Environment-Friendly Behaviour and Competitiveness: A Study of Pulp and Paper Industry in India

Environmental and Resource Economics14: 481–501, 1999.© 1999Kluwer Academic Publishers. Printed in the Netherlands.

481

Environment-Friendly Behaviour andCompetitiveness: A Study of Pulp and PaperIndustry in India

GOPINATH PRADHAN and KAUSTUVA BARIKDepartment of Economics, School of Social Sciences, Indira Gandhi National Open University,New Delhi 110068, India

Accepted 21 August 1998

Abstract. This paper seeks to examine the relationship between competitiveness and environment-friendly behaviour of producers under an economic liberalisation regime. For that purpose, it employsa probit model and estimates the influence of the prime movers of industrial growth such as technicalchange and economies of scale on environmental degradation. The empirical results of the studyof pulp and paper industry, identified as one of the most polluting industries in India, indicatethat these variables, as the key players of competitiveness improvement, have positive influenceon environment-friendly behaviour. Such findings, therefore, fail to provide support to a view thatarticulates ruthless exploitation of the environment under economic liberalisation programme.

Key words: competitiveness, economies of scale, environment-friendly behaviour, technical change

JEL Classification: Q28

1. Introduction

Search for policy options capable of protecting environment without compromisingwith the objective of industrial development continues to draw analysts’ attention.While the suggestions like market based incentives (MBIs), improved technology,free trade (see, World Bank 1992), demarcated zones, with the provision of com-mon pollution control devices, to be used by a group of industries (see, Ahuja 1992)are put forth as environment-protecting steps, another important measure, i.e.,keeping producers competitive in the international market that helps endogenisethe environmental cost of production is yet to be comprehended fully.

It needs no highlighting that the policy prescription based on competitivenessdoes not enjoy consensus on its potential of protecting the environment. As studieson economic liberalisation show, views differ on the impact of competitivenesson an environment-friendly behaviour (i.e., inclusion of healthy environment as avariable in the objective of production) of competing producers (see, Kothari andKothari 1993). Thus, although improvement in competitiveness of industrial sector

482 GOPINATH PRADHAN AND KAUSTUVA BARIK

remains the central theme of recent economic reforms, there are not many studiesthat attempt an explicit evaluation of its impact on environment.

A major factor behind the prevalence of divergent views on the likely impactof competitiveness is the absence of its transparent relationship with environment-friendliness. Such a feature is largely responsible for the persistence of an old beliefthat there is a conflict between environmental objectives and economic develop-ment. In exercising a choice between the two, therefore, priority is often assignedto economic growth.

An endorsement of the growth vis-à-vis environment protection argument, how-ever, is difficult in the context of economic reforms sweeping various parts ofthe world. A remarkable feature of the recent thinking is the convergence pointthat competition fosters economic growth with environment protection (see, Porter1991; Stewart 1984). Identification of the route through which such a relationshipis likely to manifest, therefore, remains a major challenge before the economicpolicy.

The present paper seeks to evaluate the relationship between competitivenessand environment-friendliness in the presence of an economic reform regime. Forthat purpose Section 2, which follows, examines the theoretical insights on therelationship between these two variables. As a case study, the profile of pulp andpaper industry in India1, which accounts for 5% of fuel consumed by the aggregatemanufacturing sector, is presented in Section 3. Section 4 gives methodology ofthe study and presents the empirical results on competitiveness and environment-friendly behaviour by considering data of the pulp and paper industry. Section 5presents the summary and conclusions of the analysis.

2. Competitiveness and Environment-friendliness

A positive relationship between environment-friendly behaviour and competitive-ness can be argued as a possible outcome in dynamic rivalry models of IndustrialOrganisation Theory. It is, for example, argued that in their attempt to stay aheadof rivals, producers are forced to commit themselves on R&D expenditures andchoose technologies that offer competitive prices after internalising the externalit-ies like pollution costs (see, Paulus 1988). This strand of thought finds increasingapplication in the formulation of recent years’ trade policy (see, for example, Krug-man 1986). Implicit in such an approach is the theoretical insight that benefitsof trade can be manipulated to one’s advantage when there are product marketimperfections, significant economies of scale, learning effects and R&D activities(see, Amsden 1989; Balassa 1991; Hughes 1992; Krueger 1993; Wade 1990)2.

The relationship between competitiveness and environmental abatement is sup-ported by econometric estimation undertaken by some studies (see, for example,Birdsall and Wheeler 1993; Wheeler et al. 1995). While assessing the impact oftrade liberalisation on environmental performance, these studies infer that openness

PULP AND PAPER INDUSTRY IN INDIA 483

helps in adoption of cleaner technology (see, for example, Birdsall and Wheeler1993).

However, trade liberalisation alone need not be the prime force behindcompetitiveness-improvement process. On the contrary, competitiveness assess-ment often contains as many as 330 variables, (as is, for example, reported inWorld Competitiveness Report 1992) which indicate its complex nature. By bring-ing in the trade liberalisation proposition, it is intended to drive home the pointthat protected economies are found to have favoured pollution intensive industrieswhile open economies seem to opt for cleaner industries (see, Birdsall and Wheeler1993).

By incorporating plant characteristics like production scale, choice of techno-logy, ownership and vintage apart from economic considerations like input prices,profitability, market characteristics, availability of information on abatement tech-nology and sources of financing as determinants of pollution intensity, Hettige etal. (1996) show that competitiveness variables have a significant influence on theenvironmental performance of plant’s production process.

