Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344

Control of , Regulatory Quality, Political Stability and Environmental Sustainability: A Cross-National Analysis

Sofik Handoyo Faculty of Economics and Business Universitas Padjadjaran

Fury Khristianty Fitriyah Faculty of Economics and Business Universitas Padjadjaran

Abstract: The study aims to reveal the correlation between attributes of the government and national environmental sustainability. The governance attributes of government in this study refer to the index of control of corruption, regulatory quality, and political stability. Meanwhile, national environmental sustainability refers to the index of national environmental performance. The period of investigation is the year of 2014 and involves 177 countries. Person correlation analysis was applied in this study to identify the degree of correlation between independent variables (control of corruption, regulatory quality, and political stability) dependent variable (environmental sustainability). Independent variables were measured using the World Governance Index (WGI) published by the World Bank. Environmental Performance Index (EPI) issued by The Yale Center for Environmental Law & Policy (YCELP) was proxied for measuring environmental sustainability. The results indicate that the state’s control of corruption, the national regulatory quality, and national political stability are positively associated with national environmental sustainability. The correlation coefficients are 0.230 (p<0.01), 0.193 (p<0.01), and 0.167 (p<0.01), respectively. Even though there is a positive correlation between public governance attributes and national environmental sustainability, however, the degree of correlation is weak. It implies that national governance is not a powerful instrument to predict national environmental sustainability.

Keywords: Control of corruption; Regulatory quality; Political stability; Environmental sustainability,

Introduction discussion among nations and corporations. They have the same concern, saving the In recent decades it has become earth from the negative impact of evident that environmental degradation is a industrialization and nature exploitation. In growing problem with implications for order to support the population’s life in the poverty reduction as well as for the health future, the environment must be prevented of ecosystems (Sundström, 2013). from further destruction. Therefore, Environmental issues are being an intense economic development activities should

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344 also consider environmental sustainability. Many factors are contributing to the Environmental sustainability is one of the achievement of environmental main points of Millennium Development sustainability goals. However, internal Goals (MDGs) initiated by United of factors such as the ability of the state to Nations on Millennium Summit occasion in combat corruption, the regulatory quality, 2000. The milestone of the environmental and domestic political stability are believed protection movement by global playing a significant role in determining communities was started in 1992, resulting successful environmental sustainability Kyoto Protocol, governing about goals. greenhouse gases reduction. Following Corruption is the typical negative Kyoto occasion, in the same year, Earth behavior of the national official associated Summit in Rio de Janerio released agenda with the failure to achieve sustainable 21 of sustainability development. Those development. Bribery from the private events initiated by implies sector to the official government is a classic that environmental issues are crucial for example of corruption among state international communities and challenges officials. Plenty of anecdotal evidence to be faced collectively (Scruggs,1999). suggests that corruption harms the The thinking of environment environment; bribery assists the poaching sustainability is driven by a general of rhinos in protected savannas and enables understanding of global communities that the illegal logging of timber in tropical the earth is no longer a friendly place for forest reserves (Sundström, 2013). Issuing living. Sustainable development provides a business permits that are endangering framework for humans to live and prosper population and environment, neglecting in harmony with nature rather than living, fines for a business practice that are as we have done for centuries, at nature‟s ignoring the environmental law and expense (Dernbach and Mintz, 2011). regulations, giving easy sanctions and Many economic activities, especially punishment for any actions against the industrialization and natural resources environmental law and regulations are exploitation, are believed causing common practice that is believed involving deterioration of environmental quality. bribery. Impact of bribery is very Global warming, the ozone layer’s significantly related to sustainable depletion, natural disaster, climate changes development. Therefore, the ability of the are the harmful impact of irresponsible state to control corruption practice will economic activities (Fiorino, 2010). determine whether sustainable Industrialization and natural resources development can be achieved or not. Even exploitation in one side is benefiting the though there are many assumed cause- state, the other side, it will harm effect relationships between corruption and environmental if it is not managed environmental sustainability, however, carefully. In this case, national involvement there are still few empirical analyses as the regulator is very pivotal in achieving (Morse, 2006). Therefore, further environmental sustainability. quantitative research about the influence of Environmentally friendly industrialization corruption and environmental sustainability is effectively practiced if the state has a full needs to be conducted. commitment to doing it. However, it is not an easy duty to be conducted by the state.

