Economic growth in selected G20 countries: How do different pollution emissions matter?

Abstract

This study incorporates pollutant emissions into the growth model with the presence of institutional quality and exports as control variables. The individual impact of carbon dioxide, nitrogen oxides and sulphur dioxide on G20 countries’ real GDP for the period of 1995–2014 is investigated using pooled mean group (PMG) estimator and fully modified ordinary least square (FMOLS) estimator. Our results suggest a positive relationship between all the pollutant emissions and economic growth in the long run, indicating that environmental degradation is favourable to growth. It is also confirmed that CO₂ emissions have the greatest impact on real GDP. Furthermore, institutional quality and economic growth are found to be positively related, confirming the importance of institutional quality in contributing to economic growth. The results also reveal that a positive relationship does exist between exports and economic growth. Similar results are obtained using PMG and FMOLS estimators, indicating that our findings are robust. Our study recommends effective mitigation and adaptation strategies in reducing the threats associated with global climate change.

Appendix: Summary studies showing the determinants of economic growth

Authors	Period	Countries	Variables	Methodology	Results
Fernández-Amador et al. (2017)	1997–2011	66 countries and 12 composite regions, covering a total of 178 economies	CO2; income; population density; openness; polity; human development index; value-added industry; value-added services; fossil rents; fossil fuels; nuclear	Linear regression; two-stage GMM; threshold regression	There is no inverted-U-shaped relationship between carbon emission and economic development
Grossman and Krueger (1991)	1977–1988	42 countries	Per capita GDP; desert; coast; central city: industrial; residential; population density; communist; trade intensity; sulphur dioxide; darker matter (smoke)	Random effects estimation	Increases per capita GDP at lower levels of national income will causes concentration of two pollutants (sulphur dioxide and smoke) to be increased, but with GDP growth at higher levels of income the concentrations of two pollutions will decrease
Gürlük (2009)	1970–2006	15 Mediterranean countries	Biological oxygen demand; GDP; human development index	OLS regression	A modified human development index (MHDI) can be a policy indicator in EKC analyses
Omri et al. (2015)	1990–2011	12 MENA countries	Trade; financial development; per capita GDP; CO2 emissions; per capita capital stock; urbanization; inflation; FDI; energy consumption	Simultaneous equation GMM estimation	The causality between CO2 emissions and economic growth is bidirectional
Borhan et al. (2012)	1965–2010	ASEAN 8	Air pollution; GDP per capita; population density; labour; government expenditure; foreign direct investment; fixed capital investment; net export	Two-stage least square (2SLS)	There is a simultaneous relationship between air pollution and income
Lean and Smyth (2009)	1971–2006	Malaysia	Electricity consumption per capita; real GDP per capita; real exports per capita; labour force participation rate; real gross capital formation per capita	ARDL bounds cointegration test; Granger causality test	There is a Granger causality running from exports to aggregate output as stated in export-led hypothesis
Coondoo and Dinda (2002)	1960–1990	88 countries	Per capita CO2; per capita real GDP	Granger causality test	Different country groups will have different types of income emission causality
Dinda (2009)	1960–1990	88 countries	Per capita real GDP; per capita CO2;	Granger causality test	Environment and economic growth show causal linkage
Asghar et al. (2015)	1990–2013	13 developing economies of Asia	GDP growth; capital; labour; human capital; institutional quality; trade openness	Panel ARDL; panel causality test	There is a need to improve institutional quality to increase economic growth in selected Asian developing countries
Hall and Jones (1999)	1988	127 countries	Output; labour; educational attainment; physical capital	OLS; IV regression	Differences in social infrastructure in terms of institutions and government policies can make capital accumulation, productivity and output per worker to be different
Ketterer and Rodríguez-Pose (2018)	1995–2009	EU-15	GDP per capita; gross fixed capital formation; population growth rate; institutional quality; geographical	OLS; 2SLS; IV GMM	The role plays by regional institutional conditions is important for shaping regional economic growth prospects
Lægreid and Povitkina (2018)	1972–2014	156 countries	CO2 emissions per capita; incorrupt democracy; oil production per capita; GDP per capita; population	Dynamic common correlated effects (DCCE)	Political institutions can be considered as a moderator for gaining explanatory leverage of CO2 emission in the models
