Economic growth – environment nexus: An analysis based on natural capital component of inclusive wealth

Abstract

We analyze the relationship between economic growth and environmental quality from the sustainability framework. For this purpose, we conduct a pooled mean group estimator analysis for 140 countries during the 1990–2014 period. As a proxy for environmental quality, we use the natural capital component of inclusive wealth, which takes into account both market and nonmarket assets that contribute to well-being, covering agricultural, fishery, forestry, fossil fuels, and minerals. Cointegration analysis reveals that over the long term, the impacts of economic growth and population density on natural capital levels are significant. While population growth places continuous pressure on natural capital extraction levels, the impact of economic growth on environmental quality is nonlinear. We find a beneficial impact of the composition and a technical effect of the economy, which decouples environmental degradation from economic growth. However, it only occurs temporarily, since the strong link between environmental degradation and economic growth reappears once the secondary turning point is achieved. We show important implications for natural resource management policy.

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