Re-examining Economic Growth-Environment Relationship: Evidence from High-, Medium- And Low-Income Countries

Abstract

There is said to be an inverted U shaped relationship between economic growth and the environment, named environmental Kuznets curve (EKC). But why such relationship exists and what are the mechanisms by which economic development improves environment are not well known. Studies are generally based on reduced form single equation model of this relationship, which could not explain much insight into its underlying causes. To overcome these limitations, we develop a structural model for analysing economic growth-environment linkages. Using panel data from a cross-section of countries widely dispersed on economic growth scale, this study finds that the scale of economic activities deteriorates environmental quality during the earlier stage of economic growth, whereas structural economic changes and abatement activities offset this effect and thus improves environmental quality during the later stage. It is also found that these effects differ widely across high-, medium- and low-income countries and, therefore, a global aggregation is certainly a misspecification of the EKC relationship.