Economic Growth and Environmental Responsiveness: A Cross-Country Analysis

Abstract:     
The Environmental Kuznets Curve hypothesis argues that the relation between pollution levels and per capita income levels is inverse U-shaped. While different explanations have been offered, the reduced form nature of the regression model generally tested does not lend itself to statistical verification of the explanations offered. Attempts to expand the model by incorporating additional variables are also constrained by multi-collinearity (between the new variables and per capita income). This paper argues that it is necessary to test explanations directly by looking at the relation between per capita income and possible explanatory variables. In this paper, based on a cross-country sample of 136 countries, we have examined whether ‘environmental demand’ really increases with economic growth; that is, whether richer countries are more responsive towards environmental problems. Using principal component analysis, indices of environmental governance and responsiveness of private sector are constructed for each country and their relation with per capita income observed. It is observed that while the log-log form of the relation does provides some support for the hypothesis, income elasticity of governance is stable at a low value, while that of private sector responsiveness is negative. This raises questions whether richer countries are indeed more responsive towards environmental problems.

Number of Pages in PDF File: 25

Keywords: Environmental Policy, Environmental Kuznets Curve, Sustainable Development, Factor Analysis

JEL Classification: Q28, Q56, C00, C20

working papers series