A Simultaneous Estimation of Environmental Kuznet Curve: Air Pollutants and Economic Growth in Malaysia
This study attempts to examine the relationship between environmental degradation and economic growth in developing countries by taking into account the environmental Kuznets curve. The focus will be on environmental degradation is on air pollution in Malaysia. This study attempts to measure the actual shape of Environmental Kuznets curve (EKC) in response to modern environment regulation in Malaysia. As Grossman (1995) first suggested, it is possible to distinguish three main channels whereby income growth affects the quality of the environment. Firstly, a scale effect, secondly a composition effect and thirdly, technological progress. A recent research criticism of the environmental Kuznets curve hypothesis is based on the occurrence of foreign direct investment and international trade (Cole, 2003 and 2004). The general objective of this study is to measure the relationship between economic growth and different indicators of air pollution in Malaysia. Air pollution indicators were assessed on a number of measures: Carbon Monoxide (CO), Sulphur Dioxide (SO2), Nitrogen Dioxide (NO2), Ozone (O3), Particulate Matter (PM10) and Suspended Particulate Matter (SPM). The income level per capita GDP (Gross Domestic Product) per capita were measured from the year 1996 to 2006. In the EKC literature, EKC is always estimated in the form of a single equation. However, since both income and environmental quality are endogenous variables in which they impact upon each other, therefore the estimation of single equation relationships where simultaneity exists will produce biased and consistent estimates. This study specify the channels through which the income affects pollution and pollution affects income in a conceptual model and then formulate a two-equation simultaneous model for empirical research. This study test for exogeneity with the Hausman test and estimate the simultaneity model using the two-stage least squares method. The EKC hypothesis is supported in the cases of SO2 and PM10 and there are three main differences found between single polynomial equation estimators commonly used in EKC literatures and simultaneous equation estimators. In addition, this paper also investigates the determinants of income and government pollution abatement expense. Negative impact of pollution, SO2 on income, and positive effects of physical capital on income are found in income equation. Whilst negative effects of pollutant emissions, positive effect of secondary industry share on pollution abatement expenses are also found in abatement equation.
Keywords: Air Pollutants, Economic Growth, Malaysia, Environmental Kuznets Curve, Simultaneity
Lecturer, Faculty of Business Management, University Technology Mara
Professor Elsadig Musa Ahmed
Lecturer, Faculty of Business and Law, Multimedia University Malaysia