The effect of trade and institutions on pollution in the Arab countries

Author:Azmat Gani
Position:Department of Economics and Finance, College of Commerce and Economics, Sultan Qaboos University, Al Khod, Oman

Purpose – The purpose of this paper is to investigate the effects of trade and institutional quality on pollution in the Arab countries. Design/methodology/approach – The analysis is based in fixed estimation procedure. It utilises cross-country data for 13 Arab countries into a reduced form equation. Findings – The empirical findings provide strong evidence that across the... (see full summary)

1 Introduction

As part of their long-term objective of increasing trade and overall economic growth, several Arab countries have taken measures to expand their industrial economic activities. The expansion of industrial output has also been marked by increasing levels of the emissions of greenhouse gases such as carbon dioxide (CO2). For example, latest available statistics reveal that in 2008, CO2 emissions (metric tons per capita) by the Arab countries averaged 10.2 compared to 12.5 in the high-income countries; 3.3 in the middle-income countries; and 0.28 in the low-income countries ( The World Bank, 2011 ). These statistics indicate that the level of emissions are considerably higher for the Arab countries as not all of them fall in the high-income category of countries and so poses a serious cause of concern in terms of environmental damage.

While emission levels are high as noted above, not much is known in terms of the relative effects of trade and measures of governance on emissions in the Arab countries. Past studies (reviewed in Section 3) has shown that the quality of governance can matter in mitigating emission levels. It is now quite clear that higher levels of emissions of greenhouse gases can have damaging effects on agricultural and food production through rapidly changing climatic patterns; negative effects on population health; extensive damage to physical infrastructure, population settlements and plant and animal life through severe floods and hurricanes (discussed in Section 2). This makes a convincing case to investigate if trade as well as the quality of institutions such as the rule of law, regulatory quality, contract enforcement and dispute resolution matter in the Arab countries where emissions of greenhouse gases are expected to increase. Such a study is likely to unfold policy-related issues in terms of mitigating emission levels and minimize the associated destruction to population, infrastructure and natural environment while allowing for economic expansion and sustainable living for the millions of people within the region and the globe. This line of argument can be best verified through an empirical analysis that examines the effect of trade and institutions on emission levels.

The purpose of this paper is to examine the effect of trade, rule of law, contract enforcement, dispute resolution and regulatory quality on the level of CO2 emissions in the Arab countries. In doing so, it empirically verifies this effect using cross-country data for 13 Arab countries in a reduced form equation that utilizes numerical measures of institutional quality and emissions for the years 2003-2008. The rest of the paper is structured as follows. The next section provides some background information on trade, emission levels and institutional achievements in the Arab countries. Section 3 provides a brief review of the relevant literature. Section 4 outlines the analytical framework, develops the theoretical hypotheses and discusses the data. Section 5 presents the empirical findings. Section 6 concludes.

2 Background to the study

Industrial expansion across several countries around the world has led to increasing levels of industrial by-products or detrimental externalities that degrades the environment and threatens the natural ecosystem, including human life. One of the externalities is the greenhouse gases such as CO2, among others pollutants or industrial by-products that are found to have significant detrimental effects on the natural environment such as global warming (United Nations Development Program ( UNDP, 2007, p. 3 )) and this threatens population well being ( Stiglitz, 2002, p. 223 ). Poor countries are likely to be at the receiving end of the bulk of the damages resulting from extreme weather patterns as a result of rising greenhouse gases ( Tol, 2005 ). In its recent report, the United Nations Environment Program (2012) notes that:

[…] a 2 degree Celsius global average temperature increase is likely to lead to more frequent and stronger weather events, risk of food production in many tropical regions and damaged ecosystem.

In view of these global consequences of the effects of greenhouse gases, this section provides some background information on trade structure, emission levels and achievements in institutional quality across the Arab countries.

2. 1 Trade and industrial expansion in the Arab countries

Like countries elsewhere, Arab countries are also experiencing rising levels of greenhouse gases such as CO2 emissions from industrial and other production activities. One of the causes behind this is that a number of Arab countries have witnessed an expansion of their economic activities, particularly the expansion of the industrial sector that has also led to increasing levels of trade and robust economic growth in the last decade (Figure 1).

Figure 1 shows the real growth in gross domestic product (GDP) for the Arab countries, averaged for the 2000-2010 period. According to Figure 1, all countries recorded positive real economic growth for the 2000-2010 periods. Other than Iraq and Malta, average annual economic growth for several of the Arab countries exceeded 3 percent with many countries also recording more than 4 percent real GDP growth rate during the 2000-2010 period. Lucrative world oil prices, domestic economic reforms and an increase in investment levels have been the major drivers of positive growth performances for the Arab countries. Such robust economic growth has also translated into rising levels of incomes as real GDP per capita has increased between 2000 and 2009 in several countries listed in Table I.

Industrial activity across the Arab countries also expanded since 2000. Table I presents statistics for industrial activity measured by industrial value added as a percentage of GDP for 2000 and 2009. Between 2000 and 2009, a number of countries revealed rising shares of industrial value added to GDP, thus reflecting the expansion of the industrial sector. Table I also presents statistics on trade for the Arab countries for 2000 and 2009. Trade as a percentage of GDP increased between 2000 and 2009 across several of the Arab countries. Other than the expansion of industrial activity, services sector has also expanded across the Arab countries and the expansion of economic activities within these two sectors has also contributed towards more trade.

The expansion of economic activities in the Arab countries as supported by statistics above has been a major long-term national objective in several countries so as to create opportunities such as employment and income for the domestic workforce as well as facilitate the process of economic and trade integration. For example, Hoekman and Sekkat (2010) have argued that economic integration in terms of trade in goods as well as services, labor and capital has been a key economic policy of Arab countries for several years. Al-Khodiry and Puig (2012) note that greater economic and monetary integration has been a long-term objective of the GCC member states that dates back several years to the Economic Agreement of 1981 specifically aimed to pursue greater economic and monetary integration. Tas and Togay (2012) note that the GCC member countries are integrated at many levels with the establishment of a customs union in 2003 and growing trade. Further industrial expansion among the Arab countries is anticipated as a result of robust and more promising economic growth prospects especially for the several of the oil producing nations as a result of the lucrative world market prices of oil and gas.

2. 2 Volume and trends in emissions

The patterns of trade, industrial and economic expansion noted in Section 2.1 and the anticipated economic expansion and growing international trade as a result of economic reforms instituted in several countries is likely to contribute towards rising levels of CO2 emissions in the future. Many of the Arab countries have already started to witness some of these structural changes and rises in emission levels. Figure 2 shows the trends in CO2 emissions (metric tons per capita) for the Arab countries in 2000 and 2008, respectively. The latest year for which emissions data is available for the Arab countries is 2008. A unique feature of the patterns shown in Figure 2 is that much of the emissions are from the GCC countries which are also high oil producing countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). For the GCC countries alone, CO2 emissions (metric tons per capita) has reached alarming levels, it averaged 26.6 in 2008; many times higher than the average for the high-income countries.

2. 3 Institutional achievements in the Arab countries

Table II presents statistics on four measures of institutional quality for the Arab countries for 2003 and 2011. Not all of the Arab countries listed in Table I had published data on various measures of institutional quality and only those countries where consistent set of published data was available are listed in Table II. While there are other indicators of institutional quality, scarcity of published long-term data limits the discussion in this section to the countries listed in Table II.


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