Abstract
In this study, the Pollution Haven Hypothesis (PHH) validity has been tested for Pakistan and also investigates its impact on exports of Pakistan. The PHH predicts that environmental regulations variability among countries or regions affect polluting industries location and trade flows. This study used the Kolstad (2011) model and Trade Balance Index (TBI) of Lafay (1992) to test the FDI-environment and trade-environment relationship for existence of the pollution haven effect. Time series data from 1980-2017, Autoregressive Distributed Lag (ARDL) or bound test of cointegration is used to investigate the short and long-run relationships. We found positive and statistically significant short-run and long-run relationships between CO2 (proxy for lax environmental policy) and FDI inflows. Finally, Trade Balance Index (TBI) of metal and mining, primary iron & steel, chemicals and rubber products does not support the PHH. While the pulp & paper and the textile industry validated the existence of pollution haven effect. We can conclude that PHH does exist for Pakistan and therefore effective policies needs to be put in place to encourage the FDI inflows without having implications for the environment and thus quality of life of the citizens.
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