APPLIED RESEARCH METHODS

ECON 7991

THE IMPACT OF AID FOR TRADE AND INSTITUTIIONAL QUALITY

ON GREEN GDP IN OIC COUNTRIES (2007-2016)

PREPARED BY

SUMIA FAISAL ABDULKADIR (G2114366)

SUPERVISER

DR. ZAKARIA LACHEHEB

 TABLE OF CONTENT

1. Introduction 1
1.1 Research Problem 5
1.2 Research Objectives 5
1.3 Significance of the Study
2. Literature Review 6
2.1 Economic Growth and Environmental Quality 6
2.2 Aid for Trade and Economic Growth 7
2.3 Institutional Quality and Economic Growth 8
2.4 Population Growth and Environmental Quality 9
3 Materials and Methods 10
3.1 Model Specification 10
3.2 Data Source 11
4. Results and Discussion 12
5. Conclusion
References
Abstract

This paper investigates the impact of Aid for Trade and institutional quality on green GDP in OIC
countries using a variety of macroeconomic variables. Using the System GMM (SYS-GMM)
estimator, we examine the impact of aid for trade, institutional quality, investment, trade openness,
inflation, foreign direct investment and population on green GDP from 2007 to 2016. The
empirical findings indicate the significant positive impact of Aid for Trade on green GDP. In terms
of its categories, both Aid for Trade for productive capacity building and aid for trade economic
infrastructure have significantly positive effect on green GDP in OIC countries. Furthermore, Aid
for Trade interaction with institutional variables was found to be negative. According to the study's
empirical findings, institutional quality is significant and has a positive relationship with green
GDP although it is a nonlinear relationship. Inflation and trade openness have a considerable
negative impact on green GDP, although investment had no significant relationship with green
GDP.
 1. Introduction

In numerous emerging economies, environmental destruction turns into an urgent concern as a

result of rapid economic growth (Liu X et al., 2021). One of the most crucial factors for life on
earth is the state of its environment (Fairbrother et al., 2019; Leung et al., 2020). Since the
Industrial Revolution, however, widespread environmental degradation due to factors including
soil erosion, deforestation, and release of carbon dioxide has had a devastating impact on the
services provided by the earth's ecosystems (Amundson et al., 2015; Wuepper et al., 2020). Factors
such as economic growth (Mohmmed et al., 2019), population growth (Ribeiro et al., 2019), and
rapid urbanization are often accompanied by deteriorating environmental quality (Khoshnevis
Yazdi and Dariani, 2019). The increased consumption of fossil fuels and cement production, for
instance, would contribute to the increased carbon dioxide emissions brought on by the higher
economic growth. (Adedoyin et al., 2020).

In the last few decades, rising economic activities and the associated environmental degradation
are attributed for contributing to climate change. Due to the industrial framework of developing
nations, the relationship between economic growth and environmental degradation may be greater
in these economies. In other words, Humanity has increased environmental pressure beyond what
is sustainable (Maitre et al., 2018). The propensity of pollutants to absorb heat is a major
contributor to global warming. The combustion of fossil fuels in automobiles, businesses,
households, and power facilities is the source of this pollution. Pollution is the most significant
environmental factor in the proliferation of disease and early mortality (World Bank, 2021).

Globally, environmental pollution has become a nowadays issue (Khan et al., 2019). It is essential
to emphasize that highly polluted countries are not necessarily the most polluting societies. Some
of the least polluted countries in the world pollute other regions (World Bank, 2022). The majority
of the world's most polluted countries are located in the developing world, as depicted in the graph
below and top these countries are OIC member countries.
As a whole, the OIC member states are particularly prone to the environmental alterations caused
by increasing human activity. As a result of their constrained resources and inability to adapt to
environmental changes, low-income and underdeveloped member countries are particularly
vulnerable. Chad, for instance, is a member of the OIC and least developed country (LDCs).
According to world air quality report, Chad is the most polluted country in the world as of the year
2022.

