How does economic growth impact environmental quality in Ethiopia? A non‐linear approach

Fueled by economic growth, among other factors, environmental degradation is one of the most serious challenges facing humanity in the twenty‐first century. Although extensive research has been conducted on the relationship between economic growth and environmental quality, the findings are inconclusive. This study investigated the relationship between economic growth and environmental quality in Ethiopia from 1981 to 2016 using non‐linear autoregressive distributive lag and two‐step least squares models. First, the study finds that the relationship between economic growth and environmental quality is asymmetric. Second, economic growth negatively affects environmental quality. Third, the positive environmental effect of a negative shock on economic growth is stronger than that of a positive shock. Fourth, energy consumption and population growth negatively affect environmental quality, whereas the effects of renewable energy consumption, natural resources, trade openness and human capital are positive. Fifth, an inverted N‐shaped relationship exists between economic growth and environmental quality, where GDP per capita greater than $686.770 contributes to environmental quality. Therefore, high and sustainable economic growth, renewable energy consumption, population control, resource conservation, trade openness and human capital accumulation are required to improve the environmental quality of Ethiopia. The limitation of this study is that it examines the direct impact of economic growth on environmental quality. It would be better to examine the potential indirect impact of economic growth via variables, such as institutional quality and human capital.