Governance, Environmental Vulnerability, and PM2.5 Concentrations: International Evidence.

AuthorLe, Thai-Ha
  1. INTRODUCTION

    According to the environmental Kuznets curve (EKC) hypothesis, at the initial stage of industrialization, countries prioritize economic growth and job creation rather than cleaning up air and water pollution. Furthermore, poor countries often do not have adequate resources for tackling environmental degradation and are saddled with relatively weak environmental regulations. Consequently, the pollution level of poor countries deteriorates rapidly as they industrialize. However, as a country grows richer, its citizens tend to value the environment more highly, and thus demand stronger regulatory institutions. As a result, it is possible that leading industrial sectors become cleaner and pollution peaks as a country reaches a certain threshold income level and then falls toward pre-industrial levels as income rises even further (Dasgupta et al., 2005). The EKC has been the dominant approach among economists for modelling ambient pollution concentrations and aggregate emissions since Grossman and Krueger (1991) introduced it a quarter of a century ago (Stern and Zha, 2016).

    The scenario outlined above suggests that policymakers in many developing countries are explicitly or implicitly pursuing a policy of "grow first, clean up later." The scenario does not bode well for the environmental prospects of developing countries. Since it could take a long time for many low- to middle-income countries to reach the threshold income level at which their citizens begin to vocally demand a cleaner environment, they may have to suffer worsening pollution and environmental degradation for many decades.

    Based on the pioneering work of Grossman and Krueger (1995), Selden and Song (1994) and Shafik (1994), the so-called inverted U-shape relationship between income level and pollution level has been commonly known as the EKC. Despite being challenged by many economists (e.g., Arrow et al., 1995; Stern et al., 1996; Stern, 2004), EKC has become widely cited in the empirical literature. The baseline model of this study goes beyond the EKC by incorporating two structural factors, namely, governance quality and environmental vulnerability.

    This study finds that governance has a significant effect on air quality for the full sample of countries. The other factor is environmental vulnerability, which is not due to climate alone but instead reflects a diverse constellation of underlying factors. These include biophysical perspectives as well as the socio-political environment, economic structure, and institutional and political characteristics (Diaz and Ortega, 2011). Environmental outcomes can be significantly affected by these factors. (1) Using advanced econometric techniques and newly available data, we aim to contribute to the existing literature on the environment and sustainable growth by incorporating these two important variables into a more complete analysis of environmental change.

    Air pollution has been a serious problem across the world. The cost for countries is enormous. Air pollution affects economies and quality of life, and it causes chronic diseases and even death. The health impact of air pollution is now much larger than the estimates of only a few years ago. Every year, three million people around the world die due to outdoor pollution. The World Health Organisation (WHO) estimated that in 2012, there were around 7 million premature deaths linked to air pollution, more than double the previous estimates. Of the 7 million, outdoor air pollution claimed 3.7 million lives and indoor air pollution caused 4.3 million lives. Based on the WHO Global Urban Ambient Air Pollution Database as of May 2016, which covers 3,000 cities in 103 countries, more than 80 per cent of people living in urban areas were breathing air laden with pollutants far above WHO limits. The reality is even more disturbing since many countries have only random monitoring systems or none at all (Gulf News Editorial, 2016). As such, air pollution is of interest not only to researchers but also policy makers around the world. Since the world economy is highly diverse and consists of countries at different stages of economic development, we analyse and compare countries of different income levels.

    Specifically, we investigate the relationship between governance, environmental vulnerability, and PM2.5 concentrations for a panel data of 128 countries from 2000 to 2014. The main findings are follows. For the full sample of countries, better governance improves air quality while higher environmental vulnerability causes air quality degradation. The empirical findings are robust to two alternative measures of governance quality, namely, the Government Effectiveness index obtained from the World Bank's Worldwide Governance Indicators and the Governance Readiness index obtained from ND-GAIN (University of Notre Dame Global Adaptation Index), as well as two measures of environmental vulnerability, namely, the Education index taken from Human Development Data (United Nations Development Programme) and the Vulnerability index taken from ND-GAIN. This result suggests that better governance and reduced vulnerability benefit air quality.

