Khóa luận tốt nghiệp: The impact of institutional quality on environmental pollution in asean countries

GRADUATION THESISTHE IMPACT OF INSTITUTIONAL QUALITY ON ENVIRONMENTAL POLLUTION IN ASEAN COUNTRIES INSTRUCTOR: DR... GRADUATION THESISTHE IMPACT OF INSTITUTIONAL QUALITY ON ENVIRONMENTAL

GRADUATION THESIS

THE IMPACT OF INSTITUTIONAL QUALITY ON

ENVIRONMENTAL POLLUTION IN ASEAN COUNTRIES

INSTRUCTOR: DR DANG TRUNG TUYEN

STUDENT: NGUYEN THI THUY NHUNG

CLASS: QH-2020-E ECONOMICS 5

PROGRAM: HONORS

Hanoi, 10/2023

GRADUATION THESIS

THE IMPACT OF INSTITUTIONAL QUALITY ON

ENVIRONMENTAL POLLUTION IN ASEAN COUNTRIES

INSTRUCTOR: DR DANG TRUNG TUYEN

CRITICAL LECTURER: DR NGUYEN THUY ANH

STUDENT: NGUYEN THI THUY NHUNG

CLASS: QH-2020-E ECONOMICS 5

PROGRAM: HONORS

Hanoi, 10/2023

out under the instructor of Dr Dang Trung Tuyen The information and data used inthe project are honest, accurate, and trustworthy All content is inherited andreferenced from sources that have been fully cited and the source stated in theReferences I have not published the content and research results of the study in any other author’s research.

I take full responsibility for the above commitment

Instructor Student

Dr Dang Trung Tuyen Nguyen Thi Thuy Nhung

ACKNOWLEDGMENT First of all, I would like to give my sincere thanks and gratitude to Dr DangTrung Tuyen, lecturer at University of Economics & Business - Vietnam NationalUniversity, Hanoi for his thorough instruction His directions, suggestions andcomments were paramount important for me to study and accomplish my graduationthesis.

I would like to respectfully thank all the lecturers of University of Economics

& Business - Vietnam National University, Hanoi, especially the lecturers at theFaculty of Political Economy for teaching and imparting valuable knowledge as well

as creating the best conditions for me while I study and research at school.

I would like to express my sincere thanks to my family and friends for theirinterest, encouragement and help during my study and completion of my thesis.

Finally, I would like to send all lecturers working at the University ofEconomics & Business — VNU best wishes for health, happiness in life and success

in work I hope that the Faculty of Political Economy and the University ofEconomics & Business will grow stronger and enhance prestige and position in boththe fields of education and research at home and abroad.

Student

Nguyen Thi Thuy Nhung

1.2 Definition of environmental pollution and institution

1.2.1 Definition of environmental pollution

1.2.2 Measurement of environmental pollution using CO2 emissions

1.2.3 Definition of institution

1.2.4 Definition of institutional quality

1.3 Theoretical analytical framework

1.3.1 Kuznets curve

1.3.2 STIRPAT model

1.3.3 Pollution Haven Hypothesis

1.3.4 Pollution Halo Hypothesis

1.3.5 The impact of institutional quality on environmental pollution

1.3.6 The impact of other factors on environmental pollution

CHAPTER 2: RESEARCH METHODOLOGY

Principal component analysis techniquePanel unit root test

Panel cointegration test

The optimal lag lengthResearch regression model

Descriptive statistics

Results of the tests

Correlation matrix Panel unit root test resultsCointegration test results

The optimal lag lengthARDL model estimation results

Estimated results for the ASEAN region

Estimated results for countries in ASEANDiscuss research results for the ASEAN region

The impact of control variables on environmental pollutionThe impact of institutional quality on environmental pollutionDiscussion of research results for countries in ASEAN

Cambodia

4.2.1 Policy implications for ASEAN region

4.2.2 Policy implications for Vietnam

CONCLUSIONS

REFERENCES

APPENDIX

PhilippinesSingapore

ThailandVietnam

LIST OF ABBREVIATIONS

Abbreviation Original

ARDL Autoregressive Distributed Lag

ASEAN Association of Southeast Asian Nations

DFE Dynamic Fixed Effect

EU European Union

FDI Foreign Direct Investment

GDP Gross Domestic Product

GMM Generalized Method of Moments

ICRG International Country Risk Guide

IEA The International Energy Agency

IEA International Energy Agency

MG Mean Group

OECD The Organisation for Economic Co-operation and

DevelopmentOLS Ordinary Least Squares

PMG Pool Mean Group

USD United States Dollar

VAR Vector autoregressive

VECM Vector Error Correction model

WGI Worldwide Governance Indicators

DCCE Dynamic Common Correlated Effects

LIST OF TABLES Table 1.1 Previous studies on the impact of institutional quality on environmentalpollution

Table 1.2 Selected literature on the impact of macroeconomic factors onenvironmental pollution

Table 2.1 Description of research variables

Table 3.1 Descriptive statistics

Table 3.2 Correlation matrix results between variables

Table 3.3 Test the stationarity of the variables

Table 3.4 Results of cointegration test

Table 3.5 Optimal lag length of variables in the ARDL model

Table 3.6 Estimated results according to PMG, DFE and MG techniques

Table 3.7 Hausman test results

Table 3.8 Estimation results for country ørOups

Table 3.9 Estimated results for each ASEAN country

Figure 1.1 Kuznets curve

Figure 2.1 Research process

Figure 2.2 Research model

Figure 3.1 Proportion of industry and service sectors

Figure 3.2 Proportion of economic sectors in GDP in ASEANFigure 3.3 Total fuel energy supply by countries in ASEANFigure 3.4 Institutional quality in ASEAN

