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

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.

[1]  Frederic L. Pryor.  Capitalism and freedom , 2010 .

[2]  Isabel Gallego‐Álvarez,et al.  Environmental Performance in Countries Worldwide: Determinant Factors and Multivariate Analysis , 2014 .

[3]  Sacchidananda Mukherjee,et al.  How do trade and investment flows affect environmental sustainability? Evidence from panel data , 2013 .

[4]  W. Powell,et al.  The iron cage revisited institutional isomorphism and collective rationality in organizational fields , 1983 .

[5]  J. Platteau.  Behind the market stage where real societies exist ‐ part I: The role of public and private order institutions , 1994 .

[6]  Soumyananda Dinda.  Environmental Kuznets Curve Hypothesis: A Survey , 2004 .

[7]  M. Próchniak.  To What Extent is the Institutional Environment Responsible for Worldwide Differences in Economic Development , 2013 .

[8]  Concetta Castiglione,et al.  Environment and economic growth: is the rule of law the go-between? The case of high-income countries , 2015, Energy, Sustainability and Society.

[9]  C. S. Holling,et al.  Economic growth, carrying capacity, and the environment , 1995, Environment and Development Economics.

[10]  S. Mukherjee,et al.  Is environmental sustainability influenced by socioeconomic and sociopolitical factors? cross‐country empirical evidence , 2013 .

[11]  Y. H. Farzin,et al.  Democracy and Environmental Quality , 2006 .

[12]  C. Arndt.  The Politics of Governance Ratings , 2008 .

[13]  J. List,et al.  Trade Liberalization, Corruption and Environmental Policy Formation: Theory and Evidence , 2000 .

[14]  Tom Verbeke,et al.  The income-environment relationship: Evidence from a binary response model , 2006 .

[15]  Walter Leal Filho,et al.  The role of governance in realising the transition towards sustainable societies , 2016 .

[16]  F. Hayek,et al.  The Constitution of Liberty , 1962 .

[17]  T. Tietenberg.  Economic Instruments for Environmental Regulation , 1990 .

[18]  J. Kaivo-oja,et al.  Linking analyses and environmental Kuznets curves for aggregated material flows in the EU , 2007 .

[19]  M. Cole.  Limits to growth, sustainable development and environmental kuznets curves: an examination of the environmental impact of economic development , 1999 .

[20]  T. Bernauer,et al.  Effects of political institutions on air quality , 2009 .

[21]  Demetrios Moschos,et al.  Financial Development and Economic Activity in Advanced and Developing Open Economies: Evidence from Panel Cointegration , 2015 .

[22]  An Gie Yong,et al.  A Beginner's Guide to Factor Analysis: Focusing on Exploratory Factor Analysis , 2013 .

[23]  David Vogel,et al.  Trading up and governing across: transnational governance and environmental protection , 1997 .

[24]  Chung-Chiang Chen,et al.  Income effect or policy result: a test of the environmental Kuznets Curve , 2008 .

[25]  O. Lobonț,et al.  New empirical evidence of the linkages between governance and economic output in the European Union , 2013 .

[26]  Paul Ekins,et al.  Limits to Growth and Sustainable Development: Grappling with Ecological Realities , 1993 .

[27]  D. Stern.  The Rise and Fall of the Environmental Kuznets Curve , 2004 .

[28]  O. Handlin.  Capitalism and Freedom. By Milton Friedman with the assistance of Rose D. Friedman. Chicago, The University of Chicago Press, 1962. Pp. vi + 202. $3.95 , 1963, Business History Review.

[29]  C. Hardy.  Organizations: Rational, Natural and Open Systems , 1983 .

[30]  R. Kaufmann,et al.  Long-Run Changes in Radiative Forcing and Surface Temperature: The Effect of Human Activity over the Last Five Centuries , 2016 .

[31]  A. Hsu,et al.  What progress have we made since Rio? Results from the 2012 Environmental Performance Index (EPI) and Pilot Trend EPI , 2013 .

[32]  R. Schwarze,et al.  A Matter of Opinion : How Ecological and Neoclassical Environmental Economists Think about Sustainability and Economics , 2006 .

[33]  T. Srebotnjak.  The role of environmental statisticians in environmental policy: the case of performance measurement , 2007 .

[34]  Inga Chira.  The impact of governance characteristics on the stock price of cross listed companies , 2014 .

[35]  K. Vadlamannati,et al.  Does Higher Economic and Financial Development Lead to Environmental Degradation: Evidence from BRIC Countries , 2017 .

[36]  G. Grossman,et al.  Economic Growth and the Environment , 1994 .