Does economic growth affect environmental quality in some east asian countries

UNIVERSITY OF ECONOMICS
STUDIES
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DOES INCOME PER CAPITA AFFECT
CARBON DIOXIDE EMISSIONS IN SOME
EAST ASIAN COUNTRIES?

BY

PHAM THI THU HUYEN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, MAY 2012

i


UNIVERSITY OF ECONOMICS
STUDIES
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DOES INCOME PER CAPITA AFFECT
CARBON DIOXIDE EMISSIONS IN SOME
EAST ASIAN COUNTRIES?
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

PHAM THI THU HUYEN

Academic Supervisor:
PHAM KHANH NAM

HO CHI MINH CITY, MAY 2012

ii


iii


ACKNOWLEDGEMENT

This thesis could not complete without considerable and kindly mental supports
from my supervisor, Dr. Pham Khanh Nam, who spent his valuable time to help me
to find materials, books and super my schedule tightly. He also response quickly as
soon as I asked for help and give comments, which partly contribute to the success
of this thesis. From bottom of my heart, I sincerely thank him for all.
I grateful acknowledge to Prof., Dr. Nguyen Trong Hoai, Dr. Nguyen Van Ngai and
Dr. Phan Dinh Nguyen – Public Defense Committee for their important comments
and explanations that support me to fulfill the thesis.
This study also benefits greatly from the enthusiastic assistance of Dr. Le Van
Chon, whom I got knowledge on econometric and suggested the suitable models for
the study.
I would like to express my thanks for all students of MDE 16 for their unceasing
assistance and encouragement during the course. I also show deep gratitude to the
lectures, VNP staffs, library staffs for their helps in accumulating knowledge,
accessing dataset and materials as well.
Last but not least, it gives my deepest grateful to my family members, husband,
managers and colleagues for their dear encouragement, give favorable times and
opportunities to finish the M.A course as well as the thesis.
I pledge to bear full responsibilities for errors, omissions and shortcomings of the
study.

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TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION ................................................................... 1
1.1. Problem Statement .............................................................................. 1
1.2. Objectives of study .............................................................................. 4
1.3. Research questions ............................................................................... 4

1.4. Scope of the research ............................................................................ 5
1.5. Structure of the thesis ........................................................................... 5
CHAPTER 2: EMPIRICAL AND THEORETICAL BACKGROUND ........ 6
2.1. Theoretical background ........................................................................ 6
2.2. Empirical review .................................................................................. 9
CHAPTER 3: RESEARCH METHODOLOGY........................................ ...14
3.1. The conceptual framework ................................................................. 14
3.2. Variables ............................................................................................ 15
3.2.1. Dependent environment variables ............................................. 15
3.2.2. Explanatory variables ................................................................ 17
GDP per capita .......................................................................... 17
Foreign Direct Investment (FDI)............................................... 17
Trade openness .......................................................................... 19
Population density ..................................................................... 20
3.3. Data……………………………………… ........................... ……… 22
3.4. The Econometric model .................................................................... 22
CHAPTER 4: DATA ANALYSIS ............................................................... 28
4.1. Carbon Dioxide Emissions and GDP for 6 East Asian countries ...... 28
4.2. Descriptive analysis ............................................................................ 30
4.3. The Environment Kuznets curve (EKC) ........................................... 32
4.4. Determinants of pollution .................................................................. 40
CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS .............. 46
5.1. Main findings and policy implications ............................................... 46
5.2. Limitation of the research and recommendations for further study ... 50
REFERENCES ................................................................................................. 52

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APPENDICES

A: Summary of empirical studies on different the EKC hypothesis

57

B: Description of variables and data sources

71

C: Description of CO2 –GDP of six East Asian countries individually

74

D: Estimated results

78

E: Tests

82

LIST OF FIGURES
Figure 2.1. The Kuznets Curve (1955) and the Environmental Kuznets Curve