Inclusion of a greater number of competitiveness variables (330 as given inthe World Competitiveness Report) is not easily amenable to generation of sharpconclusions. The literature in this area does not provide any clue to rank the vari-ables of competitiveness in order of their importance. Therefore, formulation ofa precise relationship between competitiveness and environment-friendliness toobtain results for policy prescription becomes a difficult task. While attempts havebeen made to present the competitiveness variables in four or eight groups of maininteractive variables (see, Doering et al. 1992), ranking of such groups in orderof their importance remains difficult to obtain a verifiable relationship betweenenvironment and competitiveness.

An examination of the experience of countries which have relied on strategictrade theory offers some broad idea on the variables to work with for attainingcompetitiveness in the international market (see, World Bank 1993). While theor-etical support for the process of selection is not always clear, one can start with the‘prime movers’ of industrial growth. For instance, the key variables that enter thedecision making process of producers for sustaining the international competitiveadvantage may be divided into two broad categories: first, the internal planning anddevelopment of a firm with respect to on-going improvements in innovation, scaleeconomies (s) and rate of technical change (tc

∗); and second, the macro-economicpolicy decisions on savings, investments, exchange rates, infrastructure, quality ofwork force and domestic competition. In this kind of a formulation, variables ofthe first group form a part of prime movers of firm’s growth. On an assumptionthat economic reform introduces a set of macro-economic policy measures, whichare pro-growth in character, attempts can be made to assess the impact of primemovers on the polluting and other environment degrading behaviour of a firm.

A recent approach that starts with the conviction that international competitive-ness can be created with a properly structured policy package (see, Porter 1985)


encompasses other important variables of competitiveness, which may be exertinginfluence on producers’ behaviour towards environment. This type of formulationof competitiveness is already reflected in the works undertaken by experts workingin the ‘New Ideas in Pollution Research’ (NIPR) project of the World Bank. In par-ticular, it has been found that (i) there is a positive relationship between scale andprofitability (as competitiveness variables) and environment-improvement (see,Hartman et al. 1997; Hettige et al. 1996); (ii) government intervention throughformal regulatory measures performs better for environment-protection only whenthe level of development is higher (see, Dasgupta et al. 1995); and (iii) openeconomies show better environment-protection standards than that of the inward-looking ones (see, Birdsall and Wheeler 1993; Wheeler et al. 1995). Keeping thesefindings in view, change in polluting behaviour of producers in case of change incompetitiveness will be assessed in the following by considering the pulp and paperindustry of India.

3. Profile of Pulp and Paper Industry

Most of the third world countries use pulpwood3 obtained through kraft process toproduce printing and writing paper, newsprint and paperboard. The kraft processapplies heat and chemicals4 to break down the wood-chips. A lot of water5 needsto be supplied while achieving the fibrous state of wood-chips. When water hasbeen removed, the wood fibres hold themselves together which makes it possibleto manufacture paper.

The kraft and other process-based pulp are produced in bleached or unbleachedform. In case of the former, chlorine is used as the principal bleaching agent.The effluents released in the process contain complex chlorine compounds. Whileleaving the mill, these effluents carry with them solid materials and organiccompounds6 that draw oxygen from water as they decay. Consequently, wastewaterproves toxic to fish and other sensitive organisms. Moreover, compounds, knownas dioxins and furans, found in the effluents are bio-accumulative in plants andanimals and could be potentially harmful to human beings.

Apart from water pollution, pulp making contributes to air pollution as well.The gaseous emissions from digesters, soda recovery boilers and coal-fired boilersbecome the major factors behind air pollution. The escaping gas from the kraft milldigesters is odorous and causes aesthetic pollution problem.

Changes in the polluting behaviour of the pulp and paper industry is likely tohave a profound effect on the quality of environment in India as it happens to be oneof the most polluting industries (see, Government of India 1996a). With a growthrate of 15.7% per annum in value of output, the magnitude of pollution caused bypulp and paper industry remains on the higher side. Table I given below shows thatthe size of average capacity in paper industry registers a decline over time. Sucha trend is due to the establishment of an increased number of small-sized firms inthe paper industry. For example, out of 380 mills functioning in the year 1993 in


Table I. Average capacity of Indian paper and paper board mills (in′000 tonne).

Year No. of units Total capacity Average capacity

1965 52 644 12.4

1970 57 768 13.5

1980 123 1538 12.5

1990 305 3014 9.9

1993 380 3790 10.0

Source: Ahuja (1992) and Indian Paper Makers Association (1995).

India, 359 (90% approximate) units belong to small-scale category having installedcapacity of less than 33,000 tonne per annum. The liberalised policy of the gov-ernment to import second-hand machinery may have helped in the establishmentof an increased number of small-scale plants. As of now approximately 66% of theinstalled capacity of paper industry is occupied by small-scale units.

An important aspect of the increased number of small-scale paper plants ishigher rate pollution. In contrast to the integrated large-sized paper mills, the smallones do not recover the used-chemicals as doing so is found to be uneconomical.In fact, some of the tiny mills do not treat wastewater to bring it to the level ofthe standard laid down by the regulatory agency of India7. It is estimated thatnon-recovery of used-chemicals in the below 50 tpd small-scale paper mills isincreasing pollution load equivalent to a 100 tpd mill equipped with a recoveryunit (see, Ahuja 1992). Moreover, water pollution caused by the small-scale unitsremains critical as re-use of water in these is not practised. A small paper millconsumes, on an average, 49,000 to 90,000 gallons of water while an integratedpaper mill of more than 100 tpd capacity consumes 66,000 to 93,500 gallons ofwater to produce a ton of paper (see, Dasgupta and Murty 1985).