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344

Sustainability development is a unstable domestic politic condition, it will vision of global communities to be take consequences of national priority in achieved. However, to achieve sustainable conducting national development, in this development, infrastructure such as case, environmental development sufficient regulatory should be in place. Regulation, one of the three fundamental levers of state power (together with fiscal Literature Review and Hypothesis and monetary policy), is of critical Development importance in shaping the welfare of economies and society (OECD, 2010). The Control of corruption dan Environmental regulatory should have good quality and Sustainability enforcement power that make business practice aware of environmental issues. World Bank defines corruption as the abuse of public power for private gain. Regulatory quality is reflected by its Corruption, in its various forms, is effectiveness to achieve the purposes of generally believed to be an obstacle to regulation itself. In this case, the intended economic development (Aidt, 2009). purpose is environmental protection. Public Corruption undermines and awareness of environmental issues in reduces economic growth, and it diverts proposing good quality of regulation will be public funds to serve the private interests of a crucial factor in achieving environmental some public officials (Winbourne, 2002). sustainability. By having a good quality of Corruption “has distorted development environmental law and regulation, the law priorities, led to massive human and and regulation will have the power to force financial capital flight, and undermined stakeholder from any actions that lead to social and political stability (Doig and environmental destruction. McIvor (1999). Robust evidence that corruption, as opposed to general Ability to achieve environmental government inefficiency, has a sizable sustainability is typically also influenced by negative effect on growth in real GDP per domestic factors. One of the crucial factors capita (Aidt, 2009). Rampant corruption determines the achievement of can put an economy on an unsustainable environmental sustainability is domestic path along which its capital base is being political stability. Domestic political eroded. stability will determine the national The theoretical accounts for why priority, such as budget allocation and corruption harms the environment are quite management of the government. vague, mainly consisting of two strands of Environmental issues may not get sufficient explanations. One is focused on the content attention if the domestic political situation of rules, arguing that corruption affects the is unstable. The states may more focus on substantial stringency of environmental activities to stabilize the domestic politic regulations, as bribery shapes policy in corrupt societies. Another explanation situation than that of taking care of instead focuses on that corruption hampers environmental issues. Neglecting law enforcement, thus allowing emitters to environmental issues are found in many evade the responsibility of pollution or countries involved in an unstable domestic encouraging the overexploitation of politic condition such as civil war, resources (Sundström, 2013). premature changing of National's leader and military coupe. The bottom line of the

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344

Corruption has not only been linked between corruption and deforestation in to social and economic development but 117 countries. Fredriksson and Svensson also environmental sustainability (Lopez (2003) propose a theoretical model that and Mitra, 2000; Damania et al. 2003, environmental quality is negatively Welsch 2004). While corruption is not influenced by corruption and political environmentally destructive in a general stability. It implies that the more sense, poor governance results in lousy corruption, the less environmental policy formulation, management, and sustainability will be. The theoretical model enforcement, and this can become apparent of Fredriksson and Svensson (2003) is through problems with environmental supported by the empirical research of sustainability (Damania et al. 2003). In the Welsch (2004). The research found that the environmental and natural resources sector, quality of the environment in developing public sector corruption serves the private countries is negatively correlated with interests of bureaucrats and criminals by corruption. Kelleher (2009) suggests that taking away from citizens their rights to the countries with low national income could clean and complete environment, improve their environmental performance misallocating environmental resources, and by decreasing corruption. Based on the diverting funds from conservation and literature review mentioned above, the preservation ( Winbourne, 2002). hypothesis is proposed as follows: Corruption in the environmental and Hypothesis 1: National control of natural resources sectors may occur across corruption is positively significant many transactions, starting from bribery associated with the national environmental and cronyism on the level of developing sustainability national policy and embezzlement in implementing environmental programs to Regulatory Quality and Environmental bribery in issuing permits and licenses and Sustainability collecting “rents” while enforcing environmental regulations (Winbourne, Regulation is the laws and norms 2002). The environment can be affected by adopted by the state, followed by the corruption in other sectors, for example, in consequence of fined or punishment for agriculture, privatization, public those who break it (Coglinanese, 2012). procurement, customs, the judiciary, and Regulation is an instrument for the state to others. Thus, privatization conducted achieve its goals; one of them is namely through corrupt procedures may allow new creating environmental sustainability. owners to use privatized land or facilities in Regulatory quality can be measured by the an environmentally damaging manner; or ability of the regulation in achieving its regulations and procedures established in goals. Associated with environmental customs may open opportunities for sustainability, the regulatory quality will trafficking in wildlife (Winbourne, 2002). determine the state’s environmental A body of empirical research has performance (Esty and Porter, 2001). demonstrated a pattern where national Scruggs (1999) suggest that tight regulatory levels of corruption affect the loss of give an incentive for business and the state biodiversity, the success of conservation, for flexible cooperation in achieving better and correlate negatively with aggregate environmental performance. OCED (2008) measures of sustainability (Sundström, mentions three indicators to measure 2013). Meyer et al. (2003) who studied regulatory quality; 1) transparency, 2) nondiscriminant and efficiency. Regulatory institutional factors and deforestation, found that there is a strong correlation that has good and beyond quality help the

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344 state to achieve goals of public policy such Hypothesis 2: National Regulatory quality as safety, health, environmental is positively significant associated with sustainability (Treasury Board of Canada national environmental sustainability. Secretariat, 2011).