7

Figure 2.2. The Environmental Kuznets Curve in N-shape

9

Figure 3.1. Conceptual framework of the study

14

Figure 4.1. CO2 emissions for the period of 1990-2007

28

Figure 4.2. CO2 emissions and GDP for the period of 1990-2007

29

Figure 4.3. The EKC shape for six East Asian countries

37

Figure 5.1. An overview of determinants on environmental quality

48

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LIST OF TABLES
Table 3.1. Summary of variables description

21

Table 4.1. Summary Statistic on the sample observations

30

Table 4.2. Correlation on the sample observations

31

Table 4.3. Estimated results for the EKC with different models

33

(without time trend)
Table 4.4. A comparison of estimated results for the EKC with FEM

34

models
Table 4.5. Estimated results for the EKC (N-shape) with FEM

36

Table 4.6. Estimated results for EKC with FEM time effects

38

Table 4.7. Estimated results for FEM with extended model (time

41

effects)

vii

ABBREVIATIONS

EKC

:

Environmental Kuznets curve

FDI

:

Foreign Direct Investment

NGOs

:

Non-government organizations

CO2

:

Carbon dioxide emissions per capita

GDP

:

Gross Domestic Products

GHG

:

Greenhouse gas

OLS

:

Ordinary least square

FEM

:

Fixed Effects Model

REM

:

Random Effects Model

X

:

Import

M

:

Export

NAFTA

:

The North American Free Trade Agreement

viii


CHAPTER 1: INTRODUCTION
1.1. Problem Statement
For many centuries, the environmental degradation has become the issue of life with
economic development. Since the industrial revolution began in 18th century, it was
as a real problem. Industrial revolution with the technological progress brought
great achievements, especially the worldwide usage of fossil fuels and coal in
various industries. As a result, global economy has growth fast along with human
who significantly consumed natural resources leading environmental quality is
worsening seriously (Irina, 2008). This implies that economic growth may affect
environmental quality.
Every nation wishes to pursue targets of economic growth without damaging

environment. This is not feasible when history shows that any country becomes an
industrial power, in the process of development, causing environmental damages,
which cannot solve for a short time. In order to serve quick economic growth
targets, the policies of incomprehensive industrialization and urbanization with
massive exploitation of natural resources have caused environmental problems in
these countries for recent years. Consequently, the air pollutions and global
warming have continuously increased by human’s uncontrolled activities in the
development process. For China case, environmental degradation is becoming
serious problems, which not only affects strongly to domestic but also causes
international consequences. Some specialists judged that environmental pollution is
creating challenges to government. It is also a long-term burden on the Chinese
people and “China’s problem has become the world’s problem” (Kahn and Yardley,
2007, p.2).
In the current context, environmental problem is not for an individual country to
cope with. It becomes the common hot issues and needs co-operation of worldwide
countries because of its global matter. Kim (1996) revealed that due to the quick
economic growth, environmental pollution has been in red alarm in China and it

1


crosses the boundaries to South Korea and Japan. Especially, the global pollutants,
in which carbon dioxide emissions are particular pollutant, causing global warming.
Carbon dioxide emissions have dramatically increased for recent century due to
human economic development.
Measuring environmental-economic relationship is necessary for any country to
orient adequate economic- environmental policy. The Environment Kuznets curve
(EKC) is reckoned as the best ruler in estimating this relationship since Grossman
and Krueger made empirical study on the impact of the economic growth on
environment in NAFTA countries in 1991. Under the EKC hypothesis,

environmental quality changes with income levels. It displays in a bell shape curve.
Environment degrades with income levels in the first stage of development and then
improves as soon as it passes a definite high-income level.
Researchers use the EKC hypothesis commonly to connect economic growth with
environmental reduction in both single countries and country groups with different
models. Local pollutants and global pollutants are treated as dependent variables.
Beside income, other factors are applied as explanatory variables. Although the
results are not the same for all studies, the economic growth links the environmental
deterioration and vice versa. However, this theory has still been debated for years
because various empirical studies found ambiguous results on the EKC but it has
meaning for policy makers to find the best solutions for development sustainability
(Dinda, 2004).
In this study, the research concerns if fast economic growth affects the
environmental quality in some East Asian countries, specifically six countries
consist of three developing countries in Southeast Asia: Malaysia, Thailand,
Vietnam and one developing country: China and two developed country in
Northeast Asia: Korea and Japan, using cross- country balanced panel data set for
the period of 1990-2007.