Despite the pollution factor, establishment of small-scale units in pulp and paperindustry is likely to continue in India. Although the large scale integrated papermills respond to pollution control measures more effectively, they do not haveadequate availability of regular and uninterrupted flow of raw materials supplylike pulpable wood to carry on production (see, Indian Paper Makers Association1995). Producers in India, therefore, rely on small-scale units for paper production,which use bagasse, agro-residues and other non-conventional raw materials.

The composition of pulp and paper industry in India restricts the efficacy ofexisting pollution control measures. As mentioned above, small-scale units findit uneconomical to install pollution control devices. The black liquor of non-wood pulp has high evaporation and low chemical recovery rates. The option of‘end of the pipe’ control as practised until now, therefore, is bound to produceunsatisfactory level of effluent water treatment in the pulp and paper industry.

The inadequacy of the end-of-the-pipe method in case of pulp and paperindustry, however, has not prompted appropriate change in government regula-


Table II. Import duty collection rate on paper industry (in per cent).

Year Rate

1990–91 24

1991–92 23

1992–93 18

1993–94 13

1994–95 11

Source: Government of India (1996b).

tion. On the contrary, the policy seems to be relying on the practice found inOECD countries for pollution control. For example, the environmental policy ofIndia, with the initiation of economic liberalisation in 1991, has contemplatedswitching over to market-based incentive (MBI) system (see, Government of India1996b). Although introduction of fiscal measures has been proposed to tackleenvironmental problems, details of operationalisation of the policy are to be madeavailable. While fiscal incentives as a possible MBI-option is pointed out in thepolicy document, its modus operandi remains unclear. Doubts crop up because themajor thrust of the economic reform is geared towards a regime of lower taxationwhereas fiscal incentive based MBI-option may have to impose a pollution taxincreasing thereby the tax burden.

It may be recalled that economic reform in India strive to relieve the industrialsector of the higher tax burden with a view to achieve competitiveness in the inter-national market. For that purpose, the fiscal policy in recent years has includedthe package of simplification of the tax structure and reduction of tax rates (see,Government of India 1992). Under such an environment, whether the pulp andpaper industry will be required to face an additional pollution tax is not clear. Atleast the recent trend of tax burden on pulp and paper is declining. It can be seenfrom Table II that the collection rate of import duty is 11% at present while it wasat a higher level of 24% during 1990–1991.

In India, paper and newsprint industries except those based on bagasse requirecompulsory industrial licensing for setting up plants. There is automatic approvalof foreign technology agreement and up to 51% foreign equity participation isallowed. In order to improve production and viability in pulp and paper industry,steps taken are (i) liberalised facility for import of raw materials, (ii) excise con-cessions for use of non-conventional raw materials, (iii) broad-banding of differentvarieties of paper and paper board, and (iv) delicensing of the manufacture ofpaper based on minimum 75% pulp from bagasse, agricultural residues and othernon-conventional raw materials subject to location policy.

While the external trade of Indian pulp and paper products is not significantuntil now (see, Table III), the industry circle expects stiff competition in paper-board segment. With the major emphasis on export-led growth of the liberalisation


Table III. Share of export and import in total consumption of paper.

Year Import as % of Export as % of Production as % of

consumption consumption consumption

1950–51 18.20 — 81.80

1960–61 6.09 0.26 94.17

1970–71 1.89 3.06 101.17

1980–81 22.15 0.06 77.91

1988–89 11.14 0.05 88.91

Source: Ahuja (1992) and Government of India (1996).

programme and opening up of the economy, the packaging industry is undergoing aqualitative change. Especially, the demand for containers and boxes for packagingof agricultural and allied products entering the export as well as domestic markethas been going up. Production of containers and boxes made out of paper andpaper board has grown in value term at current prices by 27% per annum between1987–88 and 1992–93 while that of the entire industry has been 23% per annum.As India has a revealed comparative advantage8 in agricultural and allied products,an assessment of the changed demand conditions for packaging does not appear tobe without a basis. While the environmental impact of the projected demand forpaper and paper board to the tune of 0.90 million tonne in the year 2000 needs acareful scrutiny, there could be other dimensions as well. For instance, entranceof foreign competitors into the market9, as expected by the industry, is likely tochange the nature of environmental exploitation. The direction of structural changein the packaging industry to meet the foreign competition offers an interestingopportunity for an assessment of producers’ behaviour with respect to environment.

Apart from the pollution caused by compositional characteristic of the industry(like a greater share of small-scale units), the polluting behaviour of producersmay also be ascribed to inward looking policy followed in India since the initi-ation of planned economic development during the 50s. Remaining insulated fromcompetition of the international market, producers seem to have had no incentiveto either introduce cleaner (less polluting) technology or stop over-exploitation ofnatural resources that provide raw material for pulp making. It may be seen fromthe table at footnote 4 given at the end that chemical-based technology continues todominate the industry with as much as 78% of the installed capacity. The pollutingcapacity of the industry could be high, as bio-oxygen demand (BOD) generated bychemical (Kraft) pulping process is 41 Kg/MT while that of chemical (Sulphite)process is 116 Kg/MT. In contrast, thermo-mechanical pulping process, whichgenerates BOD of 28 Kg/MT, has only a marginal share of 11 per cent of theinstalled capacity in India. Apparently, Indian paper producers have not felt theneed of introducing this technology although it has advantages like lower capital


costs, less technological complexity, less environmental impact, and better qualityand stronger fibre (see, World Bank 1992).

