The Role of Governance and Foreign Direct Investment in Shaping Environmental Kuznets Curve: Evidence from Developed and Developing Countries

Abstract

Using a panel of 160 countries, this study explores the role of governance indicators in shaping Environmental Kuznets Curve (EKC). The study finds that better governance practiced tend to reduce CO2 pollution, but the dividends of better governance are more pronounced in at higher income levels. The study further finds that better governance is also effective in bringing down the critical level of per capita income at which the relationship between income and pollution turns negative. The study concludes that good governance works only when the desired regulations are in place. Therefore, aid packages for governance reforms need to emphasize more on enactment of meaningful regulations than on their enforcement. Investment in institutions is expected to yield maximum dividends in such countries that have gained high income status but are still lacking in institutional development. *