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Does macroeconomic instability cause environmental pollution? The case of Pakistan economy

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Abstract

This study aims to investigate the relationship between carbon dioxide (CO2) emissions, macroeconomic instability, real output (GDP), the square of real output (GDP2), and financial development in Pakistan using the annual dataset over the period 1971–2016. The long-run analysis is based on the ARDL bound testing approach to cointegration, whereas the short-run dynamics are observed using error correction model. The results of the bound testing approach indicate that there exists a long-run relationship between the selected variables and macroeconomic instability increases pollution emissions. In addition, the study supports the presence of environmental Kuznets curve (EKC) hypothesis for Pakistan economy where, in low-income regime, an increase in GDP causes more emissions and, in high-income regime, the relationship between GDP and CO2 emissions becomes negative. Finally, financial development variables exert a positive impact on environmental degradation. Based on these findings, our study supports a strong role of macroeconomic stability in achieving the targets of pollution reductions.

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Notes

  1. In this study, macroeconomic uncertainty is captured by inflation uncertainty. Therefore, both these terms are used interchangeably throughout the paper.

  2. On the negative relationship between inflation and economic growth, Temple (2000) advances different arguments and survey the empirical literature.

  3. In the empirical literature, the desirable effects of both investment and FDI on environmental quality are not undisputed. The competing views note that higher capital stock can cause more pollution if the scale effect of investment dominates its efficiency effects (Chen et al. 2010). Likewise, FDI-driven industrial growth may also cause environmental degradation due to pollution heaven hypothesis (see Lau et al. 2014; Mert and Bölük 2016).

  4. A parallel stream of literature argues that economic and financial crises are attached with higher environmental degradation due to the fact that policymakers focus more on short-run economic goals like employment and welfare rather than the long-run sustainability (see Gough and Meadowcroft 2011; Geels 2013).

  5. For more details on CPEC related energy generation projects, please visit http://www.cpecinfo.com/energy-generation

  6. Rafique and Rehman (2017) present a detailed analysis about Pakistan’s current energy sources and future prospects.

  7. See Al-Mulali, Ozturk, and Lean (2015), Dogan and Seker (2016), and Sinha et al. (2017) for an updated survey on the subject.

  8. The literature on inflation uncertainty and growth can be divided into two parallel streams. The first stream tests the impact of uncertainty on capital accumulation by assuming a one-to-one relationship between capital stock and output growth, following the rationale of Solow growth theory (see Solow (1956)). The second stream directly tests the impact of inflation uncertainty on output growth.

  9. However, the empirical literature also advances some dissenting views on the subject (see Dotsey and Sarte (2000); Varvarigos (2008)). To this end, Dotsey and Sarte posit that higher inflation volatility forces agents to keep money for precautionary motives and this consequently increases physical capital accumulation.

  10. In order to avoid loss of information, we use CPI series from 1960 onwards and retain inflation instability variables for our selected years only.

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  1. Department of Social Sciences, IQRA University (Islamabad Campus), 05 Khayaban-E-Johar H-9, Islamabad, Pakistan

    Muhammad Khan

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  1. Muhammad Khan
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Khan, M. Does macroeconomic instability cause environmental pollution? The case of Pakistan economy. Environ Sci Pollut Res 26, 14649–14659 (2019). https://doi.org/10.1007/s11356-019-04804-z

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