Figure 1 depicts the most polluted countries in the world (World Air Quality Report, 2022). As
illustrated in the figure, most air polluted countries are developing countries as well OIC member
states such as Pakistan, Bangladesh, Iraq, Egypt, Bahrain and Kuwait. Consequently, the growth
rates of these countries are incompatible with the preservation of the natural environment, resulting
in adverse effects. The majority of these countries are endowed with substantial natural resources,
such as oil and gas; as a result, environmental degradation is a prerequisite for a rise in countries
income.

Figure 1: World’s Most Polluted Countries

Source: World Air Quality Report (2022).

Many studies have shown that the current rate of economic growth is unsustainable because it
causes severe environmental problems such as climate change, pollution of the air, contamination
of water, and biodiversity loss (IPCC, 2014). Developing nations will need to build and promote
green GDP if they are to adapt to and mitigate the negative effects of current and future climate
change. This will require a heavy reliance on technological advancement and the expanded of low-
carbon technologies, which are in turn aided by international trade and investment. Reorienting
policies and investments to target specific economic sectors, such as renewable energy, agriculture,
forestry, and tourism, can be conductive to inclusive growth and improving environmental quality,
while also making a significant contribution to the sustainable Development Goals.

Currently, the term "green GDP" is applied to a variety of GDP indicators that have been modified
to account for social and environmental costs. Because not all goods and services are often
provided in monetary terms in this sense, Green GDP is merely another method for calculating
and evaluating the monetary cost of social and environmental degradation caused by an expanding
economy (Stjepanovi, et al., 2017). The real gross domestic product (RGDP) or traditional
economic growth does not take into account the damage caused by pollution or the depletion of
natural resources, which is a detrimental from an environmental point of view. The most
significant advantage of green GDP is that it places a monetary value on the cost of harming the
environment and, as a consequence, adjusts real GDP in such a way that it more properly reflects
the costs associated with environmental expenses. The connection between the economy and the
environment is highly crucial, particularly in emerging countries like those that make up the
Organization of Islamic Cooperation (OIC), which are seeing considerable economic growth
(Vaghefi N et al., 2015).

Trade plays a crucial role in green economic growth because it offers access to economical goods
and services that accelerate the transition to a green economy. In certain sectors of the green
economy, such as sustainable agriculture, forestry, bioenergy, and environmental goods and
services, many developing countries have demonstrated their ability to compete. Constructing
these capabilities can generate numerous production and development opportunities to meet the
rising demand for "green" goods and services (Viljoen, W. 2013).

The goal of aid for trade is to help developing countries, especially least developed countries build
up the human resources and physical facilities necessary to implement WTO agreements and
enhance their trade. The initiative has increased awareness of the assistance developing countries
require to overcome the obstacles preventing them from benefiting from international trade. Aid
for Trade can improve developing countries' access to global markets by boosting trade-related
infrastructures and supply-side capacities, encouraging the growth of green sectors' productive
capacities and supporting production methods that are less costly on the environment (WTO,
2012). OIC countries should specifically have trade agreements and strategic partnerships between
them in an effort to boost intra-OIC trade. This can build massive markets for green products and
services, stimulate investment in both local and regional production, and direct trade in sustainable
products and new technologies.

According to OIC Environment Report (2019), the increasing rate of environmental degradation
affects and will continue to affect the entire developing world, but its negative effects are and will
be most pronounced in OIC member countries. Indeed, the increased environmental vulnerability
of OIC members is a result of their geographical locations, reliance on climate-sensitive natural
resources, and limited adaptability. The majority of OIC member states exhibit weak
environmental performance and a high degree of climate change vulnerability. In spite of this, as
in the rest of the developing world, natural resources are mismanaged and deterioration of the
environment is on the rise in a number of OIC member states. The situation is most dire in LDCs
that have limited financial resources and inadequate buffering and adaptive abilities to effectively
combat environmental degradation.

Through trade-related adjustment, aid for trade could lead to more inclusive economic growth. Aid
for trade-related adjustment assists developing nations in addressing the costs of trade
liberalization, such as lower tariffs, preference erosion, and deteriorating terms of trade. Aid for
trade might offset and compensate for the negative effects resulting from these trade changes,
especially when they impact the poor (Lammersen et al., 2016).

