The Environmental Consequences of Economic Growth Revisited

Although numerous studies on the economic growth-environment nexus exist, relatively little attention has been paid to model the effect of income on the environment, controlling for other relevant factors. The primary contribution of this paper is to examine the environmental consequences of economic growth for developed and developing countries in a dynamic cointegration framework by incorporating energy consumption and foreign direct investment (FDI). For this purpose, an autoregressive distributed lag (ARDL) approach to cointegration is applied to annual data for the period 1971-2005. Results show that economic growth improves environmental quality for developed countries in the long-run, but worsen the environment in developing economies. We also find that energy consumption has a detrimental long-run effect on environmental quality for both developed and developing countries. FDI, however, is found to have little long-run effect on the environment in both developed and developing countries. Finally, it is found that, in the short-run, income and energy play key roles in affecting the environment in developed and developing countries, but FDI does not.