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Environmental Kuznets Curve Revisit: Role of Economic Diversity in Environmental Degradation

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Environmental Kuznets Curve Revisit: Role of Economic Diversity in Environmental Degradation Environmental Kuznets Curve Revisit: Role of Economic Diversity in Environmental Degradation Raza Ghazal University of Kurdistan Mohammad Sharif Karimi ( [email protected] ) Razi University of Kermanshah: Razi University https://orcid.org/0000-0002-5967-6756 Bakhtiar Javaheri University of Kurdistan Research Keywords: Economic complexity, Structural change, Environmental Kuznets curve, Environmental degradation Posted Date: February 22nd, 2021 DOI: https://doi.org/10.21203/rs.3.rs-213429/v1 License: This work is licensed under a Creative Commons Attribution 4.0 International License. Read Full License 1 Environmental Kuznets Curve Revisit: Role of Economic Diversity in Environmental 2 Degradation 3 Raza Ghazal1 4 Mohammad Sharif Karimi2 5 Bakhtiar Javaheri3 6 7 8 Abstract 9 Background: Unlike the classical view, a new path of economic growth and development among 10 the emerging and developing nations seems to have distinct impact on environment. Customary 11 patterns of production and consumption have undergone significant changes and the new “growth 12 with non-smoke-staks” has put the developing economies on a path that can change Environmental 13 Kuznets Curve (EKC) fundamentally. With this view, the current study attempts to examine how 14 these growth patterns among developing world have impacted the degradation of environment. We 15 argue that including income per capita and share of manufacturing would not capture the full 16 growth dynamic of developing and emerging countries and therefore it masks the real impacts on 17 environmental degradation. To this end, we introduce the Economic Complexity Index (ECI) to 18 the model to reflect the full impacts of new growth approaches on CO2 emission levels by using a 19 panel data analyses of 100 emerging and developing countries over 1963-2018 period. 20 Results: The results indicate that complexity of the economies of developing and emerging 21 countries has added to the CO2 emission levels in absolute terms but it has helped to reduce the 22 CO2 intensity. 23 Conclusions: The implications of the findings for developing and developed countries could be 24 quite significant. For advanced economies, a downwardly-shifted Kuznets curve implies that, on 25 one hand, technology transfers have been successful in curbing the environmental degradation of 1 Assistant Professor, Department of Economics, University of Kurdistan, Sanandaj, Iran. E-mail: [email protected] 2 Corresponding Author, Assistant Professor, Department of Economics, Razi University, Kermanshah, Iran. E-mail : [email protected] 3 Assistant Professor, Department of Economics, University of Kurdistan, Sanandaj, Iran. E-mail: [email protected] 1 26 developing economies and, on the other hand, the economic transformation strategies of 27 developing world is working in a sustainable way. 28 29 30 Keywords: Economic complexity, Structural change, Environmental Kuznets curve, Environmental degradation 31 JEL Classification: O10, O25, Q44, Q53 32 33 34 35 1. Background 36 Global warming is now considered as one of the biggest challenge that can pose an existential 37 threat to human kind. Environmental issues represented by greenhouse gas emissions nowadays 38 have led to a series of serious ecological problems, such as accumulation of CO2 emissions to an 39 unprecedented level, and sea levels rising. Therefore, not surprisingly ecological treatments and 40 climate change mitigation have taken center stage in the development agenda of both developed 41 and developing countries as well as international organizations. As such, a global effort initiated 42 by UN has been made through the establishment of Sustainable Development Goals (SDGs) to 43 promote renewable and clean energy technologies, sustainable agriculture and food security, and 44 mitigate climate change and its impact. Despite the pledges made, the efforts undertaken, and the 45 funds earmarked, unfortunately, most of the signatory countries to United Nations Framework 46 Convention on Climate Change (UNFCCC) are lagging behind in their obliged targets on climate 47 change. 48 The growth pattern of courtiers can significantly change the landscape of fighting the climate 49 change that can free up and/or lock in the limited resources that countries have for their adaptation 50 and mitigation strategies. This is especially the case for developing countries who are more in need 51 of extra fund and support to fight the unpredictable consequences of climate change. Climate 52 change as a global commodity requires consolidated and coordinated efforts by both developed 53 and developing countries. 