Figure 3.5 Institutional quality in each country in ASEAN

but in recent decades, it has become more urgent and worrying than ever because of its negative impacts on human health During the first two decades of the 21st century (2001-2020), the earth’s surface temperature increased by 0.99°C and from 2030 onwards it could reach 1.5°C compared to the period 1850-1900, with a probabilityfrom 40-60%, according to the Intergovernmental Panel on Climate Change (IPCC,2023) The world records record high temperatures, July 2023 is the hottest month recorded on earth (NOAA, 2023) and 2023 is predicted to become one of the 5 hottestyears on record (with probability over 99%) (NOAA, 2023) Regions on Earth areaffected by these changes (Shaftel et al., 2022) The world is recording the level of natural disasters such as forest fires in the Amazon, North America, and Australia ormajor storms such as Haiyan and Doksuri; Droughts and heat waves are increasingrapidly in many areas not only in frequency and intensity but also in the duration ofoccurrence (Spinoni et al., 2018; Pokhrel, 2021) According to many studies, the maincause of climate change comes from human activities that cause greenhouse gases, inwhich CO2 emissions is considered the main factor causing the greenhouse effect(Ritchie et al., 2020).

Government awareness of environmental issues is increasing, and governmentsare interested in addressing environmental issues and their socio-economic impacts(Wang et al al., 2018) In particular, comprehensive governance and coordinatedpolicies of countries are important keys to pollution control (Congleton, 1992) Atthe 21st Conference of the Parties to the United Nations Framework Convention onClimate Change (COP21), marking the birth of the Paris Agreement, countries agreed

to cooperate internationally in solving environmental problems, as well as thecommitment to Nationally Determined Contributions (NDCs) and the responsibilities

of all participants In November 2022, the theme of the COP27 conference in Egyptwas “hands-on,” continuing to emphasise international cooperation and commitment

is the institutional quality of countries (Tørstad et al., 2020; Ajiya, 2022).

Research on the impact of agents influencing environmental pollution hasattracted much attention (Aye et al., 2017; Ahmed et al., 2017; Hanif et al., 2019;Zaidi et al., 2019; Pata & Caglar, 2021; Usman et al., 2022), however, most research

in this field focuses on economic growth, financial development, and energyconsumption with little attention to institutional quality Some studies have beenconducted on the impact of institutions on school pollution such as Bernauer & Koubi(2009), Ali et al (2019), Yameogo et al (2021), and Nguyen Hoang Chung (2021).However, research assessing the impact of institutional quality on environmentalpollution in the ASEAN region is still very limited Meanwhile, ASEAN isconsidered a dynamic economic development region with a real GDP growth rate of5.6% in 2022 and 4.8% expected to continue growing in 2024 (OECD, 2023), alongwith developments in non-agricultural sectors (ASEAN, 2021) have contributed tospeeding up the urbanization process Economies in the early stages ofindustrialization, with rapid economic development and urbanization, have moreCO2 emissions from fossil fuel use than economies that rely heavily on services (ASEAN, 2021).

Thus, studying the impact of institutional quality on environmental pollution

in the ASEAN region is very necessary, providing more empirical evidence on thisissue It is the basis for policymakers to propose solutions to reduce CO2 emissionswithout creating negative impacts on economic development.

in the ASEAN.

Thirdly, assess the impact of institutional quality on environmental pollution

in some countries in ASEAN

Subject and scope of the research

Research subject: The impact of institutional quality and macro factors onenvironmental pollution in the ASEAN region

Research scope:

+ Time range: from 1996-2020

+ Spatial scope: 10 member states of ASEAN include Brunei, Cambodia,Laos, Indonesia, Malaysia, Myanmar, Philippines, Singapore, Thailand,and Vietnam

Chapter 2: Research methodology

Chapter 3: Research results and discussion

Chapter 4: Some policy implications for ASEAN and Vietnam

1.1.1 Research related to the impact of institutions on environmental quality

The review shows that there have been studies on the impact of institutions onenvironmental pollution, such as Arminen & Menegaki (2019), Fredriksson &Neumayer (2016), Muhammad & Long (2021), Wawrzyniak & Doryn (2020).However, this relationship is still controversial when experimental results have manydisagreements.

Recent studies have shown that institutions play an important role in theenvironment Studying the dynamic influence of renewable energy, institutions oneconomic output and CO2 emissions of 85 economies during the period 1991 to 2012,Bhattacharya et al (2017) showed that institutions (determined through the economicfreedom index) have a negative impact on CO2 emissions, meaning that wheninstitutions are improved, CO2 emissions decrease, contributing to improving theenvironment This result is also found in the study of the role of institutions in therelationship between tourism, financial development, energy consumption andenvironmental performance in European Union countries by Musa et al (2021).Through combining six indicators of institutional quality published by the WorldwideGovernance Indicators (WGI) using the principal component analysis (PCA)approach, Musa et al (2021) emphasized that quality of institutions that stimulateenvironmental improvement Also via PCA approach, Ali et al (2020) created aninstitutional performance (IP) variable from five indicators of the ICRG dataset(socioeconomic conditions, government stability, law and order, corruption, andinvestment profile) Ali et al (2020) found that institutional performance improvesenvironmental quality in OIC countries using the DCCE estimation method However,Arminen & Menegaki (2019) argue that in high-income and upper-middle-incomecountries, institutional improvements have a relatively ineffective impact on reducingemissions and improving the environment

