Exploring the temporal links between foreign aid, institutional quality, and CO2 emissions for poorer countries

Abstract

It is widely acknowledged that poorer countries experience the brunt of deleterious impacts of CO2 emissions and climate change. Deteriorating environmental quality has a negative spillover impact on the health and wellbeing of the economy and individuals in these countries. In this study, we examine whether there are temporal (Granger) causal links between foreign aid (which many developing countries depend on), CO2 emissions, and the quality of the institutions of governance in poorer countries. We use the vector error-correction model (VECM) to study the links. The study was conducted for low-income and lower middle-income countries from 2005 to 2019. Results indicate that there exist complex and varied endogenous dynamics amongst all three variables in the short run. Over the longer period, the results are more uniform: the level of institutional quality and the level of CO2 emissions both Granger-cause foreign aid. Based on the results, the paper outlines key co-development policies on foreign aid, institutional reforms, and CO2 emissions to transition poorer countries onto a path of enhanced environmental development (lower CO2 emission), as envisioned in the United Nations Climate Change Conference in Glasgow (COP26) [United Nations, 2021].