A common perception in India is that the economic policy with respect to papermanufacturing made bamboo, a basic raw material for pulping in India, cheaperthan that of firewood. There is scope, therefore, to argue that Indian producers havenot gone for establishment of cleaner thermo-mechanical technology. The fact thatsuch a technology can reduce raw material cost to the extent of 5% compared tochemical and semi-chemical based pulping process seems to have no impact onthe Indian producers. In addition, the industrial policy of India until 1991 requiredcompulsory licensing for either establishing new units or expansion of the existinginstalled capacity. The stringent bureaucratic control over licensing process hasoften led to continuation of the existing structure despite its detrimental impact onenvironment. The observed dominance of chemical-based pulping in India may bea result of the policy of command and control.

Export pessimism that entered the thinking of policy makers in the early phaseof Indian planning could also be responsible for producing the existing structureof pulp processing, which appears to be more polluting. As foreign exchangeconstraints became evident during the Second Five Year Plan (1956–61), importrestrictions were resorted to and India opted for a strategy of self-reliance. This,along with the goal of rapid industrial development, produced the policy of importsubstitution. Imposition of trade barriers to support the policy of self-reliance sub-sequently severely affected the foreign trade of India. Absence of import licencerequirement and restriction on foreign collaboration, which could have helped thepaper industry to go for a cleaner technology such as thermo-mechanical pulping,did not come through.

4. Methodology

The present study postulates that environment-degrading behaviour of the paperindustry in India is inversely related to competitiveness. Such a proposition impliesthat there will be a decrease in the environmental damage caused by pulp andpaper industry as its competitive strength improves under the liberalisation regime.Competitiveness, for the present study, is seen through two prime movers ofindustrial growth, namely, tc

∗ and s. In addition to these, two more explanatoryvariables, highlighting the degree of openness of the economy (op) and govern-ment environmental regulation (gr), have been added for estimating environmentdegrading behaviour. A probit model10 is employed for estimating the underlyingrelationship, the regression equation for which takes the form

yi = X iB+ εi (1)

where, yi = environment-degrading behaviour,

X i = vector of explanatory variables,

B = vector of parameters, and


εi = error term.

The variableyi , kept as unobservable in the present study, assumes dichotomousvalues such that

yi = 1 if y∗i > k

= 0 if y∗i ≤ k (2)

where y∗i is observable dummy foryi and k is a constant. There will be fourexplanatory variables, viz., t∗c, s, op and gr in (1).

Technical progress enables production of greater output with the same volumeof inputs, or the same output with lesser inputs, thereby shifting the productionfunction upward (see, Kennedy and Thirlwal 1972). Such an upward shift in theproduction function strengthens the efficiency of a firm and enables it to withstandpressure of competition, both external and internal. In order that producers staycompetitive in the international market, it is necessary to have higher rate of tech-nical change. Therefore, it is expected that tc

∗ will have an inverse relationshipwith environment-degrading behaviour. Another explanatory variable included in(1) above, s, is defined as the reciprocal of the elasticity of cost with respect tothe value of output. It is expected that as scale economies are realised, cost savingadvantages would enable the industry to plan for improving long run competitiveposition in the international market. In order to stay competitive over time, it willinclude pollution cost as an essential variable while minimising cost of produc-tion. Under such a strategy, polluting tendency is likely to decline. Thus, s willshow an inverse relationship with the dependent variable. Outward orientation oropenness of an economy helps absorb cleaner technology (see, Wheeler et al.,1995). Following this result, it is expected that the explanatory variable relatedto openness index (op) in (1) above should have an inverse relationship withyi .The remaining explanatory variable, i.e., gr, is expected to be inversely related ashas been observed by Dasgupta et al. (1995).

In a formulation such as (1),yi = 1 wheneverεi > −X iB andεi ’s are drawnfrom the standard normal distribution. Thus,

Pi = P(εi > −X iB) = F(X iB) (3)

where Pi is the probability thatyi takes the value 1 and F is the numerical valueof the standard normal cumulative distribution function. Since data taken for thepresent analysis give one observation for each year, maximum likelihood methodis adopted for estimation, the likelihood function being:

` = 5i f(yi) = 5iPiy(1− Pi)

1−y

= 5iF(X iB)y[1− F(X iB)]1−y (4)

Under such an estimation procedure, the resultant coefficients will have asymptoticproperties implying consistency of estimates.


At this point, it is necessary to spell out clearly the variables used in the probitmodel mentioned above. The dummy variableyi

∗ is taken from a time series ofmaterial inputs share in total output (at current prices) of the paper industry. Mater-ial input is considered as a major factor contributing to environmental degradationas material intensive production tends to be pollution intensive (see, Dasgupta etal. 1995). The constant k, which influences the value ofyi in (2), is taken to be aspecific level of material share in output.

For the dependent variable to assume value 1 (or 0) according to material inputsshare exceeding (less than or equal to) a specified level, we experimented withthe behaviour of the probit model by changing the value of k in (2). While it isneither necessary nor sufficient to assume that the behaviour might be changingonce the level of material used in production exceeds 50%, the present study startslooking for the possibility of changed behaviour at such a level. An underlyingidea behind this specification is a simple presumption of searching solutions fromthe middle rather than the extreme levels. The choice of translating the behaviourinto polluting or non-polluting, a binary specification, is drawn from the traditionaldecision making process in educational institutions where a cut off point is decidedto declare a student to have cleared a particular examination. For example, in India,School and University authorities have accepted the norm of declaring a student tohave cleared an examination on securing 40% marks. Thus, in this format, whenthe student secures 39% (one per cent less than 40%) (s)he is declared to havenot cleared the examination, which highlights the binary decision making process.Here, the authorities depend upon ‘yes’ or ‘no’ type of decisions to decide success-ful completion or otherwise of a course. Following a similar analogy, the presentstudy seeks to ascertain the range in which a polluting producer might be changinghis/her decision of environmental degradation.

