Economic Globalisation, Growth and the Environment: Testing of Environment Kuznet Curve Hypothesis for Malaysia

Abstract

Economic liberalization-growth-Environment nexus is well known but debatable and an open question in the economic literature. Results regarding this nexus are not straight forward but they are sometimes confusing and contradicting. Some studies have found that the two key elements of globalization viz. trade liberalization and inflow of Foreign Direct Investment (FDI) have a positive impact on economic growth, while others have seriously questioned the significance of this result. Likewise studies have been conducted to investigate the impact of trade liberalization and FDI inflow on environment and the results remain inconclusive. There are numerous studies investigating the impact of trade and FDI on economic growth. But few studies exist that have analyzed the joint impact of FDI and trade liberalization policies on environment. The present study fills this gap by introducing explicitly and jointly the two major elements of globalization namely trade liberalization and the inflow of FDI into the analysis. Annual data from 1980 to 2008 from the World Bank data base has been used. To start with, the paper explores the causal relationship between FDI, trade, and Gross Domestic Product (GDP) growth. Also variables are tested for the degree of stationarity and co integration. Then Autoregressive Distributed Lag (ARDL) approach to co-integration techniques has been used to capture the impact of short-run dynamics and long-run equilibrium.