Rules are essential for economic Political Stability and Environmental growth, social welfare, and environmental protection. By improving, regulatory Sustainability management and regulatory reform are Political stability concept broadness among the best ways that governments can is based on government stability and promote economic development, stability of the political regime on one side, investment, and trade (OECD, 2008). and stability of internal legal and external World Bank defines. Regulatory quality is stability on another side (Akongdit, 2013). perceptions of the ability of the government In times of crisis, the role of the political to formulate and implement sound policies and regulations that permit and promote economy is crucial in redefining the private sector development. The quality of policies and objectives that must assure the a country’s regulatory system depends to a desired economic outcomes (Radu, 2015). great extent on how regulations are A steady political leadership advertently conceived and made. Governments are leads to sustained economic growth. concerned to ensure that their regulations Political instability is regarded by operate efficiently to boost economic economists as a serious malaise harmful to growth, social welfare, and environmental economic performance. It may also lead to standards (OECD, 2008) Effective a more frequent switch of policies, creating regulation can provide strong support for volatility and thus, negatively affecting meeting these challenges. Ineffective macroeconomic performance ( Aisen and regulation, conversely, will slow recovery, Vega, 2011). Alesina and Perotti (1996) inhibit growth, undermine efforts to address complex issues such as climate change and argue that socio-political instability reinforce citizens’ skepticism of generates an uncertain politico-economic government (OECD, 2010). environment. Political instability shortens the horizons of governments, disrupting In order to achieve environmental long-term economic policies conducive to sustainability, we also need to recognize better economic performance ( Aisen and regulatory quality. Environmental law is a Veiga, 2011). Political instability, human key to achieving sustainability; it provides rights violations, and corruption are among essential tools and institutions for the main challenges to sustainable governing sustainably (Dernbach and development in the country (Khadka, 2011) Mintz, 2011). If we are to make significant progress toward a sustainable society, much The awareness of the strong links less achieve sustainability, we will need to between socio-political and ecological develop and implement laws and legal systems has increased over time institutions that do not now exist, or that (Lubchenco, 1998). Environmental exist in a much different form ( Dernbach degradation is often a pivotal contributor to and Mintz, 2011). Based on the literature sociopolitical instability, and democracy- cited above, the hypothesis can be proposed building is not likely in the face of poor as follows: stewardship of the environment

(Lubchenco, 1998). Understanding long-

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344 term trends in socio-political development economic changes depends on the political can help in catalyzing a transition to institution and decision making (Kelleher et sustainability (Kates and Parris, 2003). al. (2009). Fiorino (2010) argues that there Countries with sustainable economies will is strong evidence that associates exhibit less instability over time than environmental degradation, politic countries with unsustainable economies legitimation, and political stability. Based (Goodland, 1995). and on the literature review mentioned above, socio-political stability are precursors to the hypothesis is proposed as follows: environmental protection and sustainability Hypothesis 3: National Political Stability (Rees, 2006). Lubchenco (1998) speculated is positively significant associated with that the future trajectory of the earth would the national environmental sustainability likely be characterized by rapid change, and greater uncertainty about the dynamics of ecological, as well as social and political Methodology systems The data of control of corruption, Didia (1997) found a negative regulatory quality, and political stability correlation between the level of democracy was generated from World Governance and the rate of deforestation in a study of Index (WGI). World Governance Index is developing nations. Conca and Wallace an index to measure governance of the (2009), citing a significant body of government worldwide conducted by the literature, build a case indicating that poor World Bank. Environmental Sustainability environmental stewardship precludes in this research was represented by the Environmental Performance Index (EPI). socio-political stability. They contend that The Environmental Performance Index poor environmental stewardship will result (EPI) ranks countries' performance on high- in increased vulnerability to natural priority environmental issues in two areas: disasters, as well as a substantial negative protection of human health and protection impact on the institutions necessary for of ecosystems. Environmental Performance socio-political stability (Conca and Index (EPI) is conducted and published by Wallace, 2009). In particular, they argue the Yale Center for Environmental Law & that the quality of environmental Policy (YCELP). stewardship is at the threshold of whether a The data is collected from open developing country travels down a peaceful access data publication from the official or violent path. Environmental quality is website of the World Bank and YCELP. dominated by socio-political factors This research Involved 177 countries with (Grafton and Knowles, 2004). the period of investigation is the year of 2014. There are only 177 countries of 193 Barrett and Graddy (2000), in a study population were chosen due to not all analyzing numerous pollution variables, population has both the Environmental found that environmental quality improves Performance Index and Governance Index. with advances in civil and political The reason for using the year of 2014 as a freedoms. High corruption and political time of investigation is the latest data instability would have a negative availability consideration. Normality of the compounding effect on environmental data was tested with One-Sample regulations (Karunanithi et al., 2011). Kolmogorov - Smirnov. Parametric Impact of the environment caused by statistical test, Pearson correlation analysis

