Foreign Direct Investment And Air Pollution Economics Essay

August 13, 2017 Economics

Following the seminal paper of Grossman and Krueger ( 1991 ) , the literature on trade and environment has been burgeoning. The writers examined the environmental consequence of North America Free Trade Agreement ( NAFTA ) . The writers demonstrated the graduated table, technique and composing consequence by utilizing cross-sectional informations of 43 urban countries on 3 steps of air quality viz. sulphur dioxide, fume and suspended atoms in the air. The estimated consequences showed that at low degree of national income, concentration of sulfur dioxide and fume additions with per capita GDP but for high degree of national income the contrary occurred. For the suspended atoms found in air, a negative relationship was observed between pollution and GDP and for the compositional consequence, and concluded that trade liberalisation reduced pollution.

Similarly, Copeland and Taylor ( 1994 ) augmented the bing literature by gauging the consequence of trade, national income and environment for a set of northern and southern states and found that free trade additions pollution. However, Copeland and Taylor ( 1994 ) had disaggregated the sample of states between northern and southern states and found that one-sided transportations from North to South cut down world-wide pollution. The consequences showed that both North and South states may bring forth the same goods but release different pollution strengths in the environment. When Northern states increased their production ; they released more pollution but when the south expands their production they lower pollution.

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Using Computable General Equilibrium ( CGE ) theoretical account, Antweiller, Copeland and Taylor ( 1998 ) , showed that trade liberalisation reduces pollution in a sample of 43 states over the period 1971 to 1986. Despite the writers applied a different methodological analysis they reached the same decision as Grossman and Krueger ( 1991 ) that free trade is good for the environment. Furthermore, Antweiller, Copeland and Taylor ( 1998 ) distinguished individually between the graduated table, composing and technique consequence. They reported that if GDP per individual additions by 1 per cent due to merchandise liberalisation, pollution strengths decreases by 1 per cent. They found positive graduated table effects, negative technique effects, and negative trade-induced composing effects. They observed that the technique effects dominated the scale effects and concluded that trade openness is associated with a decrease in pollution. When insulating the consequence of trade-induced alterations in the composing of end product and taking openness of a state as a feature for the chosen sample of states, the writers revealed that openness has really little but important impact on pollution concentrations.

As the empirical literature develops, assorted methodological analysiss have been used to analyze the consequence of trade on environment. Frankel and Rose ( 2002 ) questioned whether trade is good or bad for the environment. They employed Ordinary Least Square methods and found a positively statistically important relationship between trade openness and CO2 emanations. The writers further controlled for the endogeneity consequence which was non taken into consideration in old surveies. They applied the Instrumental Variable attack and found that the antecedently observed positive relationship between trade openness and CO2 emanations was non statistically important.

Following the attack of Frankel and Rose ( 2002 ) , Managi ( 2005 ) contributed to the current cognition on trade and environment by utilizing Instrumental Variable and used a sample of 63 states covering the period 1960 to 1999. The trial consequence indicated that trade liberalisation increased emanations with an snap of 0.579 which contradicts the consequence of Grossman and Krueger ( 1991 ) and Antweiller, Copeland and Taylor ( 1998 ) . Managi ( 2005 ) considered the endogeneity consequence of the variables which were non taken into consideration by old surveies and besides his chosen sample of states were dominated by developing states.

While screening out the causality between income and CO2 strengths, Dinda and Coondoo ( 2005 ) applied Engle and Granger causality trial in a panel of 88 states consisting of Africa, Central America and Europe covering the period 1960 to 1990. The consequences revealed a bi-directional relationship between the variables in Africa, a uni-directional relation running from per capita income to CO2 emanations in Central America while in Europe the causality ran from CO2 to per capita income.

A later survey by Managi et Al. ( 2008 ) , considered the impact of trade openness on CO2 emanations, sulfur dioxide, and included degrees of Biochemical Oxygen Demand ( BOD ) as independent variables. They compared the above consequence in developed states and developing states for the period 1980 to 2000. The writers controlled for endogneity consequence and besides used dynamic generalised minute method for appraisal. They besides analysed the graduated table, technique and decomposition effects for the three emanations and found that scale consequence dominates the technique consequence in non- OECD states whereas in the mean OECD states the technique consequence dominates the scale consequence. Hence they concluded that trade openness reduces emanations in OECD states but the antonym was observed in non-OECD states. The consequences are inconsistent with that of Copeland and Taylor ( 1994 ) despite the fact that Managi et Al. ( 2008 ) considered both H2O and air pollution and late developed methodological analysis.