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Four developing countries are emerging economies. China is now one of the
world’s largest economies with World Bank’s ranked by nominal GDP at the third
in 2009, the second position in 2010 and predicts to keep the second rank in 20111.
Thailand and Malaysia name in the second generation of newly industrialized
economies. Vietnam is also thought as the third generation of newly industrialize
economy with fast GDP growth in the period of 2000-2009. While Japan and South
Korea list the developed countries in East Asian region. These countries are not
avoidable the environmental damages during the fast economic growth (Nguyen,

2009; Choi et al, 2010).
One of the significant messages of the EKC is that it is not necessary to damage
environment during the development and growth if there is suitable policy in
technology application. Estimating the economic-environmental relationship bases
on an EKC can make important sense in policy implications for six East Asian
countries. Developing countries like China, Thailand, Malaysia and Vietnam can
get lessons and experiences from high income countries such as Japan and South
Korea. The new emerging country like Vietnam draws more useful lesson in policy
establishment from fast developing economies as China, Malaysia and Thailand in
term of economic growth and environmental problems solving.
This study suggests that there is the existence of an EKC for six East Asian
countries. It means that income affects environmental damages and it will cure
environment when income reach high level. Rapid economic growth is vital but not
necessary to damage environment. Moreover, empirical results shows that beside
GDP per capita, other factors contribute environmental pollution. Foreign Direct
Investment and Trade intensity have positive relation with CO2 emissions but they
are not significant statistically. Population density is contrary. Its coefficient has
against sign as expected and has statistically significant at 10 percent level. There is
a negative relationship between population density and CO2 emissions per capita. It
1

Data from World Development Indicator database, World Bank, 1 July 2011 (Available at
/>
3


means that population density increases leading to reduce pollution. Further study
with other pollutants and control variables are suggested reconfirming the EKC
hypothesis and making firm policies for six countries.
1.2. Objectives of study

The objectives related to six countries in East Asia (China, Vietnam, Thailand,
Malaysia, Japan and South Korea) of the thesis include:
 To examine the existence of an Environmental Kuznets curve (EKC) for
a group of six countries.
 To find the role of other factors beside income such as trade openness,
foreign direct investment (FDI) and population density in determining
environmental quality.
 To recommend general policies for sustainable development in term of
environment and economy of six East Asian countries.
1.3. Research questions
Some questions should be presumed in this thesis as following:
1. Does the Environmental Kuznets curve actually exist in a group of six East
Asian countries?
2. Does income (GDP per capita) impact on the environmental quality in six
East Asian countries?
3. What is the role of other factors beside income, such as population density,
trade openness, foreign direct investment (FDI) affect the environmental
quality in six East Asian countries?
4. What

are

recommendations

to

develop

economy

environmental protection in six East Asian countries?

4

harmony

with


1.4. Scope of the research
The research focuses on finding impacts of economic growth to environmental
quality in six East Asian countries under the EKC hypothesis. They are China,
Vietnam, Thailand, Malaysia, South Korea and Japan. The study only investigates
in the period 1990-2007 because full data set before 1990 for some countries
(Vietnam, Thailand and Malaysia) is not updated.
1.5. Structure of the thesis
The research consists of five chapters as followings:
The chapter 1 explains reason why the topic of thesis is chosen, main objectives,
some major research questions and the scope of the research.
Chapter 2 provides an overview on theoretical background of the Environmental
Kuznets curve (EKC), which measures the relationship between economic growth
and environmental damages. A review of empirical studies makes clearly about
different results of the EKC and opinions on income-environmental relationship and
other determinants of environmental quality.
Chapter 3 highlights the research methodology. Base on the empirical researches
and interests, framework of study is mentioned. This chapter also describes the
general econometrics model as well as variables and data, in which a brief
explanation the reasons for choosing variables included. It also outlines the process
to analyze data.
Chapter 4 shows the statistic results from adopted models. Findings are analyzed

