Open Economy, Institutional Quality, and Environmental Performance: A Macroeconomic Approach

Amaryllis Mavragani,Ioannis Nikolaou,Konstantinos Tsagarakis

doi:10.3390/su8070601

Amaryllis Mavragani, Ioannis Nikolaou + Show 1 more

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https://doi.org/10.3390/su8070601

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Journal: Sustainability	Publication Date: Jun 28, 2016
Citations: 92	License type: CC BY 4.0

Affiliation: Democritus University of Thrace

Abstract

As the subject of how economic development affects the quality of the natural environment has gained great momentum, this paper focuses on examining the extent to which the openness of a market economy and the quality of the institution affect environmental performance. The majority of the current studies focus on the Environmental Kuznets Curve and the level of economic growth. This paper addresses this question by relating environmental (“Environmental Performance Index”) to macroeconomic (Gross Domestic Product per capita, “Open Markets Index”) and governance indicators (“Worldwide Governance Indicators”). The sample consists of 75 countries, including all G20 and EU members, comprising “more than 90% of global trade and investment”. Findings show that the Environmental Performance Index is positively correlated to each of the (institutional) indicators, so as to confirm that the selected indices are consistent with previous studies, suggesting that environmental performance increases in line with economic development and that good governance increases a country’s levels of environmental protection. By applying factor analysis, an empirical model of the Environmental Performance Index is estimated, suggesting that there is a significant positive correlation between a country’s economic growth, the openness of an economy, high levels of effective governance, and its environmental performance.

Highlights

Economic growth and the natural environment are viewed as both conflicting and, at other times, cooperative concepts [1,2]
We examine if the relations of environmental performance with economic development and institutional quality, as represented by the selected indices, i.e., Gross Domestic Product per capita (GDPc), Open Markets Index” (OMI), Control of Corruption (CC), Regulatory Quality (RQ), Political Stability” (PS), Voice and Accountability (VA), Government Effectiveness” (GE), and Rule of Law (RL), support what has already been suggested by previous work
As the selected indices are shown to be consistent with economic theory, we proceed using factor analysis, with the estimation of an empirical model of Environmental Performance Index (EPI), which strongly suggested that environmental performance increases in line with economic development and high institutional quality

Summary

Introduction

Economic growth and the natural environment are viewed as both conflicting and, at other times, cooperative concepts [1,2]. The cooperative approach shows that, at an early stage of a country’s economic growth, a high level of environmental degradation is observed [6], while, after a critical point of economic growth, a gradual decline in environmental degradation is reported. This relationship has been mainly examined through the Environmental Kuznets Curve, which is outlined as a inverted U-shaped function of various environmental indicators and Gross Domestic Product per capita (GDPc) [7,8]

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