government efficiency, increased GDP will promote reductions in CO2 emissions;and for countries with low government efficiency, an increase in GDP will lead to anincrease in CO2 emissions Through three indicators to evaluate the institutionalquality based on WGI dataset, Yameogo et al (2021) explored the relationshipbetween institutions and environmental quality in the context of globalization in 20countries in sub-Saharan Africa (SSA) using the S-GMM approach The results show

a positive relationship between corruption control, government effectiveness and theenvironment; Meanwhile, regulatory quality has a positive impact on environmentaldegradation To assess environmental institutional quality in 66 developing countries,Azam et al (2021) created the institutional quality variable using PCA techniquefrom six indicators based on the ICRG dataset The results of the SYS-GMMestimation show that institutional quality increases CO2 emissions, implying that thepolitical environment in these countries is less concerned about public issues such aspollution from CO2 emissions Also using this technique, Thanh Cong et al (2021)studied the role of institutions in the relationship between FDI and environmentalpollution in 86 developing countries during the period 2008-2018 The results of the study found that regulatory quality, government effectiveness, voice andresponsibility, political stability and the rule of law have a positive relationship withthe environment when FDI has a negative impact on the environment.

In the ASEAN region, much literature shows that different institutionalelements play a heterogeneous role across countries (Ahmed & Bhattacharya, 2020).Ahmed & Bhattacharya (2020) explored the role of energy and institutions on CO2emissions for ASEAN-8 during the period 1984-2014 Through ARDL and FMOLStechniques, the authors show that institutions can help improve the environmentthrough improving corruption; the results for each country are not consistent.Similarly, Rehman et al (2023) also find evidence that institutional quality has a

Previous literature has used many governance-related indicators to represent institutions, of which the corruption index is a commonly used measure to reflect thelevel of institutions Many studies show that corruption has a negative impact on theenvironment such as Sabir et al (2020), Apergis & Ozturk (2015), Muhammad &Long (2021) According to Biswas et al (2012), corruption has an indirect impact onenvironmental quality With the implication that, as the level of corruption increases,along with the positive impact of the shadow economy on CO2 emissions,environmental quality is reduced Increasing levels of corruption will lead to lesseffective implementation of environmental policies as the economy grows (Arminen

& Menegaki, 2019) However, past levels of corruption have a stronger impact thancurrent levels of corruption regarding the implementation of climate change policies(Fredriksson & Neumayer, 2016) In addition to the corruption index, indicators ofinstitutional quality (such as political stability, government efficiency, regulatoryquality, and rule of law) demonstrate a positive role in improving environmentalpollution (Arminen & Menegaki, 2019; Muhammad & Long, 2021; Apergis &Ozturk, 2015).

Table 1.1 Previous studies on the impact of institutional quality on

environmental pollution

Period/ | Estimation} Measure | Main findings related to

Study countries | method(s) of IQ institutional quality

Arminen & | 1985-2011; | GMM Corruption | Attempting to improve

Menegaki 67 high- (ICRG) institutional quality has

(2019) and upper- been relatively ineffective

middle- in curbing emissions and

& Neumayer | 131 (ICRG) have a more important

(2016) countries impact on climate change

policies than current levels

of corruption.

Appiah et al | 2000-2021; | CS - ARDL | WGI Improvements in (2022) 30 corruption control,

countries in governance efficiency and

Sub- the rule of law have a

Saharan positive impact on

Africa reducing CO2 emissions.

(SSA) Institutional failures

(political instability and government

ineffectiveness) preventthe effective

implementation of

environmental policies asgrowth rates increase

Yameogo et | 2002— S-GMM WGI Regulatory quality

al (2021) 2017, 20 positively impacts

sub- environmental Saharan degradation; Corruption

Africa control, government countries efficiency and

& Long | 65 BRI (political stability, control

(2021) countries of corruption and rule of

law) has a positive impact

on reducing — carbonemissions and improvingenvironmental quality.

Wawrzyniak | 1995-2014; | GMM Governme | Government effectiveness

& Doryá | 93 nt changes the economic

(2020) emerging efficiency | growth-emissions

and and control | relationship For countriesdeveloping of with low government

countries corruption | efficiency, CO2 emissions

(WGI) gradually increase as GDP

increases For countrieswith high governmentefficiency, CO2 emissions

is statistically significantlyreduced in only somespecifications.

Bhattachary | 1991-2012; | FMOLS, EFI Institutions have a positive

a et al | 85 GMM impact on economic(2017) developed growth and reduce CO2

& Nguyen | 86 aspects of WGI (except(2021) developing corruption control) play an

countries important role ¡in the

relationship between FDIand environmentalpollution.

Biswas et al | 1999-2005; | FEM PRS The shadow economy

(2012) More than (Political increases pollution.

100 Risk Corruption increases the

countries Services), |level of impact of the

CPI shadow economy on

environmentaldegradation

Apergis & | 1990-2011; | GMM WGI Institutional quality has an

Ozturk 14 Asian impact on emissions

(2015) countries Political stability and

Sabir et al | 1984 - | ARDL ICRG Political stability reduces

(2020) 2019; environmental

4 South degradation; Corruption

Asian promotes environmental

Ahmed = & | 1984-2014; | ARDL, ICRG Institutions play differentBhattachary | ASEAN-8 | FMOLS roles in CO2 mitigation in

a (2020) each country.

Rehman _ et | 1990-2018; | PMG ICRG Institutional quality cleans

al (2023) the environment In

addition, the joint impact

of technology andinformation

communication with

institutions reduces

environmentaldegradation.

