Why are Some Countries Cleaner than Others? New Theoretical and Empirical Evidence from Macroeconomics

Abstract

It has been established that environmental pollution is a key driver of COVID-19 and other looming pandemics, further boosting a full-fledged transformation into a green economic system. This study aims to investigate why some countries are cleaner than the others with reference to macroeconomic governance (MEG) in order to explain how major macroeconomic aggregates should be governed to mitigate environmental pollution at the level of economic systems. Using per capita carbon dioxide emissions (CPC) as the proxy for environmental pollution, and macro non-financial governance (MNFG) and macro financial governance (MFG) as the proxies for MEG, the study introduces green complementarities (GCMs) and dirty complementarities (DCMs) as analytic concepts to compare the MEG models for managing pollution in 13 high-income countries (HICs), 10 upper-middle-income countries (UMICs), and nine lower-middleincome countries (LMICs) for the period 1994–2014. It hypothesizes that systemic and fragmented governance of GCMs and DCMs are, inter alia, the key drivers of the countries’ pollution levels, and uses the Panel ARDL Pooled Mean Group estimator to conduct the empirical analysis. The paper concludes that (i) HICs reduced their CPC levels thanks to adopting green systemic governance by creating GCMs between both MNFG and MFG variables in the long-run; (ii) UMICs experienced a remarkable increase in their CPC levels due to adopting dirty systemic governance by creating DCMs between the MNFG variables, but prevented pollution from being higher through creating GCMs between the MFG variables; and (iii) LMICs experienced the highest comparative increase in CPC due to adopting a fragmented governance in managing both MNFG-pollution and MFG-pollution nexus.