ECONOMIC LIBERALIZATION AND THE ENVIRONMENTAL KUZNETS CURVE: SOME EMPIRICAL EVIDENCE

Abstract

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONEconomic liberalization and environment are two major issues defining today's political agenda (Baek et al., 2009; Copeland, 2005; Copeland and Taylor, 2004). Although the theoretical backgrounds of economic liberalization on emission levels are not clear, studies in this area garner much interest (Jayanthakumaran and Liu, 2012) and much controversy exists on its impact on the environment.While it is widely agreed that economic liberalization is a major stimulus to environmental effects (Baek et al., 2009) its negative impacts have been highlighted by many studies (Cole, 2004; Daly, 1993; Greenpeace, 1997; Lang and Hines, 1993; Tisdell, 1999; World Wide Fund for Nature International, 1999).Previous studies have much expanded understanding on the environmental consequences of economic liberalization. However, earlier investigations mostly used the much-criticized Environmental Kuznets Curve (EKC) in its simplest form (Arrow et al., 1995; Ekins, 1997; Stern et al., 1996; Stern and Common, 2001). A specific criticism leveled at the EKC is that it does not account for the patterns of the different dimensions of economic liberalization simultaneously and in a coherent framework. Such dimensions that include trade, foreign direct investment liberalization, and the decreasing role of the state could potentially have significant impacts on the environment. Further, the earlier studies paid little attention to the issue of endogeneity in evaluating the relationship among trade liberalization, FDI, income growth, and environment quality (Chintrakarn and Millimet, 2006; Coondoo and Dinda, 2002).Although a number of papers have examined the separate impact of different dimensions of economic liberalization (Birdsall and Wheeler, 1993; Frankel and Rose, 2005; He, 2010; Jaffe et al., 1995; Janicke et al., 1997; Mani and Wheeler, 1997; Tisdell, 2001), a clear simultaneous indication of the extent to which economic liberalization may be responsible for the emission level while controlling for other variables such as energy consumption and urbanization yet to be provided. That is the contribution of this paper which appraises the impact of different features of economic liberalization in a simultaneous and coherent framework, using the GMM to take into account issues of endogeneity.This study uses different GMM estimators and detailed data on 166 countries comprising 36 developed economies, 83 developing economies and economies in transition, 47 least developed economies, and a combination of all the countries irrespective of their development stages. Apart from examining the validity of the EKC for each group of countries, this paper estimates the average turning point incomes for individual groups, and assesses the impact of trade liberalization, foreign direct investment liberalization, the decreasing role of the state on emissions. Further, the study ascertains whether patterns of urbanization and energy consumption could significantly impact pollution levels.The remainder of the paper is structured in the following manner: Section 2 addresses the way that economic liberalization is measured and the linkages between different aspects of economic liberalization and the environment; Section 3 contains the econometric analysis, and finally, Section 4 concludes the paper.2. ECONOMIC LIBERALIZATION AND THE ENVIRONMENT2.1.Measuring Economic LiberalizationAlthough economic liberalization is a complex process encompassing many facets and effects (Frankel, 2009), this paper, like in Santareli and Figini (2002), characterizes it based on three different aspects: trade liberalization, FDI liberalization, and the decreasing role of the state. A commonly used measure of the structural dimension of economic liberalization is the degree of openness usually measured as the ratio of trade over GDP ((Exp o r ts + I mp o r ts)/ G D P ). …