Ali et al | 1991-2016; | PCA, ICRG Institutional performance

(2020) 47 OIC | PMG, has a negative and

countries DCCE significant relationship

with the — ecologicalfootprint, improve theenvironmental quality ofOIC countries

Azam et al | 1991-2017; | PCA, SYS- | ICRG The political institutions(2021) 66 GMM positive and signifcant

developing impact on CO2 emissions,

countries CH4 emi: s, and forest

First, regarding the impact of economic growth on environmental pollution,many current studies depend on the EKC hypothesis (Grossman & Krueger, 1991),with an inverted U-shaped model representing the impact between income andpollution The increase in economic growth, leading to increased people's income andthe ongoing urbanization process, has negatively impacted CO2 emissions, leading

to environmental degradation (Abid et al., 2022) This is happening mainly indeveloping countries, which face more pollution as their economic growth increases(Mehmood et al (2021) as these countries are still developing “brown” industries and using non-renewable energy (Leitão & Lorente, 2019) An interesting finding whenresearching the influence of economic growth on CO2 emissions of 31 developing

countries, Aye & Edoja (2017) showed that at low growth levels, economic growthhas a negative impact on CO2 emissions, and economic growth has a positive impact

on CO2 emissions at high growth rates

Second, trade openness is an important factor affecting CO2 emissions Therelationship between trade openness and environmental pollution is proven througheconomic scale, technology and composition effects and has led to many debatesabout this relationship Leitão & Lorente (2019) have shown a long-run relationshipbetween trade openness and CO2 emissions in the European Union region over theperiod 1995-2014, showing that trade openness and renewable energy reduce climate change and environmental degradation This result is agreed by Wang & Zhang (2021)when studying 182 countries during the period 1990-2015 that trade openness reducesCO2 emissions in high-income and upper-middle-income countries because businesses are encouraged to use advanced environmentally friendly technologies,use less energy in the production process, and focus on manufacturing industrieswhere the country has a comparative advantage Contrary to these statements, tradeopenness also has a negative impact on the environment (Zakaria & Bibi, 2019) Forlow-income countries, trade openness has no significant impact on CO2 emissions,

ns (Wang & Zhang, 2021) This result implies thatand even increases CO2 emi

these countries do not have a comparative advantage in clean industries, they have an advantage in polluting industries (Grossman & Krueger, 1995) Accordingly, theresults of experiments on the relationship between trade openness and theenvironment in the long run are still controversial as research results showheterogeneity among developing countries (Mehmood et al., 2021)

Third, related to foreign direct investment, many studies believe that whencountries have high economic openness and developed financial markets, they willattract FDI capital into the country This promotes economic growth and impacts theenvironment in both positive and negative aspects (Frankel & Romer, 1999) First,countries attract FDI inflows from polluting industries, which negatively impacts theenvironment, increasing CO2 emissions This effect is known as the “pollution haven”

hypothesis In contrast to the pollution halo hypothesis, foreign direct investmentflows improve the environmental quality of the host country through improvingtechnology and applying advanced techniques According to Essandoh et al (2020),when studying the impact of international trade and FDI on CO2 emissions, it has been shown that developing countries that receive more FDI tend to suffer fromenvironmental degradation as CO2 emissions increase Agreeing with this statement,Azam & Raza (2022) also support the pollution haven hypothesis existing in Asiaand Africa when FDI in developing countries has a positive relationship with CO2emissions However, this relationship in developed countries also has significant differences Aydin (2023) studying G8 countries from 1990 to 2018 showed that thepollution haven hypothesis exists in the UK and the US; Meanwhile, in Germany andRussia, FDI has a negative impact on CO2 emissions This difference was explained

by Frankel & Romer (1999) due to political factors affecting each country's choice ofenvironmental policy

Fourth, financial development is found in many studies on the relationship tothe environment Abid et al (2022) studied the relationship between technologicalinnovation, FDI and financial development on CO2 emissions in G8 countries duringthe period 1990-2019 The results of FMOLS estimation show that strengtheningfinancial development and technological innovation can help reduce CO2 emissions and protect the environment In addition, this result is also found in the study ofRafique et al (2020) in BRICS countries during the period 1990-2017, when financialdevelopment, technological innovation can help improve the environment in the longrun This occurs in countries with developed economies: financial development willprovide resources to support businesses in implementing environmentally friendlydevelopment projects and applying advanced technologies in production Contrary tothese research results, there is much evidence that financial development has apositive impact on CO2 emissions Using the ARDL method, Shahbaz et al (2013)show an inverted U-shaped relationship between financial development andenvironmental pollution in Indonesia Zakaria & Bibi (2019) found that a 1% increase

in financial development increases environmental pollution by 0.147% This showsthat South Asian countries have used financial development to accumulate capital,focus on economic development and not on technological improvement.

Fifth, energy consumption is an important factor in economic developmentand has a two-way impact on environmental pollution Sabir et al (2020) have shownthat energy consumption causes environmental degradation both within and over thelong run in four South Asian countries Similar to this view, Aye & Edoja (2017)studied 31 developing countries and found that energy consumption promotes moreCO2 release This implies that the energy sources used in the studied countries are not environmentally friendly, with high emission levels However, Leitão & Lorente(2019) found that renewable energy has a negative impact on CO2 emissions in the

EU region This contributes to promoting energy efficiency and achievingenvironmental-related agreements

Table 1.2 Selected literature on the impact of macroeconomic factors on

environmental pollution

Study Period/ Estimation Main findings

Countries method(s)

Shahbaz et | 1965-2008; ARDL, Economic growth, coal consumption,

al (2013) South Africa | VECM and urbanization increase emissions.

Granger Financial development and trade

openness reduce CO2 emissions.