Rodrik et al. (2004)	1995	137 countries	Income per capital; institutions; integration; geography	OLS; IV estimate	Controlled the effect of institutions will make the direct effect of integration and geography to become no and weak, respectively
Young and Sheehan (2014)	1970–2010	116 countries	Real GDP per capita growth; economic Freedom; foreign aid; institutional quality; oil production; investment-to-GDP ratio; population growth rate; human capital; urban population share	OLS; 2SLS estimations	Decreases in economic institutional quality will lower the growth rates of economic
Knack and Keefer (1995)	1974–1989	97 countries	Institutional; GDP per capita growth; private investment; government consumption; school enrolment	OLS	Property rights that protected by institutions are crucial for economic and investment
Knutsen (2012)	1972–2004	45 sub-Saharan African states	Democracy; real GDP per capita; population size; political stability; ethnic fractionalization	OLS; FE; GMM	There is a positive effect of democracy on the growth in sub-Saharan Africa
Hasan, Wachtel and Zhou (2009)	1986–2002	China (31 provinces)	Per capita real GDP; exports; secondary school enrolment; bank loans; equity and debt issuance; private-sector presence; rule of law; awareness of property rights; relative pluralism	Two-step system GMM	Stronger growth can be associated with the development of financial markets, legal environment, awareness of property rights and political pluralism
Jude and Levieuge (2017)	1984–2009	93 developing countries	Growth; FDI; GDP per capita; population growth; domestic investment; trade openness; government consumption; inflation; human capital; institutional quality	GMM estimator; panel smooth transition regression	The effect of FDI on economic growth in developing countries can be modulated by institutional quality
Aisen and Veiga (2013)	1960–2004	169 countries	GDP per capita; investment; human capital; population growth; trade; inflation; government; political instability; institutional	System GMM estimator	High degrees of political instability will lower the growth rates of GDP per capita
Addison and Baliamoune-Lutz (2006)	1975–1999	3 Maghreb countries	Income per capita; institutional quality; trade reform; financial reform	Random effects estimation; fixed effects estimation	Partial improvement of low institutional quality may have negative effects on income per capita, with financial and trade reforms
Aixala and Fabro (2008)	1975–2000	62 rich countries and 94 poor countries	Per capita GDP; annual growth of the population; gross fixed capital formation as a percentage of GDP; rate of secondary school enrolment; institutional quality	OLS: ordinary least squares; 2SLS: two-stage least squares; GMM: generalized method of moments	Rule of law is fundamental for rich countries, while control of corruption is fundamental for poor countries
Butkiewicz and Yanikkaya (2006)	1970–1999	100 countries	Growth rate of real output; real GDP per capita; physical capital stock per person; human capital per person; rule of law; democracy; trade intensity ratios	Seemingly unrelated regression (SUR) estimates; three-stage least squares (3SLS)	Increases in real economic growth can be caused by maintenance of the rule of law and democratic institutions
Balassa (1978)	1960–1973	11 countries	Gross national product; labour; exports; purchasing power; domestic investment; foreign investment	OLS regression	The contribution of export growth on rate of economic growth is more than domestic and foreign capital and labour
Edwards (1998)	1960–1990	93 countries	Real GDP; physical capital; human capital; Openness;	Weighted least squares; instrumental weighted least squares	Faster productivity growth tends to associate with more open countries
Ajmi et al. (2015)	1911–2011	South Africa	GDP; exports	Nonlinear Granger causality test	There is episodic and nonlinear causal relation between exports and GDP
Lean and Smyth (2010)	1980–2006	5 ASEAN countries	Electricity consumption per capita; real GDP per capita; carbon dioxide emissions per capita	Panel DOLS; panel Granger causality	There is a nonlinear relationship between emissions and real output as explained by environmental Kuznets curve
Pistoresi and Rinaldi (2012)	1863–2004	Italy	Real GDP; real imports; real exports	Cointegration; Granger causality	There is comovement among real exports, imports and GDP in the long run
Goh et al. (2017)	1970–2012	11 Asian economies	GDP; exports; FDI	ARDL tests of cointegration; Granger causality	FDI and exports are not the sole sources for economic growth in selected Asian economies
Bakari and Krit (2017)	1969–2015	Tunisia	GDP; investment; imports; industrial exports	Cointegration analysis; Granger-Causality	Industrial exports cannot be the source of economic growth in Tunisia