and to make clear the objectives and answering the questions in the chapter 1.
Results of empirical studies by other researchers are also used to strongly support
our findings.
Chapter 5 resumes main findings and recommends useful policies for six East Asian
countries in strategy of economic growth harmony with environmental protection.
This chapter also identifies the limitations and implications for further study.

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CHAPTER 2: THEORETICAL AND EMPIRICAL BACKGROUND
2.1. Theoretical background
Environmental quality and economic growth started emerging in many outstanding
events since 1972. This relationship got more attention from people and economists
after Meadows et al published book of The Limits to Growth in 19722. At the same
time, an international conference on Human Environment was held by the United
Nations in Stockholm, Sweden on June 1972. At the conference, the importance of
environment and its both side influences on development and quality of human life
were first raised on a global level. This conference not only marked the initial
public awareness but also brought it to the worldwide level, which changed outlook
of scientists, economists as well as politicians on environmental problems.
However, the conference did not have a scientific solution to measure the
relationship between economic growth and environmental quality.
Until year 1991, the Environment Kuznets curve (EKC) was officially born and
regarded as an effective instrument to measure a relationship between changes of
environmental quality and income levels. The EKC has become standard technical
vehicle to set up environmental policy (Grossman and Krueger, 1991). Many
empirical studies investigated the existence of EKC because it has extremely
important policy meaning. Nevertheless, not all time studies resulted and implicated
base on the EKC.

Over the past decades, whenever examine the relationship of economic growth –
environmental changes, almost researchers used the EKC hypothesis. Empirical
studies suggested that there is an inverse-U-shaped relationship between economic
growth, usually measured in terms of per capita income, and the environmental
quality which proxies by pollutants. Specifically, environmental pollution increases
2

The Limits to Growth is a book, which mentioned the aftermath due to world population grows rapidly

while supply of resources is limited. Donella H. Meadows, Dennis L. Meadows, Jorgen Randers and William
W. Behrens III are book’s authors ( Available at />
6


with a rising of income per capita in the first stage of economic growth process.
When it reaches a certain income level so called turning point, environmental
degradation lessens while per capita income still increases. This environmental
pattern has called the Environmental Kuznets curve (EKC) due to the similarity
with the relationship between per capita income and the level of inequality asserted
by Simon Kuznets (1955).
Figure 2.1. The Kuznets Curve (1955) and the Environmental Kuznets Curve

Source: Yandle et al. (2004, p.2-3)
Panayotou (2003) and Poudel et al. (2009) explained the existence of the EKC
because it rooted from the nature of development process. Any developed country
generally goes through an initial stage of agriculture, which produced laborintensive products, then moves to industrial period with capital- intensive products
and finally towards to service sectors. Following these development steps, the
environmental performance changes. Agricultural production accompanies to make
less pollution but environment is damaged during the industrialization and
modernization due to natural resources exploitation and energy consumption

severing manufacture. As development flies over a new phase, service products are
favor; environmental practices are improved and polluted intensive sectors transfer