Shahbaz, 1975QI- ARDL, In the long run, economic growth and

Hye, et al |2011Q4; VECM energy consumption increase CO2

(2013) Indonesia Granger emissions; Financial development and

trade openness shrink it Financialdevelopment and emissions have aninverted U-shaped relationship.

In the short run, financial developmentincreases CO2 emissions.

Abid et al | 1990-2019; FMLOS The rapid increase in urbanization due(2022) G8 to rapid economic growth has brought

about a huge increase in energyconsumption, which in turn is

responsible for contemporary

environmental degradation Foreign

direct investment, financial

development and technologicalinnovation negatively impact CO2emissions.

Zakaria & | 1984-2015; FMOLS The EKC hypothesis exists - an

Bibi (2019) | South Asian inverted U shape Financial

countries development and trade openness have

degraded the environment FDI andinstitutional improvements have theeffect of reducing pollution

Boutabba 1970-2010; FMOLS Financial development has a long-run

(2014) India positive impact on carbon emissions

Mehmood | 1996Q1- ARDL The interaction of economic growth

et al (2021) | 2016Q4; and institutional quality with CO2

Pakistan, emissions is not uniform across

India and developing countries The EKC

Bangladesh hypothesis (inverted U shape) appears

in Pakistan and Bangladesh, but not in

India The moderating role ofinstitutional quality could increaseCO2 emissions in Pakistan.

Wang & | 1990-2015; FMOLS Trade openness reduces carbonZhang 182 countries emissions in high-income and upper-(2021) middle-income countries, and has no

significant impact on the carbonemissions of lower-middle-incomecountries, which increase CO2emissions in low-income countries.Trade openness has a positive impact

on decoupling economic growth fromcarbon emissions in rich countries, but

a negative impact on poor countries.

Leião &| 1995-2014; | FMOLS, Trade openness and renewable energy

Lorente EU-28 DOLS reduce climate change and

(2019) environmental degradation Economic

growth has a positive impact on CO2emissions

Aye & | 1971-2013; | GMM Economic growth has a_ negativeEdoja 31 impact on CO2 emissions in low(2017) developing growth but a positive impact in high

countries growth with a higher marginal effect in

high growth (U-shaped) Energyconsumption and population have apositive impact on CO2 emissions

Essandoh et | 1991-2014 PMG- Developing countries that receive more

al (2020) 52 countries | ARDL FDI tend to experience environmental

degradation in terms of increased CO2emissions, and in developed countriesincreased FDI leads to reduced CO2emissions.

Ben Jebli et | 1995-2010; FMOLS, In the long run, tourism, renewable

al.(2019) |22 Central | DOLS energy and FDI contribute to lower

and South emissions, while trade and economic

American growth lead to higher emissions.

countries

Pata et al | 1995-2018; ARDL, (i) tourism and foreign direct

(2023) 6 ASEAN | VECM investment increase CO2 emissions;

countries Granger (ii) Real income and trade openness

reduce environmental degradation; (iii)the EKC hypothesis exists; (iv)Renewable energy only reduces carbonemissions in the short run and does notaffect environmental quality in thelong run

Rafique et | 1990-2017 Augmented | FDI, technological innovation and

al (2020) | BRICS Mean Group | financial development have a negative

(AMG) relationship with CO2 emissions,

while economic growth, — tradeopenness, urbanization and energy useare positively associated with CO2emissions

FMOLS Inward FDI has a significant positive

impact on environmental pollution,supporting the pollution havenhypothesis (PHH).

GMM FDI has a significant positive impact

on CO2 in Asia and Africa, but theimpact of FDI on CO2 is insignificant

in the Latin American, Caribbean andEuropean regions In the case of developing countries, a significantpositive relationship is found betweenFDI and CO2.

Aydin

(2023)

1990-2018G8

AGM,PMG-ARDL

FDI positively impacts emissions inthe UK and US, negatively impacts CO2 emissions in Germany andRussia Trade openness positivelyaffects emissions in Canada and Italy,and negatively in Germany and the US.GDP growth has a negative impact onCO2 emissions in Russia, othercountries are insignificant

Farooq

(2022)

2001-2019Asian

countries

GLS, 2GLS,OLS, GMM

FDI increases CO2 emissions Incontrast, foreign and government aidreduces CO2 emissions Likewise,better government actions — limitindustries from emitting too muchCO2 However, receiving foreign aid

weakens the state, leading to the loss ofgovernment control over industrieswith large CO2 emissions On thecontrary, FDI strengthens thegovernment situation, thereby reducingCO2 emissions.

Behera &| 1980-2012; | ECM, FDI significantly increases CO2Dash 17 countries | DOLS, emissions in SSEA regions and high-(2017) in the South income countries.

and SoutheastAsia region(SSEA)

Source: Author summarizes 1.1.3 Research gap

Through the literature review, it can be seen that research documents onfactors affecting environmental pollution are inherited and continuously developed However, empirical results show that the role of factors affecting the environment isheterogeneous across regions and groups of countries The review process shows thatthere are still some research gaps as follows:

First, studies assessing the impact relationship on environmental pollution areoften based on variables such as economic growth, trade openness, energyconsumption, foreign direct investment, and urbanization population However, anoverview shows that in addition to the above factors, institutional quality has beenincluded in many studies This depends on the subject, scope as well as research

till debated

objectives of the authors Therefore, the impact of these factors

Second, studies related to the impact of institutions on environmental pollution have quite diverse assessment criteria, based on many different sets of indicators andresearch results in different countries and regions, there are differences due to the

socio-economic situation of each country and region Therefore, the results cannot berepresentative of other regions In addition, empirical studies related to the impact ofinstitutions and the environment in the ASEAN region still have many limitations.