Foreign Direct Investment and air pollution

One of the ultimate desires of every state is to accomplish sustainable economic growing and development. However, the agencies through which this aim can be achieved are multidimensional. Empirical surveies from both transverse state and state specific experiences have revealed that Foreign Direct Investment ( FDI ) can be of import in advancing growing but at the same clip can be a menace to the environment in the host state. Xing and Kolstad ( 2002 ) studied the consequence of the United States FDI on environmental quality in 22 states which include both developed and developing states for the period 1985 to 1990. The statistical grounds reveals that there exists a negative relationship between FDI and environmental quality in host states. They conclude that tough environmental ordinances tend to hinder or deter FDI from these industries.

Using SO2 as dependant variable, He ( 2006 ) expanded the bing literature on FDI and environment by utilizing a system of coincident equation for 29 states of China over the period 1994 to 2001. His consequences support those of Xing and Kostald ( 2002 ) and found that addition in FDI inflow consequences in impairment of environmental quality in China.

In a co-integration analysis, Baek and Koo ( 2008 ) examine the short and long tally relationship between FDI, economic growing and the environment in China and India. The consequences show that FDI inflows play a polar function in finding the short and long-term motion of economic growing through capital accretion and proficient spill over. Conversely, a FDI influx in both states was found to hold a damaging consequence on environmental quality in both the short- and long-term. Besides, they revealed that, in the short-run, there exists a unidirectional causality from FDI influxs to economic growing. FDI influxs have negative impact on the environment but positive consequence economic growing.

Similarly, Archaryya ( 2009 ) extended the literature by analyzing the the growing impact of FDI and FDI-induced growing impact on the CO2 emanation in India for the period 1990 to 2003 utilizing co-integration attack. The consequences show that FDI influxs have positive but fringy impact on GDP growing. The consequences besides revealed that FDI influxs have big positive impact on the CO2 emanations through end product growing. However, the writer bound himself to CO2 emanations and these consequences may be an underestimate as the consequence of FDI on H2O pollution and on the local air pollutants are non estimated.

Energy and Income

The relationship between energy and economic growing has been received much attending among research workers. Kraft and Kraft ( 1978 ) examined the relationship between energy ingestion and Gross National Product ( GNP ) in the United States for the period 1947 to 1974. Using granger causality trial, the writers concluded that a uni-directional relation was observed running from Gross National Product ( GNP ) to energy ingestion. However, utilizing Vector Auto Regressive attack and a larger information set for the period 1947 to 1990, Stern ( 1993 ) did non found any causality between GDP and energy usage in the United States of America.

In a sample of 6 Asiatic states, Masih and Masih ( 1996 ) investigated the nexus between energy usage and GDP. The writer used co integrating analysis and found a statistically important relationship between energy usage and GDP in merely 3 states viz. ; India, Pakistan, and Indonesia while no co-integration in Malaysia, Singapore, and Philippines. In India, a uni-directional relationship was observed running from energy to GDP where as in Pakistan and Indonesia the antonym was observed.

In a bi-variate theoretical account, Asafu- Adjaye ( 2000 ) used monetary value factor to stand for energy monetary value and estimated the relationship between energy ingestion and income in a sample of four developing states ( India, Indonesia, Philippines and Thailand ) . The writer used Maximum likeliness processs and informations over the period 1971 to 1995. They observed a unidirectional relationship from energy to income in India and Indonesia which lends support to the consequence of Masih and Masih ( 1996 ) . Yet, in Philippines and Thailand a bi-directional relationship was observed but Masih and Masih ( 1996 ) do non establish any co-integration in Philippines.

Huang ( 2007 ) explored the relationship between energy ingestion and GDP for 82 states from 1972 to 2002 utilizing dynamic panel informations attack. The writers classified the states into low, in-between and high income state. They discover that in the low income state group, there is no relationship between energy ingestion and economic growing but in the in-between income groups & A ; acirc ; ˆ™ economic growing leads energy ingestion positively where as in the high income group states, economic growing leads energy ingestion negatively. The consequences besides indicated that in high income group, there is a much environmental betterment as a consequence of more efficient energy usage and decrease in the release of CO2. However, in the upper in-between income group states, the energy efficiency diminutions and the release of CO2 rises. The writers concluded that there is no grounds that energy ingestion leads economic growing in any of the four income groups.