Within the field of institutional economics, there is broad consensus that institutional quality is
one of the most influential determinants of economic growth. In recent years, economists and
decision-makers have placed a greater emphasis on institutional quality in relation to the
surrounding environment. Moreover, the government has both direct and indirect influence over
environmental quality. Additionally, a robust judicial system mitigates the effects of market
failures (Salman et al, 2019).

The study aims to answer the following questions: Do aid for trade and institutional quality have
a positive or a disproportionate impact on green GDP? Concerning this relation, the relationship
between aid for trade, Institutional quality, environment, and green GDP in these OIC countries
has not been investigated. Consequently, selecting a sample for a study of OIC-countries, which
are among the most polluted countries, would then assist to providing empirical evidence and a
new paradigm in light of green GDP, aid for trade and institutional quality in these OIC-countries.

1.1. Research Problem

There are numerous issues associated with the OIC and green GDP. First, according to the world
air report (2022), OIC countries are the most polluted countries. The report reveals that top ten
most polluted countries are OIC members, including Chad, Pakistan, Iraq, Bangladesh, Bahrain,
and Kuwait. These nations have an abundance of natural resources, including oil and gas.
Furthermore, the average per capita GHG emissions of OIC countries are less than the global
average, but the rate of rise is faster. For instance, OIC greenhouse gas emissions climbed by 77%
between 1990 and 2017, reaching 9 Gt-CO2 equivalent, whilst global GHG emissions increased
by 43% (OIC Environment Report, 2021).

Aid for Trade's (AFT) positive effects on a variety of factors, including trade, trade liberty, foreign
direct investment (FDI), infrastructure, etc., have been extensively studied (Nguyen et al 2023).
However, there is also empirical evidence showing the negative correlation of aid for trade and
environmental quality. For instance, Nguyen et al. 2023 affirmed that aid for trade has a negative
effect on the environmental quality of recipient countries, and that the negative impact of aid for
trade on environmental quality varies based on the institutional quality and economic growth of
recipient countries. Hence, the link between aid for trade and green growth is still inconclusive,
and thus further analysis that combines aid for trade and institutional quality on the two in one
growth-environment (green GDP) factor would substantially contribute to the nexus.
The paper focuses specifically on OIC member countries, a group that has been understudied in
the field of development literature despite being the largest recipient of aid development. In
addition to representing a diversity of geographic locations, the OIC provides a politically and
culturally diverse sample of aid recipients.

Given the high levels of pollution in OIC countries, we evaluated the relationship between aid for
trade, institutional quality and green GDP from 2007 to 2016. According to our knowledge, few
studies has examined the relationship between aid for trade, green GDP, and institutional quality.

1.2. Research Objectives

The main objective of this research is to examine the linear and nonlinear relationships between
aid for trade and institutional quality on green GDP in OIC countries. The specific objectives are:

1- To analyze the direct impact of aid for trade and institutional quality on green GDP in OIC
countries.
2- To investigate the contingency and nonlinear impact of aid for trade and institutional
quality on green GDP in OIC countries.

1.3. Significance of the Study

This study contributes to scholarly literature in three different ways. First, this article examines the
relationship between aid for trade and institutional quality (political institutional quality) and their
impact on green growth. This study aims to investigate the degree to which OIC nations obtain a
green GDP in regards to institutional quality. This study would give significant contribution to
policy makers on seeking to achieve SDG goals that related to environment conservation and
sustainability. Also, this study attempts to contribute to the research field by highlighting the role
of institutional quality and unveiling the cover on the aid for trade-green GDP nexus relationship.
 CHAPTER TWO
LITERATURE REVIEW

2.1 Introduction

Economic Growth and Environmental Quality

Numerous past studies examine how economic prosperity contributes to environmental
deterioration. Saidi et al. (2020) examined the links between environmental quality, economic
growth, and energy consumption. Using panel data, and applying fully modified ordinary Least
square (FMOLS), and dynamic ordinary least square (DOLS) estimation methods are applied to a
25-year panel data set for five OPEC countries (Algeria, Nigeria, Indonesia, and Venezuela).
Long-term findings suggest the existence of causal relationships between each nation's GDP and
energy consumption. Except for Algeria, bidirectional causal relationships between GDP and CO2
emissions were demonstrated in all countries.

