Use of structural equation modeling to examine the relationships between growth, trade and the environment in developing countries

According to the environmental Kuznets curve hypothesis, environmental degradation increases in the early stages of growth, but it eventually decreases as income exceeds a threshold level. It is thus often argued that if international trade increases incomes then it can also have a positive impact on environmental quality. So far, these hypotheses have been widely empirically tested for the developed countries. However, it is still uncertain whether positive effects of international trade on growth and on the environment may also hold in developing countries. One of the major difficulties in testing these relations in developing countries is the poor quality of environment related data. In this analysis this problem is reduced by constructing a structural equation model (SEM) with three latent variables defined as environment quality, health care and structural changes. It is further assumed that these latent variables are correlated with each other and are described by their available outcomes, access to an improved water source, health-adjusted life expectancy, fertilizer use intensity, industrial carbon dioxide emissions etc., and indicators, structure of international trade by region and by commodity group, amount of international aid received by the country, foreign direct investment, income per capita etc. Using LISREL software, these structural relationships are combined into one comprehensive model. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.