Using a sample of 6 Middle Eastern states, Narayan and Smyth ( 2008 ) demonstrated statistically important association between electricity ingestion, exports and GDP which is consistent with the consequences of Kraft and Kraft ( 1978 ) . The writers used panel co-integration technique and information spanning over the old ages 1974 to 2008. The consequences revealed that 1 per cent addition in electricity ingestion additions GDP by 0.04 per cent and 1 per cent addition in exports additions GDP by 0.17 per cent. Besides, 1 per cent addition in GDP generates a 0.95 per cent addition in electricity ingestion. These consequences lend support to Chapman and Suri ( 1998 ) who applied a cross- state analysis to analyze the consequence of international trade on energy ingestion for the period 1971 to 1991. Their consequences showed that trade additions pollutant emanations related to energy usage. Both industrialised and industrializing states increases their energy ingestion by exporting manufactured goods but the antonym was observed for imports.

In a panel co-integration survey of nine South American states, Arpegeis and Payne ( 2011 ) examined the relationship between energy ingestion and economic growing over the period 1985 to 2005.The farmer causality trial show a uni-directional relationship running from energy ingestion to economic growing which is line with the consequence of Masih and Masih ( 1996 ) . Yet, Arpegeis and Payne ( 2011 ) included more variables such as labour force, and existent gross fixed capital formation and found that statistically important and positive long-run relationship between existent GDP, energy ingestion still exist in North America despite the broad spread of clip difference.

Associating all variables in a nutshell

The empirical research on the consequence of trade and environment and besides energy and growing has been mostly debated and inconclusive. Recently, research workers have started to associate the two strands of literature together and have employed different methodological analysiss. Soytas and Sari ( 2006 ) studied the consequence of energy ingestion and end product on C emanations in United States for the period 1960 to 2004. The writer used co-integrated attack and found that energy causes carbon emanations whereas income does non do C emanations.

In a clip series analysis, Halicioglu ( 2008 ) enlarged the literature by analyzing the interaction between C emanations, energy ingestion, income, and trade in Turkey over the period 1960 to 2005. The writer used Auto Regressive Distributed Lag ( ARDL ) methodological analysis and observed that there exist two signifiers of long-term relationships between the variables. For the first relationship, it was found that C emanations are determined by energy ingestion, income and trade whereas for the 2nd relationship it was observed that income is determined by C emanations, energy ingestion and foreign trade. He concluded that income was the most important variable in explicating the C emanations followed by energy ingestion and foreign trade in the state which contradicts the consequence of Soytas ( 2006 ) .

By using a different methodological analysis, Zhang ( 2009 ) examined association between economic growing, energy ingestion, and C emanations in China. Using Granger causality trial and information for the period 1960 to 2007, the trial consequences showed a uni-directional relationship running from GDP to energy ingestion, and a unidirectional causality running from energy ingestion to carbon emanations. Zhang ( 2009 ) showed that neither C emanations nor energy ingestion leads economic growing in the state which contradicts the consequence of Halicioglu ( 2008 ) . However, a panel information analysis utilizing 30 states of China itself, Li ( 2010 ) argued that a long-term relationship exist between economic growing and energy in China. Using information over the period 1985 to 2007, the writer showed that 1 per cent addition in GDP increases energy ingestion by 0.48 per cent and hence additions carbon dioxide strength by 0.41 per cent. Furthermore, Li ( 2010 ) augment the bing literature by comparing the above consequence between E and west China and found east China is energy-dependent to a great extent, and the income snap of energy ingestion in east China is over 2 times that of the west China.

Using co-integration attack and farmer causality trial, Menyah ( 2010 ) showed that a short tally and long tally relationship exist between economic growing, pollutant emanations and energy ingestion in South Africa. The writer used informations for the period 1965 to 2006 and found a uni-directional nexus between pollutant emanations to economic growing and from energy ingestion to economic growing and besides from energy ingestion to CO2 emanations which is the antonym of what Soytas ( 2006 ) has found. It is of import to indicate out that South Africa is a coal abundant state and its per capita C dioxide emanations from the ingestion and flaring of fossil fuels increased continuously from 1980 to 2006 while they were falling for the US. Menyah ( 2010 ) besides used a multivariate model and add labour and capital as explanatory variables to analyze the relationship between economic growing, pollutant emanations and energy ingestion.