The explanatory variables tc∗ and s used in the model are taken from an

estimated translog cost function which takes the form (see, Fuss 1987):

ln C = α0+6iαi ln Pi + 1

26i6jβij ln Pi ln Pj + αq ln q

+6iβiq ln Pi ln q+1

2βqq(ln q)2+ αt ln t+6iβit ln Pi ln t

+1

2βtt(ln t)2+ βqt ln q ln t (i, j = K,L,M) (5)

where Pi = price of ith input, inputs considered being capital (K), labour (L) andmaterials (M), t = time, q = value of output and C = total cost. The above costfunction is estimated through a system of equations comprising the cost function(5) and the derived share equations (see, Christensen and Greene 1976). Partiallydifferentiating (5) and on applying Shephard’s lemma, the ith share equation (i =K, L, M) is obtained such that

θi = αi +6jβij ln Pj + βiq ln q+ βit ln t (j = K,L,M) (6)


For the cost function to be linearly homogeneous in input prices, the restrictionsimposed are

6iαi = 1, 6iβij = 0, 6iβiq = 0, 6iβit = 0 andβij = βji (i, j = K,L,M) (7)

As input shares add up to unity, the problem of linear dependency and con-sequent singularity of disturbance covariance matrix is avoided by dropping thelabour share equation. The present choice is largely guided by the finding thatestimates are invariant to the share equation dropped (see, Christensen and Greene1976). Dropping of labour share, however, is different from two earlier Indianstudies (see, Jha, Murty and Paul 1991; Jha and Sahni 1991) where the equationdropped was material share. The remaining two share equations, viz., K-share andM-share, along with (5) are utilised to estimate the parameters through Zellner’smethod. Input prices and output have been normalised to unity for the beginningyear. The software package SHAZAM is used to estimate the system of equations.

It may be noted that the translog cost function is not well behaved throughout. Inorder to see that the estimated cost function is well behaved in the sample range wecheck for monotonicity and concavity of the estimated cost function. Monotonicityrequires that all the estimated cost share equations be positive at every samplepoint. The concavity of the estimated cost function is confirmed by fulfilment ofthe condition that the bordered Hessian matrix is negative semi-definite. Using (5),the explanatory variable s is derived as

s= 1/(δlnC/δlnq) = (αq+ βqq ln q+6iβiq ln Pi

+βqt ln t)−1 (i = K,L,M) (8)

The industry exploits economies of scale if s> 1. The other explanatoryvariable, tc∗ is defined as

t∗c = −δ ln C/δ ln t = −(αt +6iβit ln Pi + βqt ln q

+βtt ln t)/t (i = K,L, M) (9)

It may be noted that (5) is estimated first through its share equations. Sub-sequently (8) and (9) are obtained through the estimated coefficients of (5).

Of the remaining two explanatory variables, viz., op and gr, the former isSummers-Heston Openness Index (see, Summers and Heston 1984). It measuresthe relative openness of Indian economy by taking into account the share of exportsand imports in GDP. For the inclusion of gr in the regression analysis, the presentstudy considers the year 1974, the time when Water (Prevention and Control ofPollution) Act was introduced. The variable takes a dummy form by assuming pol-lution to be different in the pre- and post-1974 periods. If the government regulationhad a significant impact then the producer behaviour would be less environmentdegrading in the post-1974 years. Accordingly, the dummy specification follows 0and 1 respectively for the pre- and post 1974 periods.


Table IV. Estimated coefficients of translog cost function.

Parameter Estimate t-ratio

α0 9.2342 127.23

αk 0.1554 9.53

αl 0.1737 17.01

αm 0.6710 50.38

βkl 0.0011 0.06

βkm 0.0061 0.34

βlm 0.2274 6.09

βkk –0.0072 –0.31

βll –0.2286 –5.41

βmm –0.2336 –6.62

αq 1.3039 2.24

βqq 0.4216 0.54

βkq 0.1572 4.58

βlq –0.0554 –2.33

βmq –0.1018 –3.93

αt 0.2326 1.08

βkt 0.0032 0.23

βlt 0.0028 0.31

βmt –0.0059 –0.52

βtt –0.3416 –1.28

βqt –0.1708 –0.35

Data on output, inputs and cost used in estimating the above equations are takenfrom the Annual Survey of Industries (see, Government of Indiaa) for the period1963–64 to 1992–93. The detailed database and definitions of variables are given inthe Appendix. For the purposes of the probit model the period considered is 1966–93. Data for initial three years (1963–64 to 1965–66) are dropped from the purviewof regression because of difficulties encountered in the adjustment of calendar tofinancial year (see, Pradhan and Saluja 1998).

5. Empirical Results

It may be recalled that two out of the four explanatory variables, viz., s and tc∗ of

(1) are taken from an estimated equation (5). It is, therefore, necessary to brieflytouch upon the important features exhibited by these two variables before lookinginto the empirical findings of (1). The estimated coefficients of (5) are presented inTable IV to evaluate the well-behavedness of the estimated cost function.