7


to less developed countries via foreign investment or import polluted intensive
products instead of its production. As a result, environmental pollution in this stage
declines. From above ideas, under the EKC hypothesis, economic growth will be
the remedy to environmental problems in the future and it is a long run
phenomenon.
Dinda (2004) gives supplementary ideas on the EKC existing explanation. Another
reason originates from human’s preference to environmental quality or income
elasticity of environmental quality demand. When they reach higher income with
higher living standards, the demand on environmental quality is greater because
they wish to live in a clean environment and have good health conditions. A
pressure on environmental regulations and protection as well as a care and willing
to pay to green products are indispensible. Consequently, environmental
degradation is potential reducing.
However, for recent years, many researchers have interested in estimating another
shape of the EKC, N-shape, which seems to far from the original form. This curve
points that with changes of income level, pollution declines initially and then
increases. It means that the EKC does not maintain in the long-run, the inverted U
shape exists in the first stage of the income-environment relationship, a new turning
point is established to lead to N-shape.
The N-shape EKC gives a new outlook on the economic-environmental
relationship, any economic activity can affect environment in negative or positive
side. Even when income level reaches a certain high level, environmental quality
cannot be adjusted to improve automatically as the original EKC hypothesis
because economic activities are complex and impact environment in different ways

(Shafik and Bandyopadhya, 1992). From this point of view, policymakers
understand more the economic-environmental relationship in setting strategy for
economic growth and environmental protection.

8


Grossman &Krueger (1991, 1995), Shafik (1994), Friedl & Getzner (2003),
Sanglimsuwan (2011), Chuku & Agbai (2011), Panayotou (1997), Selden and Song
(1994) and Carvalho (2008) found the N- shape instead of the bell shape in
relationship of economic growth- environment quality but not many researchers
explained why the EKC exists in N-shape replacing inverted-U shape. Opschoor
(as cited in de Bruyn et al, 1998) illustrates when technology improvement in
resources usage leading to pay expensive cost, income growth further will cause
environmental degradation. It seems that this explanation has been inadequate but
there is still no more clear explanation about the N-shape EKC meanings.
Figure 2.2. The Environmental Kuznets Curve in N-shape

Source: Carvalho (2008, p.4)
2.2. Empirical review
In 1991, Grossman and Krueger were pioneers who expressing the concept of the
relationship of environmental degradation and economic growth, which known
officially as the EKC in a study about the environmental influence on countries of
the North American Free Trade Agreement (NAFTA). They used cross-country
panel of data on urban air pollution via smoke, SO2 emission and SPM with GDP
per capita to measure the relationship between air quality and economic growth of

9

these economies. Data took from GEMS for 1977-1984 & EPA for 1985-1988. He
found that pollutions increased with GDP per capita at low levels of income but
decreased with GDP per capita at higher levels of income. This referred to the
existence of EKC.
Following this study, a series of researches have been implemented in various
places and periods, even several people have studied on the EKC’s shape or
function form only (Dinda, 2004; Yandle et al., 2004; Panayotou, 2003; Ciegis et
al., 2007). However, the empirical reports give ambiguous results and conclusions.
Some authors affirm the existence of an EKC and implicate the different solutions
to reduce environmental degradation. They investigate both groups of countries and
individual ones. In cases of country group, there are Grossman & Krueger (1991)
for 42 countries in North America (NAFTA), Grossman & Krueger (1995) for 42
developing and developed economies during period 1987-1988, Poudel et al. (2009)
for 15 Latin American nations, Selden and Song (1994) for 30 countries, Eugenio
and Roberto (2009) for 73 countries, Holtz-Eakin & Selden (1995) for 131 countries
both developing and developed ones, Sanglimsuwan (2011) for 63 countries,
Reichert (2007) for 28 emerging and industrialized nations,ect. Meanwhile, several
authors also find the EKC existence in individual case, for particular, Friedl and
Getzner (2003) for Australia, Chuku and Agbai (2011) for Nigeria, Hung and Shaw
(2006) for Taiwan and Managi and Jena (2008) for India.
On contrast, some researchers confirm that the EKC is not existent and show a
linear line. In other words, there is unilaterally increasing or decreasing relationship
between income and pollution. For example, Omojolaibi (2010) for 3 countries in
West Africa, Wen and Cao (2009) for China, Khanna and Plassmann (2004) for
America, de Bruyn et al. (1998) for 4 countries, Day and Grafton (2001) for
Canada, Vincent (1997) for Malaysia, Nguyen (2009) for 6 East Asian countries.
Some studies doubt or show unclear existence of the EKC among pollutants. Egli
(2002) tested environment- economy relationship of Germany in the period of 1966-