According to Arfanuzzaman (2016), there is a relationship between the human development index
(HDI), the environmental index, and per capita income in Bangladesh. The study's findings suggest
that as Bangladesh's industry grows, environmental quality would inevitably degrade, negatively
impacting the country's environmental performance index. Additionally, a study was undertaken
in China on the effects of economic development and the usage of renewable energy consumption
on CO2 emissions (Dong et al., 2018). Their results suggested a correlation between economic
growth and carbon dioxide gas emissions, but that this trend can be reversed by the increased use
of natural gas and renewable energy sources.

Using ARDL method, Sulaiman et al. (2017) investigated the relationship between CO2 emissions,
energy consumption, and economic growth in Malaysia from the period of 1975-2015. According
to the study's findings, energy consumption and CO2 emissions had no impact on economic
growth. furthermore, it has been found that CO2 emissions increase alongside rising energy usage
and economic boom.
According to the EKC theory, low-income countries, many of which are pre-industrial or
agricultural, will adopt agricultural and industrial mechanization, hence increasing resource usage
and pollution. Numerous characteristics of early-stage economic growth are detrimental to the
environment, such as the significant use of nonrenewable energy, the continuing of outmoded
production processes, and a general lack of awareness regarding the significance of environmental
preservation. In addition, while still in their developmental stages, most countries place economic
growth over environmental conservation.

Aid for Trade and Economic growth

There is limited empirical evidence regarding the link between aid for trade (AFT) and economic
growth.

For instance, Benziane et al., (2022) looked at how Aid for Trade inflows affect economic growth
in developing countries and whether or not this effect is conditional on the quality of institutions
in these countries. Between 2009 and 2018, 75 recipient countries are included in the empirical
study. Quantile Regression was used as an analysis method for this research. The findings of the
third objective revealed that the aggregate Aid for Trade inflows had a major effect on the entire
sample, particularly the recipients with low incomes. In addition, a negative relationship between
Aid for Trade and institutional variables was observed. Additionally, these coefficients appear to
converge towards the positive for nations with higher institutional quality (high-income
recipients).

Roy et al. (2021) conducted the first empirical analysis of the effect of aid for trade inflows for
trade policy and laws on sustained GDP per capita growth in 50 recipient countries from 2005 to
2017, and whether this impact is contingent on the political stability of these countries. Utilizing
the fixed-effects and GMM estimation techniques. The results confirm that aid for trade policy and
regulations increase sustainable economic growth across entire sample of countries. However, in
a politically stable environment, this positive effect remains nearly the same for low- and lower-
middle-income recipients, whereas it nearly doubles for upper-middle-income recipients. These
findings have substantial policy recommendations for donors and international development
organizations, who are advised that, as per capita economic growth in aid nations rises, it becomes
increasingly desirable to allocate funds to the formulation and implementation of trade policies
and regulations.

Institutional Quality and Economic growth

In the past, numerous empirical research has been conducted in order to study the influence that
institutional quality plays on the growth-emissions nexus. For instance, Slesman et al., (2015)
studies the relationship between the quality of numerous aspects of institutional infrastructure and
economic growth in a panel of 39 OIC countries using two-step system GMM. The empirical
findings demonstrate that improved political as well as economic institutions can promote
economic growth. Overall, the results from the nonlinear model confirms the "hierarchy of
institutions theory," which states that the quality of political institutions ensuring stable
governance, less economic exploitation, and comparatively low conflict are the crucial
components of an institutional matrix.

Abid (2017) used data from 1990 to 2011 to incorporate institutional quality into a growth-
emissions model for 41 countries in the European Union (EU), as well as 58 countries in the Middle
East and African (MEA) regions. In the economies that he chose to examine, he argued that
improving the quality of the institutions was crucial for simultaneously fostering economic growth
and cutting carbon emissions. Using system-GMM and completely modified OLS techniques,
Bhattacharya et al. (2017) investigated the impact of institutional quality on economic growth and
CO2 emission reduction in 85 developed and emerging economies focusing on the period between
1991 and 2012. According to the findings, institutions have a substantial role to play in both the
acceleration of economic growth and the reduction of carbon emissions in the countries that were
investigated.