It may be seen from the table that the estimated coefficientsβKK , βLL andβMM are negative (–0.0072, –0.2286 and –0.2336, respectively). An implicationof these is that Allen Partial Elasticity of Substitution11 of capital (labour/material)input with respect to capital (labour/material) is negative. This will help producea negative semi-definite bordered Hessian matrix. It indicates, therefore, that theestimated cost function is concave. Again, by combining appropriate coefficientsfrom Table IV according to the requirement of (8) it is observed that the estimatedcost shares are positive at every sample point. This fulfils the monotonicity condi-tion. The estimated cost function, therefore, can be accepted to be well-behaved.By combining the relevant coefficients from Table IV, according to (6) and (7), sand tc∗ are obtained.

Table V below gives the necessary information on s and tc∗ along with that

of op for the period 1966–93. It can be seen from the table that the pulp andpaper industry in India has been experiencing diseconomies of scale. Althoughdiseconomies of scale persisted throughout, there was a little improvement up to1974–75. Thus starting with a scale coefficient of 0.8425 in the year 1966–67,the industry reached a level of 0.9655 in 1974–75. However, by the year 1993 thedeclining scale coefficient reached a lower level of 0.8483. The behaviour of tc

∗also broadly follows the pattern of s. As can be seen from the table, tc

∗ witnessedan increase from 0.0792 to 0.0807 in the initial phase. But subsequently, startingwith the year 1969–70 a declining trend set in. From the highest tc

∗ record of 1969–70 (0.0807), the lowest is reached by the year 1992–93 (0.0435). Openness indexalso witnessed a declining trend, as it was 1.53 for the year 1966–67 and 0.98during 1992–93.

Results of an estimated probit model are reported in Table VI. The tablesummarises the findings when environment-degrading behaviour is changed withmaterial inputs share of production crossing 51%. It is apparent from the table thatthe underlying relationship between competitiveness and environment-degradingbehaviour is captured fairly well by the estimates. The goodness of fit is at anacceptable level and coefficients of three out of four explanatory variables havethe expected signs. As the likelihood ratio statistic is significant at 1% level, thehypothesis of no relationship between dependent and explanatory variables is rejec-ted. Since the coefficient of determination does not hold good for probit models,a number of pseudo-R2 have been proposed in the literature which have a rangeof 0 (for no relationship) to 1 (for perfect relationship). The goodness of fit of theestimated probit model in the present study is judged by such summary measuresas Maddala R2, Cragg-Uhler R2 and McFadden R2 (see, Table VI).

The present analysis brings out the following features of pulp and paperindustry. As s has a negative relationship with the environment-degrading beha-viour, it may be inferred that higher economies of scale reduces the probabilityof environmental degradation. Since the advantages of scale economies are fastdeclining in the industry (see, Table V), the incidence of environment degradationcaused by paper industry in India may be rising. The estimated coefficient associ-


Table V. Returns to scale, rate of technical change and openness index.

Year Returns to scale Rate of technical Openness index

change

1966–67 0.8425 0.0797 1.53

1967–68 0.8738 0.0815 1.37

1968–69 0.8862 0.0804 1.23

1969–70 0.8580 0.0807 1.03

1970–71 0.8306 0.0797 0.91

1971–72 0.8449 0.0763 0.91

1972–73 0.8405 0.0740 0.82

1973–74 0.8754 0.0703 0.73

1974–75 0.9655 0.0658 0.73

1975–76 0.8731 0.0657 0.90

1976–77 0.8586 0.0636 0.89

1977–78 0.8415 0.0620 0.88

1978–79 0.8599 0.0595 0.82

1979–80 0.8629 0.0583 0.81

1980–81 0.8644 0.0568 0.76

1981–82 0.8090 0.0566 0.76

1982–83 0.8644 0.0533 0.86

1983–84 0.8522 0.0522 0.81

1984–85 0.8164 0.0520 0.82

1985–86 0.8329 0.0504 0.87

1986–87 0.8079 0.0498 0.75

1987–88 0.8024 0.0487 0.75

1988–89 0.7872 0.0480 0.73

1989–90 0.8027 0.0469 0.82

1990–91 0.7838 0.0464 0.85

1991–92 0.8041 0.0449 0.88

1992–93 0.8483 0.0435 0.98

N.B.: s and t∗c given in columns 2 and 3 have been estimated from a translogcost function of the form lnC =α0 + 6iαi ln Pi + 1

26i6jβij ln Pi ln Pj + αq ln q +

6iβiq ln Pi ln q + 12βqq(ln q)2 +αt ln t + 6iβit ln Pi ln t + 1

2βtt(ln t)2 + βqt ln q ln t (i, j= K, L, M). Figures given in column 4 relate to Summers-Heston openness index.

ated with tc∗ indicates an inverse relationship with the dependent variable. Thus,an increased tc

∗ in pulp and paper industry will result in amelioration of environ-ment degradation. The probit model employed by the present analysis predicts thechange of behaviour in 22 out of 27 (i.e., 81%) observations correctly.

An examination of Table VI, which records the findings of regression analysis,supports the proposed relationship between the environment degrading behaviour


Table VI. Results of maximum likelihood estimation of probit model.

