The impact of economic performance on environmental quality in developing countries

Abstract

The relationship between environmental quality and economic performance using a generalised least squares (GLS) regression framework is assessed for 15 developing countries during the period 2000-2010. The Environmental Performance Index (EPI) is used as an indicator of environmental quality. The results do not show an inverted U-shape relationship or the effect of the environmental Kuznets curve (EKC). Concerning the environmental performance, the GDP per capita and energy use have the most significant explanatory power on pollution for developing countries. The other economic determinants of pollution are trade openness, financial development, foreign direct investment, and urbanisation are of indirect influence because they are strongly correlated with economic growth and energy use. The obtained results show a positive and statistically significant relationship between economic performance and environmental quality, and empirically an increase in GDP per capita by USD 100 improves EPI in absolute value by 0.1. Energy use (kg of oil equivalent per capita) is statistically significant and negatively correlated with environmental performance. Thus, 100 kilograms of oil equivalent per capita reduces EPI in absolute value by 0.2. One of the policy implications of research is to stimulate economic development, while reducing oil consumption.