Annex

z
Pollution Intensity of Economic
Growth in South Asia and Other
Regions

VEGA GUTIERREZ STEEV JORDAN

 Econometric Analysis Reveals Economic Growth in South Asia Systematically More
Pollution-Intensive Than in Other Regions

Econometric analysis was performed to test the hypothesis that economic growth has been
systematically more pollution-intensive in India and the other South Asian countries than it has for
countries at comparable levels. Adapting an approach developed by Stern et al. (2016), the
relationship between the long-run growth in pollution and income per capita as:

𝑘
 
𝑝˙ 𝑖=𝛼 0 +𝛼 1 𝑦˙ 𝑖 + 𝛽 1 𝑦˙ 𝑖 𝑦 𝑖 , 0+ 𝛽 2 𝑦 𝑖, 0 + 𝛽 3 𝑝 𝑖, 0 + ∑ 𝛽 𝑗 𝑋 𝑖 +𝜀 𝑖 (1)
𝑗= 4

 
where the subscript indexes countries. The dependent variable is the average annual rate of
change in pollution, calculated for the period from year 0 to year T as ; is the average annual
growth rate of GDP per capita (year 2011 US$, market rates), calculated similarly to ; is the initial
level of GDP per capita in year 0; ,0 is the initial level of pollution in year 0; Xi is a vector of control
variables; and εi is an error term.
To test if the income elasticity of pollution is systematically different in South Asian countries after
controlling for other characteristics, we introduce a regional dummy variable r_i, equal to 1 if the
country is in the South Asian region and 0 otherwise:

𝑚
 
𝑝˙ 𝑖 = 𝛼 0 +𝛼 1 𝑦˙ 𝑖 + 𝛽 1 𝑦˙ 𝑖 𝑦 𝑖 , 0+ 𝛽 2 𝑦 𝑖, 0 + 𝛽 3 𝑝 𝑖, 0 + 𝛽 4 𝑟 𝑖+ 𝛽5 𝑦˙ 𝑖 𝑟 𝑖 + 𝛽 6 𝑦𝑖 , 0 𝑟 𝑖+ ∑ 𝛽 𝑙 𝑋 𝑖 +𝜀 𝑖
𝑙=7

 
The regional dummies are interacted with GDP per capita and GDP growth, so the overall effect of
GDP per capita growth on air quality is for countries in South Asia and elsewhere. The coefficient
of interest is β5. If β5 ≠ 0, then the income elasticity is systematically different for countries in South
Asia.
Changes in air quality in one country may affect in downwind countries, though much of the earlier
EKC literature ignored the spatial nature of pollution. 60 To capture the transboundary nature of air
pollution, we estimate equation (2) by introducing a spatial lag of the dependent variable and
allowing for spatial dependence in the error terms. Rewriting the equation in column-vector
notation:

 𝒑
˙ =𝛼 0+ 𝛼 1 𝒚
˙ + 𝛽1 𝒚
˙ 𝒚 0 + 𝛽 2 𝒚 0 + …+ 𝜆 𝑾 𝒑
˙ +𝜺

  𝜺 = 𝜌 𝑾 +𝒖

where W is a matrix of spatial weights, proportional to the inverse distance between countries; λW
represents the spillover effect from the estimated change in PM2.5 in neighboring countries; and ε
is a spatially autoregressive error term, with ρW accounting for the spillover of the errors.
 Results

 
First, the signs of the estimated EKC coefficients and in the GS2SLS and ML models are
consistent with the EKC hypothesis, although is statistically insignificant. The implied EKC
turning point at which mean annual PM2.5 is expected to peak occurs with GDP per capita
somewhere between US$ 3,379 and US$ 4,578 for countries outside South Asia in the different
models.
Second, in all the models, the estimated coefficient of interest is positive and statistically
significant, meaning that the income elasticity of ambient PM2.5 is systematically higher in the
South Asia region than for other regions. The implied EKC turning point for South Asia would
occur at GDP per capita far above the sample range—effectively meaning that there is no EKC
turning point for South Asian countries if they continue along their current growth path.