54 The classical view on industrialization of economics pioneered by Nobel prize laureate, Arthur 55 Lewis, was basically recommending on moving farmers from subsistence farms into factories and 2 56 commercial farms. This view, however, has undergone considerable changes as the scope for 57 “classic labour-intensive, export-oriented industrialisation” is narrower now. The model now is in 58 between a classic manufacturing and a subsistence farming for many developing countries, labeled 59 as “industries without smoke-stacks”. Rodrik (2016) argues that automation, competition and 60 shifting demand are closing the door to countries wanting to copy Asia’s miracle. Economic 61 transformation under this model is quite distinct from the Asian model and this has strong 62 implications for green growth and climate change. 63 The pattern of industrialization has undergone serious changes in nature. The classical pattern of 64 industrialization is not the common practice anymore in the way that the agriculture- 65 manufacturing-services sequence shifted to agriculture-services-manufacturing or for some simply 66 agriculture-services. In other words, many developing countries are jumping over the second stage 67 of industrialization such that service sector constitutes more than 50 percent of the economy with 68 a very thin manufacturing sector. This arguably influences the shape of the classical environmental 69 Kuznets curve4 (EKC) as manufacturing sector is the main contributor to the environmental 70 degradation compared to other sectors. As service sector is less polluting than manufacturing, it is 71 expected that developing countries experience a different version of the classical inverted U-shape 72 curve. 73 According to EKC theory there is an inverted U-shaped relationship between environmental 74 degradation and per capita income, simply indicating that at early stages of growth countries will 75 be facing higher environmental degradation, but as the economy grows the intensity of 76 environmental degradation will ease up. 77 Structural change and economic transformation to service and information-based economic 78 activities which are less emission-intensive than physical production and the growing ecological 79 efficiency of production and consumption by means of a ‘greening’ technical and technological 80 progress are perceived to be the main channels of reducing the intensity of damages to the 81 environment. On the other hand, product diversification, product complexity and economic 82 complexity are the main driving forces of structural transformations in the economy. Therefore, 83 economic growth and development with less adverse impact on the environment seems to be 4 Kuznets (1955) was the first who introduced the hypothesis that income inequality increases to a maximum and then starts to decrease as per capita income increases. This hypothesis then extended to the environment labelled as Environmental Kuznets curve (EKC) hypothesis. 3 84 happening and the relationship between GDP per capita and environmental quality depends on 85 scale, composition and technology effects of such transformation. 86 In this context, this study examines the Environmental Kuznets Curve for 100 emerging and 87 developing countries over the period 1990–2018 from a different perspective than other studies 88 had on the issue. More specifically, it attempts to see how changing the pattern of industrialization, 89 in particular, and economic growth, in general, affect the inverted U-shape curve between 90 environmental degradation and level of income of these countries. 91 To the knowledge of the authors of this study, this research is among the first studies to analyze 92 the relationship between economic degradation and structural transformation. More specifically, 93 our study is unique in the sense that it benefits from a highly cited indicator of economic 94 transformation known as Economic Complexity Index (ECI) developed by Harvard University. 95 To this end, this research aims at investigating the interactions between economic complexity and 96 economic growth and it impact on environmental degradation. 97 The remainder of this paper is organized as follows: Section 2 provides a literature review. Section 98 3 surveys economic complexity and environmental degradation. Section 4 describes the data and 99 variables definitions, as well as methods for empirical analysis. Section 5 presents the empirical 100 results and discussions, and Section 6 concludes the paper with some key policy implications. 101 102 2. Literature review 103 As far as the authors of this study know, the majority of the exiting literature on environmental 104 Kuznets curve has used share of manufacturing in GDP as a representation of industrialization to 105 study the impacts of industrialization on economic degradation or they simply looked at the 106 association between GDP per capita
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