Third, through a review of the research literature, the two data sets WGI andICRG are used by many studies as proxy variables for institutional quality (Appiah

et al., 2022; Yameogo et al., 2021; Sabir et al., 2020; Ahmed & Bhattacharya, 2020)

In particular, the WGI measures six institutional factors: government effectiveness,political stability, absence of violence, regulatory quality, the rule of law, voice andaccountability, and control of corruption The ICRG measures five institutional qualities: inherent quality, risk of expropriation, law and order, corruption andgovernment repudiation of contracts Both of these data sets have indicators to assessinstitutional quality based on economic, social and political institutional aspects (Samadi & Alipourian, 2021) However, this study prefers World GovernanceIndicators (WGI) to the International Country Risk Guide (ICRG), because of broadercoverage with more than 200 countries and broader definitions of institutional quality(Kaufmann et al., 2011) Besides, previous empirical studies use one or moreindicators measuring institutional aspects to represent institutional quality, which areincluded in the model as individual variables Furthermore, almost no studies use theinstitutional quality (created from 6 indicators based on the WGI data set through the PCA technique) to evaluate its impact on environmental pollution in ASEAN.Therefore, this study will fill this gap

1.2 Definition of environmental pollution and institution

1.2.1 Definition of environmental pollution

According to Holdgate (1979), pollution is the introduction of substances orenergy into the environment by humans that are potentially dangerous to humanhealth, damaging living resources and ecosystems, damaging structures or amenities,

or interfering with lawful uses of the environment Also approaching pollution in abroad sense, the National Geographic Society believes that pollution is theintroduction of toxic substances into the environment With the above broad approach,

Smith and Jones (2003) believe that environmental pollution is the presence in theenvironment of an agent that has the potential to cause harm to the environment orhuman health From the above perspectives, environmental pollution can generally

be a change in the biochemical, chemical, and physical properties of environmental components that cause adverse effects on the health of humans, organisms, animalsand the natural environment

Environmental pollution is also defined through types of pollution, classifiedaccording to affected subjects including air pollution, water pollution, soil pollution,light pollution, noise pollution and light pollution Air pollution is the phenomenon

of air being contaminated by waste, dust, exhaust gases, chemicals, etc from sourcessuch as factories, vehicles, trash burning, and volcanic eruptions Water pollution isthe phenomenon of water being contaminated by waste, chemicals, and microorganisms from sources such as agriculture, industry, domestic activities, andoil spills Soil pollution is the phenomenon of soil being contaminated by waste,chemicals, and fertilizers from sources such as mining, farming, and construction.Soil pollution affects soil quality, reduces agricultural productivity, causes erosion,and ecological imbalance Noise pollution is the phenomenon of noise exceedingpermissible levels caused by sources such as traffic, construction, and machinery.Thermal pollution is the phenomenon of increased environmental temperaturebecause of sources such as electric, thermal, and nuclear energy Thermal pollutionaffects human health, causes changes in water temperature, and reduces biomass andbiodiversity Light pollution is the phenomenon of light exceeding the necessary levelcaused by electrical sources

According to Appannagari (2017), based on the subject of impact,environmental pollution can be divided into (1) Natural pollution and (2) Man-madepollution In particular, the impact of humans on the environment through economicactivities is extremely complex and diverse.

1.2.2 Measurement of environmental pollution using CO2 emissions

There are many research papers that have used CO2 emissions as a proxy forenvironmental pollution, especially in the context of climate change (Arminen &Menegaki, 2019; Appiah et al., 2022; Abid et al., 2022; Boutabba, 2014) One of themain arguments for using CO2 emissions as a proxy is that they are considered amajor source of extreme environmental pollution and one of the core causes ofclimate change (Rahman et al, 2020) CO2 emissions accounted for 78.3% ofgreenhouse gas emissions in ASEAN in 2015 (ASEAN, 2021) and are expected toincrease to 80.8% by 2040 (Ritchie et al., 2020) Besides, there is no uniform index

to measure environmental pollution Meanwhile, depending on each industry, theimpact of manufacturing activities on the environment is different Some industriespollute the land environment, some industries can pollute the air and waterenvironment, or cause harm to all types of environments Additionally, data on CO2emissions is available on a country-by-country basis, which makes measurement andcomparison across countries and regions relatively easy, unlike other pollutants thatcan vary in composition and concentration Of course, using CO2 emissions as aproxy for environmental pollution cannot comprehensively assess the impacts ofinstitutions and macro factors on environmental pollution.

1.2.3 Definition of institution

According to North (1990), institutions are seen as “the rules of the game of society or the constraints imposed by humans to regulate interactions Institutionsexist because of the structural incentives of human transactions (economic, social,and political).” According to this definition, institutions are not only organizationsbut also principles created by humans Furthermore, economic, social and politicalorganizations create a society, interacting with each other under the direction ofinstitutions Developing from the above concept, Ménard (2003) redefinesinstitutions as “a set of permanent, stable, abstract and objective rules, crystallized inlaw, tradition or custom and embedded in instruments that establish and carry out, through consent and/or constraint, modes of organizing transactions” According tothis definition, he believes that institutions have the following main characteristics:

institutional stability, abstract and impersonal nature, and finally normative nature.Similarly, according to Ostrom (2005), institutions are the rules that humans use toorganize all forms of structured and repeated interactions Institutions shape the waypeople interact, regulate rights and obligations, and are the driving force andbehaviour that motivates subjects in the "political and economic race" Institutionswill create conditions and support for policies that ensure effectiveness for thesustainable development of society Besides, policies can change and develop but donot violate institutions so that they are consistent with social reality However,according to Greif (2006), institutions are considered endogenous and self-enforcing equilibrium Thus, enforcement is endogenous and institutions are conceived asequilibria in a sequence of repeated games In general, institutions can be considered

as rules that regulate human behaviour.

