Is Environment Degradation a Pre-condition to Economic Growth? A Case of India and China

This study is an attempt to model the co-integrating relation between economic growth and environmental degradation for two countries namely India and China. Although CO 2 emissions has been the proxy for environmental degradation for most research papers, the study also includes a supplementary proxy environment variable viz forest area as a percentage of land area reflecting the depleting green cover. Thus, the study includes gross domestic product (GDP) per capita as the dependent variable and two regressors as carbon dioxide emissions per capita and forest area as a percentage of land area. The study also includes two additional regressors as trade as a percentage of GDP (proxy for trade openness) and domestic credit to the private sector (proxy for financial development), all converted to natural log terms, and the relation between the variables has been tested using autoregressive distributed lag bounds co-integration approach. The results of the study showed that long-run ‘F’ bounds co-integration test of autoregressive distributed lag was accepted for India but was rejected in case of China. For India, temporal causality was also seen to flow from forest area to per capita GDP with negative cause–effect relation, which was confirmed by Toda and Yamamoto (1995, Journal of Econometrics, 66 (1–2), 225–250) causality results. Further with respect to India with a significant co-integration results, vector error correction model was worked out and the results showed that error correction (ECM) coefficient (which was found to be negative and significant) showed that the process of movement towards equilibrium was unexpectedly slow at a rate less than 0.01% per period. The main contribution of the study was to include a new proxy ‘forest area’ for environmental degradation and to empirically prove that with the decrease in forest cover there was a rise in economic growth.