The spillover effect of economic institutions on the environment: A global evidence from spatial econometric analysis.

Abstract

This study examines the impact of economic institutions on ecological footprint and their spatial spillover effects globally, covering the period from 2000 to 2021. We focus on economic institutions because institutions that espouse economic freedom are essential for safeguarding environmental quality. We hypothesize that the spatial influence of these institutions varies both globally and regionally. The Moran's I test reveals significant spatial associations among countries, while the Wald and likelihood tests identify the spatial Durbin model as the most appropriate approach. Furthermore, the Hausman test indicates that a fixed effects model best captures the coefficients. Globally, economic institutions demonstrate a direct reduction effect of 16.4% and a spillover reduction effect of 4.4% on ecological footprint. However, these effects show considerable regional variation. In North America, East Asia and the Pacific, the Middle East, North Africa, Europe, and Central Asia, economic institutions effectively reduce ecological footprint, while their impact is negligible in other regions. These regional differences underscore the importance of addressing institutional deficiencies, encouraging policymakers in regions with limited effects to learn from best practices to enhance institutional effectiveness. These insights collectively advance the literature on economic institutions and environmental economics, emphasizing regional policy adaptation and the transboundary effects of institutional quality. The findings further reveal that economic institutions moderate GDP per capita to curb ecological footprint significantly. These conclusions hold even after addressing endogeneity using the generalized spatial two-stage least squares method. The study recommends that policies promoting economic freedom are essential to mitigate global environmental degradation.