A recent survey by Lotfalipour ( 2011 ) in Iran examines the connexion between economic growing, C emanation, and fossil fuels ingestion utilizing informations for the period 1967 to 2007. The writers used late developed, Toda-Yamamoto method and three placeholders for energy viz. ; fuels, crude oil merchandises, and natural gas ingestion. The consequences indicated a uni-directional relationship running from GDP to energy ingestion ( crude oil merchandises and natural gas ingestion ) but no relationship between fossil fuels ingestion and C emanations in the long tally. The consequences revealed that C emanations, crude oil merchandises, and entire dodo fuels ingestion do non take to economic growing, but gas ingestion does. In a survey related to the same state, Saboori ( 2011 ) illustrated that energy ingestion has a positive and important impact on C emanations. The writer used ARDL attack to co integrating and one-year informations from the period 1971 to 2007 in Iran. More exactly, 1 % addition in per capita ingestion of energy will take to 0.53 % addition in the per capita CO2 emanations which is in line with Halicioglu ( 2008 ) .

A more recent survey by Beak ( 2011 ) expanded the bing literature on trade, income growing, energy ingestion and CO2 emanations in G-20 states utilizing CO incorporate Vector Auto Regression ( CVAR ) and informations for the period 1960-2006. Beak ( 2011 ) was the first survey to see the G-20 states and revealed that trade liberalisation and income growing has a positive consequence on the environment for developed G-20 states but a damaging consequence for that in developing states. Energy ingestion amendss the environment in both developed and developing economic systems.

Role of establishments

Many environmental jobs can be explained by institutional failure and bad administration methods. At international degree it is hard to lucubrate efficient and equity systems for environment resources direction like oceans and clime heating. The quality of establishments affects the environment indirectly. Payne ( 1995 ) provided theoretical grounds of the positive consequence of democracy on the environment. He argued that as citizens in democratic societies enjoy freedom of imperativeness, address, association and ballot, hence they will be able to better show their positions on environmental issues which may thereby act uponing policy. By utilizing pooled samples of about 58 states and informations over the period 1977-1991, Torras and Boyce ( 1998 ) found that addition in the degree of democracy reduces air pollution and H2O pollution. The writer measured the degree of democracy by Freedom House Index of political rights and civil autonomies and took 3s steps of air pollution viz. SO2, fume and particulate affair. In the same line of idea, Barrett and Graddy ( 2000 ) find that addition in democracy which was besides represented by the Freedom House Index, significantly reduces air pollution which included SO2, fume and coarse particulates. The latter used panel informations analysis and the clip period ranged between 33 and 38 old ages for the states.

Yet, Buitenzorgy ( 2006 ) augment the available literature by widening the EKC literature to political development which may complement the function of economic development as the beginning of the turning point in explicating the kineticss of environmental debasement. The writer used Polity index as a step of democracy and four steps of air pollution viz. Carbon Dioxide ( CO2 ) emanations, oxides of sulfur ( SOx ) emanations, Volatile Organic Compounds ( VOC ) emanations, and concentration of particulate affair with diameter greater than 10 microns and one H2O pollutant known as Biochemical Oxygen Demand ( BOD ) emanations. The consequences showed that states at earlier phases of democratization tend to exhibit higher rates of environmental debasement than the autocratic states.

Furthermore, Kinda ( 2011 ) used panel informations to analyze the relationship between demographic establishments and environment for the period 1960 to 2008 in 122 development and developed states. They showed that democratic establishments have positive direct consequence on environment quality and democratic establishments attract investings that cause injury to the environment. Besides, their consequences revealed that democratic establishments cut down income inequality which causes harm to the environment. The consequences revealed that the positive consequence of democratic establishments on environment quality is higher in developed states than in developing states.

Consensus of the empirical surveies

The bing literature on environmental and energy economic sciences is big. Different writers have used assorted methodological analysiss and the consequences vary widely harmonizing to chosen state, clip period and the methodological analysis employed. Initially, most of the research focussed on trade and environment and energy and income individually and employed econometrics techniques such as clip series analysis and Granger Causality trial. The consequences showed that long term relationship may or may non be between the variables. However, as the literature develops new appraisal methods such as CGE, dynamic panel methods have been employed and besides included much control variable like Gross Fixed Capital Formation, labor and quality of establishments and research workers started to associate environmental and energy economic sciences into a individual yarn. Overall, most of the surveies have found that trade openness and lifting energy ingestion causes harm to the environment in developing states but in developed states it may be the opposite instance. This occurs because rich states frequently have the agencies and resources such as strong establishments and they are active and extremely involved in research and development to provide for environment quality.


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