Variable Estimate t-ratio

s –18.41 –1.71∗∗tc∗ –255.49 –2.57∗op 2.60 1.33

gr –5.55 –2.55∗Constant 9.91 2.43∗Maddala R-squared 0.48

Cragg-Ulher R-squared 0.65

McFadden R-squared 0.48

% of Successful Prediction 81

Likelihood Ratio Statistic 17.59

N.B.: The estimates are obtained from the probit model in (1) where thedependent variable assumes value 1 (or 0) if material share in outputexceeds 51%.∗Indicates significance at 5% level.∗∗Indicates significance at 10% level.

and competitiveness. It may be seen that s and tc∗ have coefficients –255.49 and

–18.41 respectively, with the corresponding t-ratios –2.57 and –1.71. An implica-tion of this feature is one of material intensity increasing with a decrease in scaleand technical change. In order to appreciate this result it will be useful to recall anearlier finding, which emphasises a positive relationship between abatement andscale economies (see, Hartman et al. 1997). Perhaps in the event of increasingmaterial prices, a material intensive production process will encourage substitutiontowards products or technologies which are less material and pollution intens-ive as has been highlighted in Dasgupta et al. (1995). The profitability positionof the paper industry, given the conditions of declining scale economies as wellas rate of technical change, may be working as a constraint for switching overto cleaner technology like thermo-mechanical pulping. Consequently, pollutionintensity continues as chemical-based pulping process remains a major pulpingdevice.

Introduction of government environmental regulation indicates an inverse rela-tionship with the dependent variable. Table VI records this coefficient to be –5.55with a t-value of –2.55. With the introduction of Water Act (1974), many paperproducers were compelled to install water treatment plants. Thus, the magnitude ofpollution might have gone down due to the regulatory measure. Such a response offirms to government regulation might have been reflected in the regression analysis.

Lastly, the openness index of the analysis fails to show the expected sign. Ascan be seen from Table VI, its coefficient is 2.60 with a t-value of 1.33. Such a find-ing runs contrary to the expectation of the inverse relationship with the dependentvariable. The coefficient being statistically not significant, one may presume that


openness index has no influence on environment-degrading behaviour. However,such an interpretation is difficult to push through as an earlier study has shown itsrelationship to be significant (see, Birdsall and Wheeler 1993). Possibly, the per-verse result shown by openness index in the present analysis is due to the structuralcharacteristics of pulp and paper industry of India. It has been observed earlierthat paper industry operates in the command and control regime catering to thedomestic demand only. As export or import has never been a major considerationin paper industry until the recently introduced liberalisation measures, opennessindex does not indicate a systematic relationship with the dependent variable.

Based on results obtained, the scepticism expressed on the possibility of over-exploitation of environment under competitive conditions cannot be supported.On the contrary, there is evidence to show that environment-friendliness andcompetitiveness go hand in hand. Thus, pollution abatement through inculcationof competitiveness in pulp and paper industry emerges as an important policyprescription of the study.

On the whole, findings of the present study indicate that the pulp and paperindustry, at present, is characterised by declining tc

∗ and s (see, Table V). As aconsequence, the environment-degrading behaviour of producers of Indian pulpand paper remains a dominant feature.

6. Summary and Conclusion

The discussion above delineates the influence of competitiveness on environment.As factors behind competitiveness are pointed out to be many by the recent stud-ies of Strategic Trade Policy, the present analysis concentrates on two primemovers of industrial growth, viz., economies of scale and technical change, todiscern their systematic influence on the environment-friendly behaviour of pro-ducers who compete in the international market. Following a strand of thoughtthat proposes that international competitiveness can be created with a properlystructured policy package, the study includes the Summers-Heston Openness Indexand environmental regulation by the Government of India to assess their impacton environment-degrading behaviour of producers. Pulp and paper industry, iden-tified as one of the most polluting industries in India, is taken as a case study.Since the economic liberalisation regime in India aims at improving competitivestrength of the industrial sector, the study is likely to generate empirical sup-port to the presumed relationship between environment-friendly behaviour andcompetitiveness.

An examination of the features of the pulp and paper industry of India at presentindicates its weak competing capacity. For example, the industry is characterisedby a declining technical change and diseconomies of scale, which would givean upper hand to rivals in the international market. The estimated relationship ofthese two variables with environment-degrading behaviour is found to be inverse.Therefore, it can be inferred that competitiveness and environment-degrading beha-


viour move in the opposite direction. The regulatory measure introduced by thegovernment to protect the environment is indicated to have a positive impact onenvironment-friendliness by the regression analysis. In contrast to the expectedfindings of the above three factors, openness index fails to exhibit a meaningfulrelationship with the environment degrading behaviour.

From the findings of the present analysis it can be said that in the presence ofdiseconomies of scale and a declining rate of technical change, pulp and paperindustry of India may be facing profitability constraints. Consequently, the processof switching over to cleaner technology of thermo-mechanical processing has notbeen taken up by the industry. With chemical-based pulping, the pollution level aswell as other material use may continue to be high.

Thus, the present exercise provides support to the proposition that the presenceof economies of scale and improvement in rate of technical change are expectedto create conditions for improvement in competitive strength of the industry. Inits attempt to stay ahead of rivals over time, a firm would adopt cleaner techno-logy, which results in an environment-friendly behaviour. Therefore, scepticismexpressed in respect of the on-going liberalisation programme that it will lead toover-exploitation of the environment does not seem to be valid.

Acknowledgements

The fellowship to first author awarded by Shastri Indo-Canadian Institute underits Faculty Research Programme during which work on this paper was initiated isthankfully acknowledged. The authors are thankful to Daniel C. Esty, Jaleel Ahmadand two anonymous referees of this Journal for valuable comments. Thanks arealso due to David Wheeler who readily helped us by sending a paper needed forthe study but not available in India. Usual disclaimer, however, applies.