Salman et al. (2019) investigated the effect of institutional quality on the growth-emissions nexus
in a sample of three East Asian countries from 1990 to 2016 using Fully Modified Ordinary Least
Squares and Dynamic Ordinary Least Squares to assess the long-run effects of explanatory
variables on economic growth. In order to avoid variable bias, the model also integrated energy
usage and trade openness as main factors. Key findings demonstrated a significant and positive
interaction variable between carbon emission and institutional quality, demonstrating that effective
and equitable domestic institutions are vital for improving economic growth and reducing carbon
emissions at the same time. Moreover, the findings suggest that high-quality institutions, high
energy use, and free trade all contribute to economic growth.

Population Growth and Environmental Quality

It is crucial to look into the relationship between rapid population increase and declining
environmental quality, as this phenomenon is common in developing countries. For decades,
economists have debated whether or not there is a causal link between growing population,
declining resource availability, and worsening state of the environment Bhattacharya et al (2007).
The debate has focused on whether economic growth, unsustainable agricultural and industrial
methods, and excessive and wasteful consumption are primarily to blame for the escalating
environmental problems or whether population growth is the primary reason. Both population
growth and non-sustainable economic growth are contributing to many environmental issues in
the case of OIC countries.

Rehman et al. (2020) examined the relationship between energy consumption, GDP, population
growth, and carbon emissions in Pakistan using the new GRA method and found a significant
connection within all sectors. Nevertheless, Population growth significantly contributes more to
the increase in CO2 emissions in Pakistan's transport sector. According to the findings of Lacheheb
et al. (2015), Algeria's rising population and economic growth are contributing to the country's
increasing CO2 emissions. Audi and Ali (2016) analyzed the effect that population growth, energy
consumption, economic progress, and GDP had on the deterioration of Lebanon's natural
environment from 1974 to 2014. According to the data, rising population levels are associated with
higher levels of CO2 emissions.

There have not been many studies that focus on the role of green GDP as the best measure of
environmental health, particularly when it comes to income growth. Not only does this indicator
concentrate on the state of the environment, but it also highlights the income and the growth rate.
In addition, research on aid for trade (AFT) and its effects on the green growth is still inconclusive
therefore this research intends to address this literature gap by examining the relationship between
Aid for trade, institution-green GDP nexus in OIC countries.
 CHAPTER THREE
METHODOLOGY

3.1 Introduction
Materials and methods

Model Specification
The purpose of this research is to investigate the impact of AFT and institutions on green GDP in
OIC countries. As a result, the empirical model augmented from Hayat (2019) in the research is
as follows:
𝑙𝑛𝐺𝐺𝐷𝑃𝑖𝑡 = 𝛼 + 𝛽1 𝑙𝑛𝐺𝐺𝐷𝑃𝑖,𝑡−1 + 𝛽2 𝑙𝑛𝐴𝐹𝑇𝑖𝑡 + 𝛽3 𝑙𝑛𝐼𝑄𝑖𝑡 + 𝛽4 𝑋′𝑖𝑡 + 𝑣𝑖 + 𝜂𝑡 + 𝑢𝑖𝑡 (1)

GGDP is green GDP, where I and t are country and time indexes. Institutional quality (IQ) is
proxied by democracy (Demo) and commonly used in the literature (Slesman et al., 2015;
Williams, 2017; Acemoglu et al., 2005). Aid for trade (AFT), X' (vector of control factors expected
to affect green GDP), 𝑣𝑖 (country specific effect), 𝜂𝑡 (time specific effect) and 𝑢𝑖𝑡 is the error term.
To assess the non-linear link between institutional quality and green GDP, the model specification
includes the squared term of institutional quality (𝐼𝑄𝑖𝑡2 ) to capture the non-linear effect of
institutions on green GDP and determine the U-shaped or inverted U-shaped relationship. Law and
Azman-Saini (2012) utilized the squared term of institutional quality to describe its impact on
financial development; also, some studies theorized that institutions had an indirect impact on
environmental quality (Abd Razak et al., 2021). As a result, the model specification includes the
squared term of democracy as follows:

2
𝑙𝑛𝐺𝐺𝐷𝑃𝑖𝑡 = 𝛼 + 𝛽1 𝑙𝑛𝐺𝐺𝐷𝑃𝑖,𝑡−1 + 𝛽2 𝑙𝑛𝐼𝑄𝑖𝑡 + 𝛽3 𝑙𝑛𝐼𝑄𝑖𝑡 + 𝛽4 𝑙𝑛𝐴𝐹𝑇𝑖𝑡 + 𝛽5 𝑋′𝑖𝑡 + 𝑣𝑖 + 𝜂𝑡 + 𝑢𝑖𝑡 (2)

The general method of moments (GMM) established by Holtz-Eakin et al. (1988) and further
developed by Arellano and Bond (1991), Arellano and Bover (1995), and Blundell and Bond
(1998) are used. The estimation is performed using the System GMM (SYS-GMM) estimator on
a panel of 74 developing and emerging economies from 2007 to 2016. Two diagnostic tests based
on Arrelano and Bond (1991) were utilized to analyze the first and second order serial correlation
in errors to assure the reliability of the augmented results. First-order serial correlation can be
rejected, while second-order cannot be discarded. The second test is the Sargan/Hansan test, which
examines the issue of overidentification, which is created by numerous instruments and would lead
to biased estimation. In addition, the U test is used to determine the presence and existence of a U-
shaped (or inverse U-shaped) relationship on an interval. We choose the system GMM estimator
(Blundell and Bond, 1998) over the pooled ordinary least squares (OLS), within-groups (fixed
effect), and difference GMM estimators because it provides consistent parameter estimates and is
unbiased. The system GMM is capable of handling endogeneity since it delivers more accurate
estimates than alternatives such as difference GMM or fixed effect models.

Data Source

Institutional quality is proxied by democracy, which is re-scaled with a maximum score of 0 for
complete autocracy and a maximum score of 100 for complete democracy, according to data from
the World Governance Indicator (WGI). In additional, openness is defined as the total of exports
and imports divided by GDP, and World Bank provides data on trade openness. As a proxy for
investment data, gross domestic capital formation as a proportion of GDP is used. AFT is aid for
trade inflow and is proxied by aid for trade economic infrastructure and aid for trade productive
capacity building. Aid for trade data was extracted from OECD/DAC- International Development
Statistics (IDS) online databases.
 CHAPTER FOUR
RESULTS AND DISCUSSION

4.1 Introduction

1.1 Descriptive Statistics

Table 1: Descriptive Statistics

Variable Obs Mean Std.Dev. Min Max

aftei 342 74.171 105.789 .166 615.764
aftpcb 342 22.388 36.797 .095 302.075
ins 342 29.669 15.336 4.839 74.639
pop 342 2.258 1.141 -.927 11.794
inf 342 7.034 22.275 -3.233 359.093
to 335 69.837 44.591 4.128 347.997
fdi 342 3.761 5.128 -10.954 39.456
inv 332 25.761 10.18 -3.946 60.058
ggdp 266 1.27e+11 2.17e+11 8.97e+08 1.09e+12

Table 1 displays the descriptive statistics for all of the variables used in this study. The mean value
for the dependent variable, greengdp, is 1.27e+11, while the minimum and maximum values are
8.97e+08% and 1.09e+12, respectively, indicating that there are substantial disparities in green
gdp among these countries. Aid for trade-economic infrastructure has the highest and lowest
values of 615.764 and .166, respectively. The data are dispersed relative to their respective means
if the standard deviation is large. the variable of aid for trade economic structure has a standard
deviation as high as 105.8%, indicating that there are large disparities in aid for trade economic
infrastructure among these OIC countries. Aid for trade productive capacity building has a
minimum .095 and maximum values of 302.075 respectively with standard deviation of 36.797.
Likewise, a minimum and maximum values for the institutional quality are 4.839 and 74.639, with
a standard deviation of 15.336%.
Almost all of the explanatory variables exhibit substantial variation, suggesting that these variables
could explain green gdp variations. Not all variables have the same number of observations (N),
resulting in unbalanced data in the estimation.