10

1998. He pointed that the EKC existed for NOx and NH3 but other pollutants (SO2,
CO, CO2, CH4, PM, NMVOC) were unclear. He reported that income changes did
not influent on pollution emissions in the short-run but they might follow the EKC
hypothesis in the long-run time and follow bell-shape curve correlating to income.
Although the result is mixed, some evidences show the belief of the EKC
hypothesis.
Similarly, Shafik and Bandyopadhya (1992) studied 149 countries in 1960-1990.
They investigate the effect of income per capita to environmental indicators named
as lack of clean water, lack of urban sanitation, SPM, SO2, annual deforestation,
total deforestation, dissolved oxygen in rivers, fecal coliform, municipal waste per
capita and CO2 emissions per capita. The study concludes that there existed the
EKC in some pollutants and others are not. Most environmental indicators initially
rose with income, except for variables of clean water shortage and urban sanitation,
which essentially solved by higher income levels. Some variables: municipal waste
per capita, dissolved oxygen in rivers and deforestation have fitted with quadratic
form, which were out of expectation.
Cole et al. (1997), Shafik (1994) revealed the same results as the two above
particular examples. Some environmental variables follow the inverted-U-shape
curve or N-shape curve but some pollutants did not follow the EKC hypothesis.
Anyway, there is a little difference in some cases. Galeotti et al. (2006) measured
relationship between CO2 emissions and GDP per capita in OECD countries and
non-OECD. He reckoned that inverted-U- pattern only was in OECD countries with
turning point of $15,000 but not for non-OECD countries. Abdubai and Ramcke
(2009) found the EKC existence in high-income countries, not for low-income
economies when tested the influence of economic growth on the environmental
quality, using CFCs, BOD and energy usage relative to per capita GDP.
To estimate the relationship between income change and environmental quality,
dependent variables are pollutants: CO, CO2, NO2, O3, SO2, TSP, Dioxin, Fecal

11


coliform, Dissolved oxygen, PM10 or NOx, SPM... are proxies for waste materials
polluting air, water or soil. Researchers use many pollutants or just only one
pollutant in their studies because they want a confirmation of the EKC among
pollutants. Moreover, finding another factors affect environmental quality beside
income are necessary to further policy recommendations. Thus, they add more
explanatory variables.
Selden and Song (1994) looked at changes of SPM, CO, NOx and SO2 per capita
versus GDP per capita and population density. De Bruyn et al. (1998) specified for
CO2, NOx and SO2 in relation with GDP per capita, structural change and
technological change. Wen and Cao (2009) gave the standards model for China with
testing relationship between environmental variables such as emission of waste
water, waste water per capita, emission of waste gas, waste gas emission per capita,
emission of SO2, SO2 emission per capita, emission of solid waste and solid waste
emission per capita with national income per capita. For case of Hung and Shaw
(2006), dependent variables such as CO, SO2, NO2 and PM10 and explanatory
variables as population density, number of specialists of air quality protection, air
pollution inspection rate, man-made capital stock per capita, employment,
education, government expenditure per capita beside income per capita were
practiced in his model.
Many authors observe environment –economy relationship by using only one
pollutant, in which CO2 emissions are supposed as popular environmental indicator
with many independent variables in almost investigations. For particular, Reichert
(2007) with four independent variables as real GDP per capita, percentage of total
population live in urban, total commercial energy usage and total power electric
consumption to measure the relationship economic growth and environment
pollution in 28 worldwide countries in period of 1975-1998. Heil and Selden (2001)

investigated with explanatory variables, namely GDP per capita and population in
135 developing and developed countries in years of 1951-1992. Friedl and Getzner
(2003) explored the relationship between CO2 emissions as the environmental
12


