Environmental governance: disentangling the relationship between economic growth and rule of law on environmental policy stringency

Abstract

Economic growth and the rule of law development are two important factors that affect the stringency of environmental policy. Due to the reversible causality between the two variables, a reduced-form relationship is likely to oversimplify their effects. This paper develops a equation system to illuminate the interactive relationships between rule of law, economic development and the stringency of environmental policies and tests the robustness of the variables using sensitivity and weak instrumental variable tests. Nine determinants of rule-of-law including presence of a parliamentary system, coup d’états, and the degree of social fractionalization, are examined. We find that economic development, the rule of law, and their interactions have direct and indirect effects on a state’s environmental policies. We further find political coups have a significant impact on adherence to the rule of law. The nonparametric simulation indicates that long-run effect of rule-of-law development on environmental protection is likely considerably stronger than its direct effect.

Appendices

Appendix 1: Mathematical process to derive long-run effect and indirect effect of rule of law

$$\begin{aligned} S= & {} \alpha _0 +\alpha _1 R+\alpha _2 Y+\varepsilon \end{aligned}$$

(9)

$$\begin{aligned} R= & {} \beta _0 +\beta _1 Y+\pi Z+\epsilon _R \end{aligned}$$

(10)

$$\begin{aligned} Y= & {} \gamma _0 +\gamma _1 R+\rho G+\epsilon _Y \end{aligned}$$

(11)

Replace Y in Eq.(10) with Eq. (11) and combine R term, we have

$$\begin{aligned} R=\frac{1}{1-\beta _1 \gamma _1 }\left[ \beta _0 +\beta _1 \left( {\gamma _0 +\rho G} \right) +\pi Z+\varepsilon _R +\beta _1 \varepsilon _Y \right] \end{aligned}$$

(12)

Replace R in Eq.(11) with Eq.(10) and combine Y term, we have

$$\begin{aligned} Y=\frac{1}{1-\beta _1 \gamma _1 }\left[ {\gamma _0 +\gamma _1 \left( {\beta _0 +\pi Z} \right) +\rho G+\epsilon _Y +\gamma _1 \varepsilon _R } \right] \end{aligned}$$

(13)

Replace R and Y in Eq. (9) with Eqs.(12) and (13), we have

$$\begin{aligned} S= & {} \alpha _0 + \frac{\alpha _{1}}{1-\beta _1 \gamma _1 }\left[ {\beta _0 +\beta _1 \left( {\gamma _0 +\rho G} \right) +\pi Z+\varepsilon _R +\beta _1 \varepsilon _Y } \right] \nonumber \\&+\,\frac{\alpha _{0}}{1-\beta _1 \gamma _1 }\left[ {\gamma _0 +\gamma _1 \left( {\beta _0 +\pi Z} \right) +\rho G+\epsilon _Y +\gamma _1 \varepsilon _R } \right] +\varepsilon \end{aligned}$$

(14)

The long-run effect is an autonomous increase in R. That is to take derivative with respect to $\beta _0$ or $\epsilon _R$. Then we have $\frac{\alpha _1 +\alpha _2 \gamma _1 }{1-\beta _1 \gamma _1 }$ .

The rule-of-law factor effect is to take derivative with respect to Z and we have $\frac{(\alpha _1 +\alpha _2 \gamma _1 )\pi }{1-\beta _1 \gamma _1 }$.

Appendix 2: Summary statistics for variables in Table 5

Variable	Mean	Standard deviation	Minimum	Maximum
Rule of law	0.43	0.99	−1.25	1.92
Income per capita	15013.63	11291.69	1279.07	41829.56
Investment share GDP	24.11	8.93	5.50	46.99
Labor force share	64.55	4.49	53.00	75.00

List of country in the dataset

Argentina, Australia, Austria, Bangladesh, Belgium, Bolivia, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Finland, France, Germany, Greece, Guatemala, Honduras, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Korea, Latvia, Lithusania, Malaysia, Mauritius, Mexico, Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Ukraine, United Kingdom, United States, Uruguay, Venezuela, Vietnam, Zimbabwe

Appendix 3: Data source

Data	Source
Environmental Regulatory Regime Index	Esty, D, C., & Porter, M. E. (2002). Ranking national environmental regulation and performance: A leading indicator of future competitiveness. In M. E. Porter, J. Sachs et al. (Eds.), Global Competitiveness Report 2001–2002 (pp. 78–100). New York: Oxford
Income per capita	Penn World Table. Real purchasing power parity (PPP) adjusted dollars. For the 2000 income per capita, the reference year is 1996
Rule of Law	World Bank’s Worldwide Governance Indicators (WGI)
Parliamentary system	CIA Fact Book 2000: Individual country’s legislature systems
Civil war	Centre for the Study of Civil War (CSCW): Armed conflict dataset
Coup d’état	Center for Systemic Peace: Coup d’état dataset
Continuous independence	CIA Fact Book

Resource to GDP ratio	United Nations Statistics Division 1993 System of National Accounts (SNA)- Mining and quarrying industry output to GDP ratio
Ethnolinguistic fractionalization index	Philip G. Roeder.  2001.   “Ethnolinguistic fractionalization (ELF) indices, 1961 and 1985”. http://pages.ucsd.edu/~proeder/elf.htm.
Polarization index	Desmet, K., Ortuno-Ortin, I., & Wacziarg, R. (2012). “The political economy of linguistic cleavages”. Journal of Development Economics. 97(2):322–338
Antiquity	Brown University. State Antiquity Index. http://www.econ.brown.edu/fac/louis_putterman/antiquity%20index.htm