1.2 Matrix of Correlations

Table 2: Correlation of variables

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Variables
(1) ggdp 1.000

(2) aftei 0.481 1.000

(3) 0.527 0.618 1.000

aftpcb
(4) ins 0.307 0.222 0.213 1.000

(5) pop -0.311 -0.232 -0.112 -0.158 1.000

(6) inf 0.173 0.055 0.117 -0.239 -0.083 1.000

(7) to -0.231 -0.235 -0.222 0.157 -0.007 -0.239 1.000

(8) fdi -0.242 -0.128 -0.120 0.042 0.086 -0.010 0.362 1.000

(9) inv 0.085 0.053 -0.035 0.165 -0.003 -0.118 0.107 0.409 1.000

A correlation coefficients test was performed to ensure that collinearity was not a major concern
(see Table 2). The vast majority of correlation coefficients are less than 0.3, implying that this
study was not required to address collinearity issues. The panel data series utilized in this study
were suitable for conducting accurate and robust estimation and no spurious regression was
detected.
4.2 Regression Results

Table 3 below displays the acquired results on the impact of aid for trade and institutional quality
on green GDP in OIC countries. We can see that AFT economic infrastructure coefficient is
statistically significant and denoted by a positive sign, showing a positive relationship between
AFT economic infrastructure and green GDP. In other words, an increase of 1% in AFT economic
infrastructure results in an increase of 0.194% in green GDP. The AFT productive capacity
building coefficient is positive and statistically significant, suggesting a positive link between AFT
productive capacity building and green GDP in OIC countries. When AFT productive capacity
construction increases by 1 percent, the green GDP rises by 0.045 percent. these findings show the
effect of aid for trade on green GDP is significantly positive in OIC countries. In the first model,
the institution quality coefficient is negative, demonstrating an inverse relationship between
institution quality and green GDP. Surprisingly, the coefficient of institutional quality was
significantly negative. So, we test the nonlinear effect of institutional quality to determine what
the result will be if an institution’s quality improves. The result reveals that the relationship
between institutional quality and green GDP is nonlinear and U-shaped.

On the other hand, our results also show the interaction between aid for trade and institutional
quality. Both AFT economic infrastructure and AFT productive capacity building have an inverse
relationship with institutional quality. Their coefficients are statistically significant and negative.
1% increase in both AFT economic infrastructure and AFT productive capacity building decreases
institutional quality by 0.056% and 0.032% respectively.

The population coefficient is significant and positive, indicating a positive correlation between
green GDP and population. Moreover, the inflation rate as expected is statically significant and
negative. When there is an increase of inflation by 1% green GDP falls by 0.031%. In all models,
trade openness is represented with a negative sign, indicating an inverse link between trade
openness and green GDP. When a trade openness increases by 1%, green GDP decreases by
0.259%. These findings concur that trade openness tends to be concurrently distorting and harmful
to green growth. The negative coefficient for foreign direct investment indicates an adverse
correlation between foreign direct investment and green GDP. When FDI rises by 1% green GDP
decreases by 0.019 %. Investment-green GDP relation is positive but not statistically significant.
Table 3: Regression results

(1) (2) (3) (4)

lggdp lggdp lggdp Lggdp
L.lggdp 0.821*** 0.808*** 0.823*** 0.800***
(0.029) (0.033) (0.031) (0.029)
_cons 5.401*** 5.697*** 4.807*** 6.243***
(0.863) (0.933) (0.927) (0.844)
laftei 0.194*** 0.015**
(0.028) (0.006)
laftpcb 0.045*** 0.145***
(0.010) (0.041)
lins -0.019 0.010 0.153** -0.070
(0.044) (0.040) (0.068) (0.046)
Laftpcb*lins -0.032***
(0.012)
Laftei*lins -0.056***
(0.009)
lpop 0.069*** 0.062*** 0.078** 0.055*
(0.022) (0.024) (0.038) (0.030)
linf -0.031** -0.022 -0.028** -0.033**
(0.012) (0.015) (0.012) (0.015)
lto -0.259*** -0.276*** -0.238*** -0.264***
(0.048) (0.044) (0.043) (0.049)
lfdi -0.019** -0.019* -0.022** -0.025***
(0.010) (0.010) (0.009) (0.009)
linv 0.011 0.006 0.003 0.001
(0.018) (0.017) (0.026) (0.019)
AR(2) (p-value) 0.611 0.567 0.072 0.527
J-test (p-value) 0.385 0.428 0.191 0.165
No. of Instruments 32 32 32 31
No. of Countries 37 37 37 37
No. of Observations 220 220 220 220
Time dummies Yes Yes Yes Yes