Appendix

For the study, data requirements are on capital, labour, material, output and cost. Data on thesevariables for the years 1967–68 to 1992–93 are taken from the ‘Summary Results for the FactorySector’, whereas for the period 1963–64 to 1966–67 they are from ‘Capital, Employment, OutputEstimates for Factory Sector by Capital Size’ published by Central Statistical Organisation. Assummary results were not published for the years 1970–71 and 1971–72, data are estimated on apro-ratabasis from the Census Sector based on the ratio between factory sector and census sector forthe year 1969–70. As no survey was conducted during 1972–73, data included in the series for thisyear are the simple average of the adjacent two years. Given below are the definitions of variables,respective prices and costs.

Capital: For estimating aggregate capital stock we adopt the standard practice of perpetualinventory method with the bench-mark year 1960–61. From the book value of fixed capital for thisyear, the gross capital stock is estimated by taking gross-net ratio as given by Hashim and Dadi(1973) and subsequently reproduced in Balakrishnan and Pushpangadan (1994). Price deflator usedto have capital stock at constant prices (1970–71 = 100) is Wholesale Price Index (see, Chandhok1990; Government of Indiab) for machineries and machine tools. No capital discarding is assumed.


The price of a rupee worth of capital is the sum of interest rate on long term government bonds anddepreciation rate (see, Jha et al. 1991). The cost of capital services is the product of price of a rupeeworth of capital and the aggregate fixed capital stock.

Labour : Labour variable represents ‘total employees’ which includes both workers and otheremployees receiving wages and salaries. Cost of labour is the ‘emoluments’ paid to employees.To neutralise price changes, emoluments have been deflated by consumer price index for industrialworkers (all India, general) (see, Chandhok 1990; Government of Indiab). Price of labour is obtainedby dividing emoluments by the number of employees.

Material : Material inputs include all items of fuel, lubricants, electricity and gasoline consumedby the factory, raw materials, components and chemicals entering into the production process. Aprice index for material inputs is estimated by combining the price indices of the input components,the weights assigned to individual components being taken from the Input-Output Table, 1991–92(see, Government of India 1995). Cost of material inputs at constant prices is obtained by deflatingthe value of material consumed by the price index for the material.

Cost: Total cost of production is the sum of cost on capital, labour and material as discussedabove.

Notes

1. Selection of pulp and paper industry is largely guided by our access to information. There are17 most polluting industries identified by the Central pollution Control Board, New Delhi, forwhich the present analysis can be extended when the available time series data are improvedupon (for data problems see, Pradhan and Saluja 1998).

2. Notwithstanding the emergence of this strand of thought, doubts persist on the environmentalimpact of trade liberalisation (see, Barrett (1993)’s reference to Copeland and Taylor (1992)and Grossman and Krueger (1992)). It is also argued that the increased volume of production,which is brought forth by a trade liberalisation regime, may create problems for sustainableenvironment even when competitive pressure prompts producers to adopt comparatively lesspollution intensive technology.

3. In India, for example, out of 2,268,000 tonne paper produced during the year 1993, 39% waswood pulp-based, 31% was agro-based and 30% was waste paper-based.

4. That use of chemical-based technology still dominates the pulp and paper industry in India isevident from the following table:

Year Capacity Share of Year Capacity Share of(in ′000 chemical-based (in′000 chemical-basedmetric tons) technology (%) metric tons) technology (%)

1976 330 92.4 1985 664 74.81977 350 92.8 1986 724 74.21978 340 92.6 1987 750 76.01979 440 90.0 1988 750 78.71980 498 86.5 1989 750 78.71981 536 86.0 1990 750 78.71982 512 86.3 1991 750 78.71983 593 75.4 1992 750 78.71984 624 75.3

Source: FAO, various issues.


5. It has been estimated that about 250 to 440 cubic metre of water is required per tonne of papermanufactured in India (see, Government of India 1991). This implies that in 1993, with theproduction of 2,268,000 tonne of paper, water used runs to the tune of 567 to 997.9 millioncubic metres.

6. On an average a tonne of paper manufactured in India generates 220 cubic metre of waste watercontaining 168 kg of suspended solids, 65 kg of bio-chemical oxygen demand and 246 kg ofchemical oxygen demand (see, Government of India 1991).

7. Central Pollution Control Board, New Delhi, for the prevention and control of water pollutionhas prescribed the minimum national standard (MINAS) to be:

BOD: 50 mg/LSuspended Solids: 100 mg/LPH: 6–9

8. See, Balassa (1967) for the formula. The revealed comparative advantage coefficient foragricultural and allied products in recent years is worked out to be the following:

Year Revealed Year Revealedcomparative comparativeadvantage advantage

1985 3.37 1992 2.36

1990 2.04 1995 1.28

N.B.: Estimated from figures provided in Government of India (1998).9. Data on foreign collaboration in respect of paper boards are not available. However, the general

trend of investment can be seen from the number of foreign collaboration approvals in theindustry. Such approvals during 1983–1990 were 42 while during 1991–94 (till March 1994)they went up to 47. During the year 1993, foreign investment in paper industry was to the extentof Rs. 1.15 billion (see, Indian Paper Makers Association 1995).

10. The choice between logit and probit models is usually made on the basis of convenience as thedifference between their results is minimal (see, Judge et al., 1988).

11. The Allen Partial Elasticity of Substitution of ith input with respect to ‘i’ is given byσii = (βii + θi − θi 2)/θi2 (i = K,L, M)

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Environment-Friendly Behaviour and Competitiveness: A Study of Pulp and Paper Industry in India

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