Can environmental sustainability be decoupled from economic growth? Empirical evidence from Eastern Europe using the common correlated effect mean group test

Abstract

The European Union (EU) and the Organisation for Economic Co-operation and Development (OECD) aim to develop long-term policies for their respective member countries. Having observed increasing dangers to the environment posed by rising economic growth, they are seeking pathways to enable policy action on economic growth and environmental sustainability. Given the facts in theoretical and empirical studies, this study assessed the validity of the decoupling hypothesis by investigating asymmetricity in the relationship between environmental sustainability and economic growth in nine Eastern European countries from 1998 to 2017 using the cross-section augmented Dickey-Fuller (CADF) unit root, panel corrected standard errors (PCSE), common correlated effect mean group (CCEMG), and Dumitrescu Hurlin causality approaches. Both population growth and drinking water are used as controlled variables. The outcomes establish strong cointegration among all the variables of interest. According to the results of CCEMG test, first, economic growth exerts short-term environmental degradation but has long-term environmental benefits in Eastern Europe; second, population growth and drinking water exert a positive effect on environmental sustainability in both the short- and long-run. The results of Dumitrescu Hurlin causality test indicate that environmental sustainability is unidirectionally affected by economic growth. Based on these outcomes, the following policy suggestions are made: (1) the EU and OECD should implement member-targeted policies on economic growth and fossil-fuel use towards regulating industrial pollution, water use, and population control; (2) the EU and OECD member countries should invest in environmental technologies through green research and development (R&D) to transform their dirty industrial processes and ensure productive energy use.