quality indicator and GDP per capita, import and value added in service sector as
explanatory variables in period of 1960-1999. He and Richard (2010) examined the
EKC for Canada, CO2 emissions per capita related to oil price, GDP per capita,
industrial structural changes and international trade.
Studies investigate the relationship between income and environmental quality,
having various results and depending on the environmental indicators. A summary
of empirical studies on the difference of the EKC hypothesis is shown in appendix
A. The common point of almost studies found that environmental quality is spoilt in
an early stage of economic development and improved in a later stage as economy
develops (Dinda, 2004). Following the EKC hypothesis, income level affects
environmental quality. There is a positive relationship between environmental
quality and economic growth at the first stages and a negative side at the later stages
as income gains a certain high level.

Summary
This chapter gives an overview on theoretical background, which measures
relationship of economic growth –environmental quality. The Environmental
Kuznets curve (EKC) is mentioned as a foundation of this relationship. A basic
general model of the EKC also includes. Following the EKC hypothesis, it shows an
overview of literature review resume with various different results. In empirical
studies concluded that the EKC is vague but it is meaningful for policy
implications. Beside the traditional relation of income-environment, other
exogenous factors also reconsider. A resume of some researches is listed in the
appendix A.

13


CHAPTER 3: RESEARCH METHODOLOGY
3.1. The conceptual framework
In this research, the EKC hypothesis is applied to measure the relationship between
income level changes and environmental damages. Carbon dioxide emissions (CO2)
use as pollutant and GDP per capita acts as national income. CO2 can partly
represent global pollutants. Its change means change of environmental quality.
Moreover, some variables such as population density (Selden and Song, 1994;
Abdulai and Ramcke, 2009; Holtz-Eakin and Selden, 1995; Panayotou, 1997;
Khanna and Plassmann, 2004; Sanglimsuwan, 2011; Managi and Jena, 2007;
Nguyen, 2009; Poudel et al., 2009; Grossman and Krueger, 1991), trade openness
(Grossman and Krueger, 1991, 1995; Abdulai and Ramcke, 2009; Panayotou, 2003;
Cole et al., 1997; Harbaugh et al., 2001, He and Richard, 2010; Dinda, 2004) and
foreign direct investment (Yanchun.Y, 2011; Dinda, 2004; Nguyen, 2009; Shafik
and Bandyopadhya, 1992; Abdulai and Ramcke, 2009) are concluded in the model
to explain factors affect environmental quality beside income. These factors may
cause environmental degradation. The reasons why these variables are chosen,
mentioning specifically in the part 3.2 of this chapter (data and variables). The
impact on environmental quality of the research is shown in conceptual framework
as following:
Figure 3.1. Conceptual framework of the study
EKC Hypothesis
Economic Growth
(GDP per capita)

Environmental
quality (CO2

emissions per capita)

Population density

Foreign Direct Investment (FDI)

Trade intensity
(Level of trade openness)
14


3.2. Variables
3.2.1. Dependent environment variables
Many studies have only chosen CO2 as environmental variable to measure the
relationship between economic growth and environmental quality in individual or
group nations. They are Poudel et al. (2009), Holtz-Eakin and Selden (1995),
Eugenio F. & Roberto C. (2009), Panayotou (1997), Sanglimsuwan (2011), Friedl
and Getzner (2003), He and Richard (2010), Omojolaibi (2010), Moomaw and
Unruh (1997), Reichert (2007), Galeotti et al (2006), Heil and Selden (2001) and
Chuku and Agbai (2011). In this study, carbon dioxide emissions per capita is
chosen as environmental indicator (hereafter called CO2), for some following
reasons.
Firstly, it is believed that CO2 emissions may one of the primary elements causing
greenhouse gas (GHG), which responsible for the problem of global warming.
Baumert et al. (2005) show the persuaded evidence that the global warming and
climate change due to GHG emissions, which derive from human activities in
burning fossil fuel. It increasingly grows because of its damages and dangers to
widen environmental scope and human. In a report of Intergovernmental Panel on
Climate Change, Metz et al. (2007) state the truth of human activities in
contribution of the global warming over the past 50 years is amazing. It covered