We conducted a robustness check to provide more reliable and precise estimation. Table 4 below
shows aid for trade, institutional quality – green GDP link. The results show that AFT economic
infrastructure and AFT productive capacity building are still statistically significant and positive.
Furthermore, the coefficient of institutional quality turned positive, indicating a positive link
between institutional quality and green GDP. A strong institutional quality increases green GDP.
Except for the institutional quality variable, the signals for the control variables stay constant,
showing that the obtained results are consistent prior to and after the robust check. Thus, we can
conclude that the findings of our study are reliable and consistent. Our estimation indicates that
institutional quality and aid for trade has a positive relationship with green GDP whereas inflation,
foreign direct investment, trade openness have a negative and significant impact on green GDP.
Additionally, population has a substantial and positive relation with green GDP in OIC countries.

Table4: Robustness Check

(4) (6)
lggdp lggdp
L.lggdp 0.820*** 0.850***
(0.024) (0.026)
_cons 5.518*** 4.361***
(0.760) (0.905)
laftei 0.187***
(0.027)
laftpcb 0.188***
(0.043)
lins 0.028 0.169**
(0.043) (0.066)
Laftpcb*lins -0.043***
(0.014)
Laftei*lins -0.054***
(0.009)
lpop 0.072** 0.083**
(0.034) (0.033)
linf -0.020 -0.017
(0.013) (0.013)
lto -0.276*** -0.208***
(0.046) (0.047)
lfdi -0.091*** -0.105***
(0.018) (0.026)
linv 0.005 -0.057*
(0.031) (0.030)
AR(2) (p-value) 0.513 0.065
J-test (p-value) 0.497 0.285
No. of Instruments 32 32
No. of Countries 37 37
No. of Observations 209 209
Time dummies Yes Yes
5.0 Conclusion

The main objective of this research is to examine the impact of aid for trade and institutional
quality on green GDP in OIC countries. Aid for trade is proxied by aid for trade economic
infrastructure and aid for trade productive capacity building. Institutional quality is proxied by
democracy. The data set included the years 2007 through 2016. This study employed the System
GMM (SYS-GMM) estimator for estimate purposes.

According to the findings of this study, there exists a positive and statistically significant
relationship between aid for trade and green GDP. AFT economic infrastructure and AFT
productive capacity building have a stronger positive effect with green GDP. This study concurs
with and provides empirical support for the expanding body of literature indicating that aid for
trade enhances green economic growth. In other words, an increase in aid for trade disbursements
would be most helpful for OIC countries, and it would also speed up their move to the fastest-
growing economies. These results are consistent with aid for trades’ primary goal, which is to
enhance and broaden trade-related infrastructures. Nonetheless, the interaction between aid for
trade and institutional quality is shown to be negative.

Additionally, institutional quality has a significant positive relationship with green GDP although
it is nonlinear. Moreover, trade openness and inflation have a negative association with green GDP.
The conclusion that can be derived from the figures shown above is that green GDP growth will
be higher in proportion to the number of countries that maintain their institutional quality.
Moreover, our results illustrate a negative relationship between trade openness and green GDP.
These findings lend empirical evidence to the expanding body of research that relates greater
openness with environmental deterioration, income inequality, and an upsurge in environmentally
destructive economic activities. This result has significant policy considerations that the
government could implement to accelerate the growth of its green GDP. To minimize
environmental contamination, the OIC governments should emphasize preserving and improving
the quality of their institutions in to boost and develop green GDP in their respective nations.
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