Public spending and green economic growth in BRI region: Mediating role of green finance
Introduction
Policymakers worldwide strive to produce sustainable solutions for environmental degradation and uncontrolled climate change (Huntington, 2015). Although for a less polluting economic growth, the government's spending on R&D is considered a significant driver, technology stands as the preferable option to bring about green economic growth. This notion encourages innovation and is promoted by most economic experts. It is eminent to analyse the determinants of a green economy before its implementation. One of the critical indicators of green growth is public expenditure change (Aly et al., 2017). Existing literature indicates that the composition of public spending is directly affected by economic and environmental degradation. The relationship between public spending and green economic growth still lacks considerable evidence (Lepitzki and Axsen, 2018), (Iqbal et al., 2020). Several previous studies support the role of restructuring fiscal expenditures as an essential factor in the growth of the green economy (Facchini and Seghezza, 2018). Although economic growth is accelerated by increased public expenditure, it also decreases green economic progress by augmenting environmental hazards. The theories for neoclassical economics and evolutionary economics explain the recent increase in public spending on environmentally friendly energy solutions to compensate for sub-optimal investment. Market failures can be compensated by public funds, which gives rise to new technological solutions. Private R&D expenditure is not enough to produce groundbreaking solutions; therefore, public financial support is required (Wu et al., 2021). On the other hand, in light of the evolutionary economics theory, the foundation for developing adequate technologies by enterprises cannot be automatically established merely based on the availability of new technologies developed by public expenditures. This means that private sectors need to be involved in this process with the public sector support.
Several economies face a fiscal crisis as governments cannot establish a deficit between public expenditure and taxation. The budget-cuts on a green economy make a society miserable due to the consequences of such a crisis (Afonso and Furceri, 2010). The scale of public expenditure in a green economy and the relationship between public expenditure composition and economic growth impact fiscal policy implementation. Some public expenditure components with more significant influence on green economic activity than others give rise to this question. Changing the level and composition of the total public expenditure on R&D enables a country to improve its economic performance (Iram et al., 2020).
The Belt and Road initiative (BRI) by China encourages the construction of large markets through mutual cooperation centric to energy and infrastructure (Sun et al. 2020a, 2020b). Developing countries, particularly in Asia and Africa, see this as a tremendous opportunity due to Chinese banks' lucrative financing offers. While most of the projects are predominantly executed by China, the member countries often have the opportunity to negotiate terms. The strategy of growth amongst the developing economies is shifting from agriculture to modern industrial manufacturing. Developing countries from Asia and Africa are trying to achieve a significant output to support their growth targets by focusing on their industrial sectors (Yang, 2017). Targeting much smooth and enhanced output, emerging countries among BRI members have increased their reliance on energy resources. However, to mitigate global warming, the member countries must cooperate towards green development, in addition to economic interests. Although the various authors proposed studies (Dai et al., 2015) and (Ã and Spreng, 2007) regarding environmental issues in the BRI region, the research is still in its initial phase. Due to the reliance on the industrial sector and non-renewable energy (NRE) resources, green economic growth has improved; however, the continuous degradation of the environment threatens the future (Montalbano and Nenci, 2019) and (Mohsin et al., 2018). According to the literature, the BRI member countries' economic growth can be significantly improved with the BRI project's help. The growth targets can be achieved through energy and living standards (Omri, 2013 and Shah et al., 2019). Specific pointers play a role in the failure of green economic growth, such as too much reliance on NRE, inappropriate environmental planning, and insufficient public spending in the field of research and development (R&D) (Al-mulali, 2011; Acheampong, 2018). With the popular direction distance approach, this study establishes a “green economic growth index” (Lin and Zhu, 2019). Fluctuations in the economy's progress, resource base, and environment scenario are considered in the index construction process. The fluctuations are keenly observed in this index throughout the study. The investigation follows the index's formation to measure the impact of education and R&D expenditure on green economic growth through the two-step system, called the GMM method, used to run econometric estimation. A positive statistical impact is noticed along with the composition effect and the technical effect. The composition effect is recorded to have a more significant impact than the technical effect throughout the observation (Peña-Martel et al., 2018). The impact of the influential prospective channels of public spending on green economic growth is also assessed in this study. According to the results, human capital-based industries can be improved by public spending on the education sector. Similarly, technology advancement can be accelerated by public spending on Research and Development (Xing and Fuest, 2018) and (Martínez-Moya et al., 2019).
This study plays its role in providing instrumental insights for literature. This study's result can support the role of public spending in affecting the green economy movement. Regardless of a consistent study proving this concept, The market mechanism is influenced by government spending. This study proposes the minimised market failure through increased public spending with empirical evidence regarding the presence of composition and technique effect. In this study, green economic growth is recorded to positively correlate with an increase in fiscal spending. Data envelopement has been used to measure energy efficiency for selected countries. The public policy measures broadly impact energy conservation, economic growth, and environmental safety initiatives, and these three variables must have an excellent right balance in the green economy movement. According to this study, governments can foster green economic development by increasing spending on public properties, concluding with some suggestions for the BRI countries to achieve sustainable economic development. The heterogeneity of the sample countries is evident in this study. Hence, in order for different countries to benefit from public spending for green economic growth (green public finance), it is vital to form different development initiatives.
The remaining sections of the study are stated as: Section 2 presents detailed literature on green economics, section 3 introduces the data and methodology, section 4 presents an analysis on the empirical study, section 5 is based on the conclusion and policy recommendations.
Section snippets
The green economy: role of clean energy
The global sustainable development for energy and the environment relatively depends on BRI construction (Zhang and Zhang, 2018). With one-third of the global GDP in energy, an estimated 62% of the global population, 39% of the global land area, 24% of household consumption, and approximately half of the world's total energy consumption is based on the countries along the “Belt and Road” (IEA, 2016; see Fig. 1 for the map of BRI). Therefore, the total energy intensity or the energy input per
Data and methodology
Data from the BRI member countries between 2008 and 2018 is used in the study because of its availability and robustness. The BRI region databases, World development indicator (WDI), official databases of BRI countries' government agencies, BRI countries' environmental regulation (BRIGC & MEE/FECO), and World Bank carbon pricing database; are the source of data.
Green economic performance analysis
Ragwitz and Miola (2005) state that among the 29 countries in the EU, R&D and demonstration R&D have the lowest allocated budget (i.e., <10%). The energy industry is the central part of the R&D sector, where 65% of the allocated budget is used for photovoltaic technology, which is a balancing point. This low budget allocation is due to Europe's less inclination towards import-based economy (i.e., feed-in tariff, feed-in tariff premium, green certificates, tax incentives, grants) and
Conclusion and policy recommendations
The GMM analysis performed in this study using BRI countries' data show that both the composition and technology effects are present in achieving green growth goals. The composition effect in mitigating pollution and paving the way for a new form of economic growth. Technique or technology effect can ultimately help keep the pollution output ratio at a minimum. Moreover, Public spending on both the R&D of green energy technologies and human resources (education) appears to accelerate the growth
CRediT authorship contribution statement
Dongyang Zhang: Conceptualization, Methodology, Writing – review & editing. Muhammad Mohsin: Conceptualization, Data curation, Software, Writing – original draft. Abdul Khaliq Rasheed: Writing – review & editing. Youngho Chang: Investigation, Writing – review & editing. Farhad Taghizadeh-Hesary: Supervision, Validation, Writing – review & editing.
Declaration of competing interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
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