Institutions can be classified based on the criteria of rule composition,including formal institutions and informal institutions (North, 1990) Formalinstitutions are the legal system, made up of laws, regulations, prescribed by theconstitution and binding orders that stipulate what cannot be done On the other hand,informal institutions are not constituted by their norms, these are formed in social life,attached to customs and traditions and human moral standards and are constrained bythemselves

Institutions can be created by humans, but they can also simply evolve.Institutional constraints often include what people are forbidden to do, and in certaincircumstances stipulate that certain individuals are allowed to perform certainactivities Institutions also provide punishment when regulations and laws areviolated

1.2.4 Definition of institutional quality

Institutional quality is a term that refers to the characteristics and performance

of institutions in a country or region There is no single or universally accepteddefinition or measure of institutional quality, as different institutions may havedifferent aspects, functions and impacts (Kuncic, 2012) However, most definitions

point out that institutional quality measures the power, consistency and robustness ofinstitutions in each country In particular, institutional robustness reflects the realpower, level of influence as well as the sovereignty of the institutions Based on theview of North (1990), the main factors in assessing institutional quality are efficiency and predictability of the given rules However, Greif (2006) argued that assessinginstitutional quality should not only consider the incentives driven by institutions butalso assess the reasons why agents operate according to that framework Thus, thecredibility and legitimacy of institutions are also important factors of institutionalquality Therefore, in an eclectic approach, institutional quality can also be assessedbased on the following four criteria: Static efficiency, dynamic efficiency(adaptability), credibility (legitimacy) and predictability (Alonso et al., 2020) Thesefour criteria meet two basic economic tasks of institutions: reducing transaction costs and facilitating coordination among economic actors In addition to the above twounderstandings, institutional quality can also be assessed based on three criteria:institutional performance, stability and adaptability (UNDP, 2015) In particular,institutional performance is the effectiveness and efficiency of the state in managingand solving its goals Stability reflects the government's ability to mitigate risks andcope with shocks through institutionalizing good practices and standards.Adaptability refers to the ability to adapt to changes in current conditions and meet future needs (UNDP, 2015).

Thus, institutional quality is a broad concept that reflects the state of the rule

of law, individual rights and the provision of government regulations and services in

a country, it is difficult to obtain accurate indicators and reliable data (Barbier &Burgess (2021) This study uses the Worldwide Governance Indicators (WGI) toevaluate institutional quality, because it encompasses many aspects of institutionalquality The six WDI indexes are (1) Control of corruption, measuring perceptionsrelated to the extent to which public power is exercised for private benefit in society,including levels of corruption, and the power of the state is captured by capital andelites; (2) Government effectiveness, measuring the level of perception of public

service quality, the effectiveness of policy formulation and implementation and thegovernment's credibility with promulgated policies; (3) Political stability, measuring

of the likelihood of political instability and/or political motivated violence, includingterrorism.; (4) Regulatory quality, which reflects awareness of the government's ability to formulate, promulgate and implement appropriate policies and laws andpromote private sector economic development; (5) Rule of law, measuring people'sperception of whether state agencies comply with social norms, especially theenforcement of agreements, property rights, executive and judicial; (6) Voice andaccountability, measuring people's awareness of their right to choose their government, and their rights to freedom of speech, freedom of assembly and freedom

of the press and media

1.3 | Theoretical analytical framework

Environmental EKC theory was first introduced by Grossman and Krueger(1991) in a study of the North American Free Trade Agreement (NAFTA) on theenvironment in three countries: Mexico, Canada and the United States They arguethat as per capita income increases, air pollution will increase at the initial stage, butthen will decrease when income reaches a certain threshold This is influenced bythree factors: (1) Scale effect, (2) Composition effect, (3) Technical effect First, thescale effect assumes that the economic structure and technological level do notchange When income increases, consumption and production demand also increase,leading to increased pollution; That is, the increase in scale negatively impactsenvironmental quality Second, the composition effect when there is a change in the

structure of economic activities: when income increases, the economic structure willgradually shift from agriculture to heavy industry, using many natural resourcescausing environmental pollution and then the economy will gradually shift towardsdeveloping light industries and services, positively impacting environmental quality Third, technical effects when there are technical changes in economic activities: whenincome increases, environmental protection concerns increase, leading to the use ofclean, energy-saving technologies, improving policies related to the environmentcontribute to reducing pollution, while also contributing to improving labourproductivity and promoting economic development Besides, during the process of economic growth, investment in research and development of environmentallyfriendly projects and techniques also increases.

Level of environemental degradation

Industrial

econo!

Post-industrial economies

`

Pre-industrial economies

consumption Besides, the U-shaped model cannot explain large fluctuations inenvironmental quality in the context of developed economies, especially in caseswhere per capita income reaches a high level In addition, there are manycontroversial issues related to determining the turning point of the Kuznets curve.Thus, the author expects economic growth to have a positive impact on environmentalpollution in the short and long run in ASEAN.

Hypothesis Hla: Economic growth has a significant positive impact andincreases CO2 emissions in the short run

Hypothesis H1b: Economic growth has a significant positive impact andincreases CO2 emissions in the long run.

