A Structural Analysis of Economic Growth-Environment Relationship under Economic Openness

Abstract

Economic openness under globalisation process has been instrumental for recent increased transfer of both production and consumption activities across countries. Such transfers may have been shifting associated environmental effects from one country to another. In this paper, we have developed a structural model of the relationship between economic growth and environmental quality. We decompose the environmental Kuznets curve (EKC) relationship by breaking down net environmental effect of economic activities into three major determinants: scale, composition and abatement effects. We have incorporated additional variables such as, trade openness, foreign direct investment (FDI) and technological changes in our model to examine the effects of economic openness on the economic growth-environmental relationship. We find that trade openness reinforces increasing scale effect; FDI pushes inverted U-shape of composition effect upward; and technology seems to result in stronger abatement effect. The improvement of environmental quality under globalisation will thus require stronger abatement measures in order to offset increased detrimental scale and composition effects. But stronger abatement measures need better access to modern technologies and therefore, modern technology dissemination is a pre-requisite for improvement of environmental quality.