    Furthermore, improved governance is found to reduce the negative impact of vulnerability on air quality. This finding implies that countries with stronger institutional frameworks that facilitate enforcement of environmental regulations tend to experience more innovations which enhance their capability to cope with air pollutants, contributing to cleaner air. As such, policies that improve governance and reduce environmental vulnerability can promote cleaner air.

    Unlike the clear overall pattern of the full sample results, the empirical evidence for different income groups of countries is mixed. The results for the sub-sample of high-income countries are qualitatively similar to the full sample results. However, the results for the sub-samples of upper-middle-income and lower-middle-and-low-income countries differ from the full sample results. Environmental vulnerability still harms air quality, but governance becomes insignificant. Overall, the evidence indicates that developed countries are more successful than developing countries in addressing air pollution problems. As such, there is a need for substantial economic, technological and financial support from the international community to strengthen the environmental institutional capacity of developing countries.

    The remainder of this paper is organized as follows. Section 2 reviews the literature on the economy-environment nexus, especially studies on pollutant emissions. Section 3 presents the empirical model, data, and methodology. Specifically, we introduce governance and environmental vulnerability as new explanatory variables, and we explain how to incorporate them into the empirical analysis. Section 4 reports and explains the empirical results. Section 5 discusses the policy implications of the main findings. Section 6 concludes the paper.

  2. LITERATURE REVIEW

    The link between income and air quality has been extensively studied. Examples of recent studies include Zheng and Kahn (2017) for China; Le et al. (2016) for a global sample; Le and Quah (2018) for countries in Asia and the Pacific; Apergis and Ozturk (2015) and Le et al (2019) for countries in Asia; Ohler (2015) for the US; and Richmond and Kaufmann (2006) for OECD countries. The evidence indicates that not all countries and not all pollutants follow the inverted U-shape curve pattern suggested by the EKC hypothesis - e.g. Dogan and Turkekul (2016) for C[O.sub.2] in the US; and Lipford and Yandle (2010) for C[O.sub.2] in G8 and five developing countries. Taguchi (2013) found that sulphur emissions follow the expected inverted-U shape under the EKC while C[O.sub.2] tends to increase with per capita income. Wood and Herzog (2014) argue that institutional quality plays an important role in the linkage between economic development and air quality. As such, the omission of this factor in economic models of pollution such as the EKC could cause spurious results.

    Regarding the effects of governance and institutional quality on the environment, Carlsson and Lundstrom (2001) proposed the efficiency effect which arises under the assumption that improved governance leads to efficient and competitive markets. Specifically, environmental requirements induce private costs by forcing firms to make investments that crowd out other more productive investments, which hampers productivity growth and therefore competitiveness (Broberg et al, 2013). However, this argument is questioned by the Porter hypothesis which suggests that imposing stringent environmental regulations on firms triggers innovation and thus enhances their productivity and competitiveness compared to competitors not subject to environmental regulations (Porter, 1991). However, neither theoretical nor empirical literature provides strong support for the Porter hypothesis (Brannlund and Lundgren, 2009). (2)

    The correlation between governance quality and environmental performance in general and air quality in particular is expected to be positive. First, efficient use of resources could result from, for example, externality-correcting taxes which reduce emissions per unit of environmental resources. Second, efficient and competitive markets can better satisfy government regulations and consumer preferences. Competitive pressures will force firms to adapt to changes in the market environment in order to survive. Clearly, these two effects are only relevant in the presence of environmental regulations or strong consumer demand for a cleaner environment (Carlsson and Lundstrom, 2001).

    Furthermore, Carlsson and Lundstrom (2001) attribute the favourable environmental impacts of governance to the stability effect. This effect implies that a stable macroeconomic environment with a low inflation rate and clear pricing signals results in more...

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