Revisiting the institutional quality-environmental pollution nexus in developing countries

Abstract

Global environmental pollution disproportionately burdens developing countries through multiple channels. Prior research identifies institutional quality as one of a key determinant of environmental outcomes in these settings. Exploring how six different aspects of institutional quality uniquely influence environmental quality over the long term in developing countries. Dynamic heterogeneous panel data estimators that account for cross-country heterogeneity and persistence have been employed to identify long-run relationships. The analysis is based on a panel of 94 developing countries over the period 2002 to 2019. Environmental quality is proxied by carbon dioxide (CO2) emissions, while institutional quality is measured using six widely recognized dimensions: Control of Corruption, Rule of Law, Voice and Accountability, Government Effectiveness, Regulatory Quality, and Political Stability and Absence of Violence. All six institutional dimensions exhibit statistically significant long-term effects on CO2 emissions. Specifically, improvements in Control of Corruption, Rule of Law, and Voice and Accountability are associated with reductions in emissions. Conversely, enhancements in Government Effectiveness, Regulatory Quality, and Political Stability and Absence of Violence are linked to increased emissions. The magnitude and direction of institutional quality effects vary across dimensions. Institutional quality plays a crucial role in shaping environmental outcomes in developing countries; however, its impact varies significantly across dimensions. Effective policy design must take these divergent pathways into account to effectively support the achievement of sustainable development goals.