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344 was adopted in this research to understand Data normality test is required to the relationship among variables. SPSS make sure that a data set is well-modeled by Statistical tool version 23 was deployed in a normal distribution. It is also required for helping the calculation the normality test a random variable underlying the data set to and correlation test. normally distributed. The analysis of the research is using Parametric Statistical test; therefore, a set data normally distributed is Results required. The results of data normality test Data Normality Test using One-Sample Kolmogorov – Smirnov is presented in table 1 below: Table 1. Normality Test Variables One-Sample Critical The conclusion of Kolmogorov Smirnov Value Data Distribution Control of Corruption 0.132 0.05 Normal Political Stability 0.063 0.05 Normal Regulatory Quality 0.072 0.05 Normal

A set of data is normally distributed Correlation Analysis if based on normality test; the outcome of the test statistic is higher than the critical Correlation is another way of value of 0.05 (Test Statistic > 0.05). Based assessing the relationship between on the normality test presented in Table 1, variables. To be more precise, it measures it indicates that all variables have a the extent of correspondence between the normality test statistic results higher than ordering of two random variables. the critical value of 0.05. Therefore, we can Correlation denotes the interdependency conclude that the data set of variable among the variables for correlating two control of corruption, variable political phenomena. This research was developed stability, variable regulatory quality, and to identify the relationships between two variable environmentally quality is variables. Since the purpose of the research normally distributed. Since the data is is investigating the relationship between normally distributed, parametric statistical two random variables, correlation statistical test using Pearson Correlation analysis test analysis test is believed as the right one. is allowed. The results of the correlation analysis are presented in Table 2 below:

Table 2. Correlation Analysis Matrix

Control of Political Regulatory Environmental Corruption Stability Quality Sustainability Control of Corruption 1 0.757** 0.859** 0.230** Political Stability 0.757** 1 0.666** 0.167* Regulatory Quality 0.859** 0.666** 1 0.193** Environmental 0.230** 0.167* 0.193** 1 Sustainability ** p< 0.01 level (1-tailed). *. p<0.05 level (1-tailed).

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Journal of Accounting Auditing and Business - Vol.1, No.2, 2018 10.24198/jaab.v1i2.18344

In this research, the design of the components of Governance of the correlation analysis is one way in term of Government. the direction of correlation, which is a positive correlation direction. The Hypothesis Testing argumentation of using one-way correlation analysis test is due to the robust literature In this research, there were three supporting the direction of the relationship hypotheses propose. The first hypothesis, between two variables. Pearson Correlation control of corruption is positively Matrix in Table 2 indicates that variables associated with environmental control of corruption, political stability, and sustainability. The second hypothesis, regulatory quality correlate with variable regulatory quality, is positively associated environmental sustainability. However, the with environmental sustainability. The degree of correlation is relatively weak (< third hypothesis, political stability, is 0.25). The strong correlation ( >0.5) is positively associated with environmental happening between variable variables sustainability. After conducting correlation control of corruption, political stability, and analysis, as mentioned in the correlation regulatory quality. As in the literature analysis section, the summary of the mentions, control of corruption, political hypothesis testing is presented as follows: stability, and regulatory quality are

Table 3. Summary of Hypothesis Testing Correlation Conclusion Hypothesis Coefficient H1: Control of Corruption is positively associated 0.230** Significant with Environmental sustainability H2: Regulatory quality is positively associated with 0.193** Significant Environmental sustainability H3: Political Stability is positively associated with 0.167* Significant Environmental sustainability **. p<0.01 level (1-tailed). *. p< 0.05 level (1-tailed).

Based on information summarized quality, and political stability are in table 3, it concludes that all proposed determines environmental sustainability. hypotheses are supported. However, there is a note in this conclusion, and it is about the degree of correlation. As mentioned Conclusion previously in the correlation analysis, the The research concludes that degree of correlation is relatively weak. It national control of corruption, regulatory implies that variable control of corruption, quality, and political stability are associated regulatory quality, and political stability with national environmental sustainability. correlate statistically, but not convincing. Even though the degree of correlation is However, from the perspective of the relatively weak, however, at least we have research, scientific investigation results are an opinion that public governance is fully supporting the theoretical framework associated with national environmental that control of corruption, regulatory sustainability. Referring to the World Bank,

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