1.3.2 STIRPAT model

In addition to the EKC theory of the Kuznets curve on the relationship betweeneconomic growth and the environment, the STIRPAT model has contributed to thestudy of other factors affecting the environment

Dietz & Rosa (1994) proposed the STIRPAT model (Stochastic Impacts byRegression on Population, Affluence and Technology), based on the IPAT model.Ehrlich & Holdren (1971) proposed the IPAT model, arguing that the environment(I) is affected by three factors: (1) P is population, (2) A is affluence (usuallymeasured as total product per capita), (3) T is technology (can be measured by innovation, improvement, policy effectiveness of production and consumptionprocesses) This model assumes that the impact on environment I is proportional tothe product of three factors P, A, T.

To overcome some of the limitations of IPAT, Chertow (2000) proposed theImPACT model, which is based on the IPAT model He argued that environmentalimpact (I) is influenced by four factors: (1) P is population, (2) A is affluence, (3) C

is energy consumption per unit of income import, (4) T is technology This modeladds the factor of energy consumption However, environmental impact is alsoproportional to the above four factors, implying that reducing any factor reducesenvironmental impact

However, the limitation of these two models is that they do not take intoaccount the interaction between factors or other factors that affect the environmentsuch as institutions, socio-economic policies, politics, and culture Besides, bothmodels assume that the factors have a linear relationship with I, which hinders the estimation of nonlinear and non-proportional relationships Therefore, the STIRPATmodel proposed by Dietz & Rosa (1994) overcomes this limitation The STIRPATmodel shows the environmental impact based on three factors: population (P),affluence (A), technology (T), and allows for logarithmic transformation, reflectingthe level of change according to the percentage of the independent variable on the dependent variable; The model also adds a random element to account for variabilityand uncertainty in the data With this model, Dietz & Rosa (1994) allow identifyingthe main causes of environmental impact and evaluation the potential of proposedpolicies.

Based on the EKC theory, STIRPAT model and literature review, the author aims to use factors such as gross domestic product per capita and energy consumptionper capita as factors affecting environmental pollution in this study

1.3.3 Pollution Haven Hypothesis

Besides the above factors, many studies show that FDI plays an important role

in economic development and affects the environment One of the hypotheses related

to FDI affecting environmental pollution is the pollution haven hypothesis byCopeland & Taylor (1994) According to the hypothesis that foreign directinvestment makes environmental pollution in developing countries worse.

This hypothesis explains that in developed countries, the more institutionsdevelop and the concern for the environment also increases, the state sets higherstandards of environmental quality for the production process This not only increasescosts for domestic businesses but also affects multinational corporations: increasingproduction costs when having to control inputs to meet prescribed standards, andincreasing waste disposal costs when investing in advanced technologies andtechniques to treat waste Therefore, businesses tend to invest in heavy industries in

countries with lower environmental standards to maximize profits and retain thecomparative advantage of the manufacturing sector In developing countries,environmental standards are lower than in developed countries, and multinationalenterprises have less investment to improve the environment This foreign direct investment flow into developing countries causes higher environmental pollution Inaddition, in the opposite direction, to increase the ability to attract foreign investment,countries can participate in a "race to the bottom", offering preferential tax and landpolicies, further aggravating the problem of environmental pollution.

Hypothesis H2a: Foreign direct investment has a significant positive impactand increases CO2 emissions in the short run.

1.3.4 Pollution Halo Hypothesis

In contrast to the above view, many studies suggest that direct investment contributes to improving the environment of the host country (Essandoh et al., 2020;This hypothesis states that strict environmental regulations in countries receivingforeign direct investment will promote research and development projects onenvironmentally friendly technologies and encourage businesses Use more advancedtechnology This contributes to improving the productivity and competitiveness ofbusinesses, while also contributing to reducing CO2 emissions According to thistheory, FDI has a positive impact on the environment through the transfer of technology, experience and knowledge on environmental protection and emissiontreatment from developed countries to developing countries

It can be seen that the impact of FDI on the environment is complex and notsimple It also depends on many other factors such as the level of economicdevelopment of the country, economic structure, and institutional quality especiallypolicies and regulations related to the environment of FDI-receiving countries Ifdeveloping countries can establish and enforce effective environmental regulations,they can take advantage of the economic and environmental benefits of FDI, whileavoiding the risks and negative consequences of FDI

Hypothesis H2b: Foreign direct investment has a significant negative impactand reduces CO2 emissions in the long run.

1.3.5 The impact of institutional quality on environmental pollution

In the study of Menard (2003), he presented a perspective of new institutionaleconomics (NIE) on economic and social issues He pointed out that there are threeimportant aspects of new institutional economics: the ability to enforce legalregulations, institutional efficiency, and institutional stability Researching moredeeply about NIE's perspective on environmental issues, Ménard (2011) has madenew findings He finds four institutional components that need to be mentioned whentalking about establishing, allocating and monitoring rights: legal, political,administrative and ideological

In particular, the legal mechanism for the parties involved in the transaction plays an extremely important role Law is a set of formal rules established andenforced by the state, aimed at protecting and regulating property rights andtransactions related to the environment Laws influence the costs and benefits ofenvironmental protection and use, as well as the allocation and use of naturalresources The formation of a judicial body plays an important role in creatingtrustworthy commitments and ensuring that participating parties comply with theagreement This also creates consistency and transparency in the enforcement of environmental rules If these agencies have limitations or weaknesses, it will createdifficulties in enforcing environmental regulations

These restrictions also create opportunities for political interference Manystudies point to opportunistic actions by governments in identifying problems andenforcing regulations, including environmental regulations Politics can influence thecompetition and cooperation of environmental stakeholders as well as theresponsibility for establishing, participating in and implementing internationalenvironmental treaties However, up to now, the impact of political factors related tothe environment remains controversial