Estimating the relationship between economic growth and environmental quality for the brics economies - a dynamic panel data approach

It has been forecasted by many economists that in the next couple of decades the BRICS economies are going to experience an unprecedented economic growth. This massive economic growth would definitely have a detrimental impact on the environment since these economies, like others, would extract their environmental and natural resource to a larger scale in the process of their economic growth. Therefore, maintaining environmental quality while growing has become a major challenge for these economies. However, the proponents of Environmental Kuznets Curve (EKC) Hypothesis - an inverted U shape relationship between income and emission per capita, suggest BRICS economies need not bother too much about environmental quality while growing because growth would eventually take care of the environment once a certain level of per capita income is achieved. In this backdrop, the present study makes an attempt to estimate EKC type relationship, if any, between income and emission in the context of the BRICS countries for the period 1997 to 2011. Therefore, the study first adopts fixed effect (FE) panel data model to control time constant country specific effects, and then uses Generalized Method of Moments (GMM) approach for dynamic panel data to address endogeneity of income variable and dynamism in emission per capita. Apart from income, we also include variables related to financial sector development and energy utilization to explain emission. The fixed effect model shows a significant EKC type relation between income and emission supporting the previous literature. However, GMM estimates for the dynamic panel model show the relationship between income and emission is actually U shaped with the turning point being out of sample. This out of sample turning point indicates that emission has been growing monotonically with growth in income. Factors like, net energy imports and share of industrial output in GDP are found to be significant and having detrimental impact on the environment in the dynamic panel model. However, these variables are found to be insignificant in FE model. Capital account convertibility shows significant and negative impact on the environment irrespective of models used. The monotonically increasing relationship between income and emission suggests the BRICS economies must adopt some efficiency oriented action plan so that they can grow without putting much pressure on the environment. These findings can have important policy implications as BRICS countries are mainly depending on these factors for their growth but at the same time they can cause serious threat to the environment.