Institutional Quality and CO2 Emission–Trade Relations: Evidence from Sub‐Saharan Africa

• Author: Mansor H. Ibrahim,Siong Hook Law
• DOI: http://doi.org/10.1111/saje.12095
• Date: 01 June 2016
• Published date: 01 June 2016

INSTITUTIONAL QUALITY AND CO2EMISSION–TRADE

RELATIONS: EVIDENCE FROM SUB-SAHARAN AFRICA

MANSOR H. IBRAHIM

*

AND SIONG HOOK LAW

†

Abstract

This paper examines the roles of trade, institutional quality and their interactions in explaining

carbon dioxide emissions in a panel sample of 40 Sub-Sahara African countries using the system

generalised method of moments. We find that institutional reforms are unequivocally

environmental improving. Meanwhile, the impacts of trade on the environment tend to depend

on the institutional setting of a country. More specifically, trade openness is harmful to the

environment in countries with low institutional quality and beneficial to the environment in

countries with high institutional quality.This means that institutional reforms are a perquisite for

the countries with low institutional quality to actualise the beneficial environment effect of trade.

As for the countries with adequate institutional quality, trade and institutions are reinforcing each

other in bringing down pollution. From these results, we conclude that trade openness

implemented in a sound institutional setting potentially brings better trade, more growth and

better environment.

JEL Classification: F18, O13, Q56

Keywords: Trade, pollution relations, institutions, Sub-Sahara Africa

1. INTRODUCTION

Environmental degradation and its relations to economic development have long been

at the centre of both policy and academic discussion especially since the seminal work

by Grossman and Krueger (1991). According to Grossman and Krueger (1991),

environmental quality tends to worsen during early stages of economic development and

then it improves after an economy has reached and surpassed a threshold income level.

This postulated inverse U-shaped relation between environmental problems and

economic development is known as the environmental Kuznets curve (EKC).The validity

of the EKC means that such environmental problems as pollutant emissions are more

of a problem of poor or developing countries. It also means that in adopting any

development initiative, these countries are placed in a dilemma of choosing between

economic development and environmental sustainability. At best, they may have to first

sacrifice the environment in their pursuit of economic development and later rely on

* Corresponding author: Professor, International Centre for Education in Islamic Finance

(INCEIF), Lorong Universiti A, 59100 Kuala Lumpur, Malaysia.Tel: +603 7651 4197, Fax: +603

7651 4110. E-mail: mansorhi@inceif.org

† Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia,

43400 UPM Serdang, Selangor, Malaysia

We would like to thank the two anonymous referees and the associate editor of the journals for

helpful and constructive comments on the previous draft of the paper. However, the usual

disclaimer applies.

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economic development to serve as a panacea for environmental degradation (Ibrahim and

Law, 2014). From a policy point of view, this dilemma or policy option faced by

developing countries raises a natural inquiry: can environmental implications of any

policy prescription for economic development and growth be curtailed?

One of the widely known policy prescriptions for economic development, which has

added relevance due to its implications on the environment, is openness to international

trade. Over recent years, the trade–environment relations have been a hotly contested

issue among especial advocates and opponents of trade globalisation. As posited by the

so-called gain-from-trade hypothesis, trade entails environmental benefits. International

trade is expected to accelerate a country’s income level and consequently intensify public

demand for cleaner environment. Moreover, with stringent environmental regulation, the

international trade promotes the adoption of environmentally friendly production

technology as well as result in the production composition shifts towards sectors that emit

less greenhouse gasses. A counter argument, however, is not hard to find. Namely,

according to the race-to-the-bottom hypothesis, trade stimulates the scale of production and

accordingly emissions, and for countries with lax environmental regulations, production

shifts towards pollution-intensive goods. Thus, in climbing a development ladder, the

countries race to the bottom of the environmental quality. Moreover, these countries

would likely be the preferred locations of pollution-intensive industries, as posited by the

pollution-haven hypothesis.

These contrasting views on the environmental effects of trade have motivated a great

deal of researches seeking to pinpoint the trade–environment relations. Although existing

studies have been extensive in their coverages of countries, the Sub-Saharan African (SSA)

countries seem to receive relatively little attention. As compared with other developing

countries in Asia or Latin America, the SSA countries are relatively backward. Hence,

propelling economic development in this region is central in raising its standard of living,

pulling many out of poverty, and narrowing global income disparity. Among the various

development strategies, openness to international trade has been much prescribed. For

instance, Onafowora and Owoye (1998) emphasise the need for the SSA countries to

adopt trade liberalisation policies as a driver of their economic growth. The recent

empirical evidence by Misati and Nyamongo (2011), Bruckner and Lederman (2012),

Sghaier and Abida (2013) and Ngare et al. (2014) further substantiate the significance of

trade to economic development in the African countries. Indeed, Brucker and Lederman

(2012) attribute the recent growth performance in SSA Africa to openness to trade.

Although trade can be important for the African growth, trade potentially entails

environmental costs. Thus, there seems to be also a need to evaluate the

trade–environment relations for the region such that appropriate policies for these

countries to progress with better environment can be derived.

In light of this, the present paper examines the empirical relations between trade and

the environment in a dynamic panel of 40 SSA countries during 2000-2010. In the

analysis, we focus on CO2emission as a measure of the environment, which is noted to

contribute substantially to climate changes and global warming (Yan and Yang, 2010).

Our contributions are threefold. First, as highlighted above, we extend the analysis of

trade–environment relation to a region, i.e. the SSA, which has received relatively little

attention. Indeed, existing studies on Africa focus predominantly on the experiences of

individual countries (Kohler, 2013; Farhani et al., 2014; Kivyiro and Arminen, 2014;

Mensah, 2014). We enrich the literature on Africa by examining a panel of SSA countries.

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