How fiscal decentralization and trade diversification influence sustainable development: Moderating role of resources dependency

Abstract

After ratifying the Paris Climate Agreement (PCA), most advanced economies are contributing incessantly to the international climate change framework. However, their “Intended Nationally Determined Contributions (INDC) pledges are still far from achieved due to their high consumption of natural resources, which spurs economic activities and environmental impairments. Therefore, to coup this predicament, this study evaluates the influence of natural resource rent (NTR), fiscal decentralization (FSD), and trade diversification (TDF) on the sustainable development of G-7 countries from 1995 to 2020. The ecological footprint is used as the proxy to accurately represents environmental sustainability. The direction and magnitude of the asymmetric association of the nexus between FSD, NTR, TDF, and EFP have been evaluated with the quantile-based econometrics approach of “Method of the Moments Quantile Regression” (MMQR). The estimates of MMQR suggested that fiscal decentralization and trade diversification have negative and significant coefficients at all quantiles (Q0.25- Q0.90), which implies that these variables are the plausible solution to reducing ecological footprint by sharing the fiscal power with the local or subnational governments and excluding the specialized products from the trade basket. In contrast, NTR and GDP are positively and significantly associated across all quantiles (Q0.25- Q0.90), indicating the adverse impact of these variables due to the escalation of resource consumption and GHG emissions. Additionally, for the robustness of the MMQR estimates, the “Augmented Mean Group” (AMG) and “Common Correlated Effect Mean Group” (CCEMG) confirm a similar direction of association between variables. The results provide policy recommendations to enhance environmental sustainability through FSD and TDF.