Foreign aid, economic globalization, and pollution

Abstract

This paper explores how trade and foreign direct investment (FDI) condition the effect of foreign aid on environmental protection in aid-recipient countries. We suggest that (1) environmental protection should be viewed as a public good and (2) all else equal, resource flows from abroad (via aid, trade, and FDI) influence governments' incentives to provide public goods. (3) Because these resources shape governments' incentives differently, their interactive effects should be examined. We begin with the assumption that developing country governments seek some optimal level of environmental protection, a level conditioned by their factor-intensive growth phase. We hypothesize that at low levels of export receipts or FDI inflows from the developed world, foreign aid is associated with superior environmental protection. This is because foreign aid, as an environmentally neutral addition to revenue, allows recipient governments to partially relax the trade-off between economic growth and environmental protection. As levels of export receipts or FDI inflows from the developed world increase, however, the salutary effect of foreign aid will diminish and eventually be reversed. This is because foreign aid mitigates the recipient government's dependence on traders and investors in the developed world, and concomitantly reduces their pro-environmental policy leverage. Our analysis of 88 aid recipients, for the period 1980-2005, lends support to our argument.

An analysis of foreign aid and environmental degradation in Pakistan using the ARDL bounds testing technique (1972-2013)

“…Most of the researchers analyze the impact of foreign aid on the economic growth of the country. For example, find that dependence on the stable and sustainable external resources could be helpful in enhancing economic 3 FDI more than 7% of GDP increases pollution (Lim et al, 2014). growth in Pakistan.…”

Environmental policy impacts of trade with China and the moderating effect of governance

“…Population Density is also controlled for, as there is reason to suspect that this factor is closely linked to various types of pollution (Lim et al, ; McLeod et al, ; Raupach, Rayner, & Paget, ). Likewise, a control for veto players is included, following earlier work identifying veto players as a key domestic political institution mediating the effects of trade on environmental regulations (Cao & Prakash, ).…”

“…Second, governments of the world have made strong and longstanding efforts to regulate SO 2 , relative to other pollutants, such as carbon dioxide (CO 2 ) or nitrous oxide (N 2 O). Finally, SO 2 emissions largely stem from activities associated with industrialization in developing countries (Lim et al, ).…”

“…Studies of environmental politics often use SO 2 Intensity (e.g., Lim, Menaldo, & Prakash, 2015) and it is an appropriate measure for this study for several reasons. First, such emissions are visible to the public and to governments, fostering high levels of awareness (Cao & Prakash, 2010).…”

“…9 FDI data are from the World Bank's World Development Indicators. 5 Data for these inputs comes from the CEPII Bilateral Trade Historical Series dataset (Fouquin & Hugot, 2016 Population Density is also controlled for, as there is reason to suspect that this factor is closely linked to various types of pollution (Lim et al, 2015;McLeod et al, 2000;Raupach, Rayner, & Paget, 2010).…”