the global economic production structure and cycle. Therefore, addressing these environmental concerns necessitates that China both advances its economy towards a more advanced stage of CPE 7,2 264 development with an optimized division of labor and a rational economic structure, as well as actively engages in global governance to reform the inequitable traditional international economic order, thereby gradually resolving its environmental problems. Notes 1. The other root for the relative price, p¼ ½ðc11 −c22Þ−ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q�=2c21 is omitted because it has no economic significance as it is negative due to ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 4c12c21 þðc11 −c22Þ2 q>c11 −c22. 2. In this context, the same coefficient is aggregated on a global scale, following the general logic of input–output table aggregation (Feng, 2016b). References Andersson, J. and Lindroth, M. (2001), “Ecologically unsustainable trade”, Ecological Economics, Vol. 37 No. 1, pp. 113-122, doi: 10.1016/s0921-8009(00)00272-x. Baran, P.A. and Sweezy, P.M. 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