around at least 90 percent of the observed total. The report found that since the mid20th century, human activities related to emissions of heat-trapping gases brought
almost the increase of averaged temperatures in global level.
Friedl and Getzner (2003) concluded that CO2 emissions cause environmental
problems and create the sphere of global influence and it takes unimaginable the
social costs to solve the problems of global warming as it is accumulated across
nations and time. Moomaw and Unruh (1997) reconfirmed the potential danger of
CO2 emissions on the global environmental quality, not only for local ones.
Meanwhile, Arrow et al. (1995) mentioned that people think environment is free of

15


charge. For this free rider behavior, human emits CO2 without caring. It might lead
to a close association of CO2 emissions and income levels. Galeotti et al. (2006)
also judge the fundamental role of CO2 emissions to GHG and measuring incomeCO2 emissions should be interested specially.
Secondly, human activities include the burning of fossil fuel (gas, coal and oil),
deforestation, land over-usage, energy consumption originates by transport, facility
related to industrial output contribute mainly to CO2 emissions. It concentrates in
the atmosphere, affecting environment. CO2 emissions have been grown
significantly in the past centuries and ever increasing in the future both high-income
and low-income nations (Heil and Selden, 2001). All above human’s activities seem
to link directly with economic growth and development. Moomaw and Unruh
(1997) know well the importance of fossil fuel in the development of an economy
and claim the CO2 emission for this usage. To forecast the CO2 emissions, they
predict the demand of energy consumption, which suggest policy of energy and
environment.
In the fact that a fast economic growth needs higher amount of energy consumption,
thus an increase of CO2 and other pollution emissions are inevitable. Six countries
are chosen in East Asian region for this study because these countries are
appreciated in taking large energy consumption. Obviously, for these countries,

energy plays a vital role in the strategy of the rapid growth. It is average estimated
about 61% energy consumption of Asia and 20% of world in period 1990-2007
(EIA data, 2011). China, Japan, South Korea and Thailand rank in top 25 CO2
emitting countries, covering 22% of world in 2000 (Baumert et al, 2005, p.111).
Some countries as China and Japan have CO2 emissions much higher than other
ones. To avoid the outlier problem, which can bring great different results in the
sample, CO2 emissions per capita is used as a dependent variable in this study.

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3.2.2. Explanatory variables
Beside variable GDP per capita, which under the EKC hypothesis, some other
explanatory variables comprise in the research to explain more exogenous influence
on environmental quality. They are population density, trade openness and foreign
direct investment (FDI).
GDP per capita
Since CO2 emissions are the consequences of economic growth at different levels.
The EKC measures relationship of income and environmental pollutants. GDP per
capita is considered as income measurement. We follow literature review of some
studies such as He and Richard (2010), Nguyen (2009), Omojolaibi (2010),
Moomaw and Unruh (1997), Poudel et al. (2009), Abdulai and Ramcke (2009),
Sanglimsuwan (2011), Galeotti et al. (2006), Heil and Selden (2001), Holtz-Eakin
and Selden (1995) in specific of the EKC hypothesis on CO2 emissions and GDP
per capita.
A form of quadratic function allows the examination of an inverted-U shape, which
shows relationship between the dependent variable and independent variables. This
study also wants to check the shape of N-shape but not main task. However, cubic
function form is not good solution in this study because it may not be appropriate
for newly industrialized and developing countries (China, Thailand, Vietnam and

Malaysia).
Foreign Direct Investment (FDI)
According to many critics’ opinion, rapid economic growth of developing countries
greatly thank for open policy, which attract foreign direct investment and
stimulation of trade exchange. However, it takes adverse results on living
environment and ecosystem. Environment seems to unceasing degradation because
of the more industrial pollutions. It is right under environmental theory when
through investment and international trade, the rich countries tend to import
polluted intensive products and find the legal way to move their polluting sectors to
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