Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 13 Impact of Private Investment, Economic Growth and Financial Development on Environmental Degradation: Evidence from Pakistan Shabana Parveen a, Bibi Aisha Sadiqa b, Sher Ali c, Farrah Yasmin d a Assistant Professor, Department of Economics, Hazara University Mansehra, Pakistan Email: shabana_economist@yahoo.com b Assistant Professor, Department of Economics, Hazara University Mansehra, Pakistan Email: agrieco24@yahoo.com c Assistant Professor, Department of Economics, Islamia College Peshawar, Pakistan Email: drali@icp.edu.pk d Assistant Professor of Economics, Govt. Emerson College Multan, Pakistan Email: farraheconomist@gmail.com ARTICLE DETAILS ABSTRACT History: Accepted 25 Feb 2021 Available Online March 2021 Private investment plays an important role in the process of economic growth and also impact natural environment of a country. The main purpose of the present study is to empirically analyze the impact of private investment and other macro economic variables on environmental degradation of Pakistan. For the purpose, time series data is collected for the years 1975 to 2017. The study used Linear regression model for analyzing the impact of private investment, energy consumption, financial development and economic growth on environmental degradation. Augmented Dickey Fuller (ADF) test and Phillips Perron (PP) test is used for identifying the unit root of the variables; first with an intercept then, with an intercept and a linear deterministic trend. Akaike Information Criterion (AIC) is used for selection of optimum lag whereas Johansen cointegration test is adopted for analyzing long run association in the variables. The results of linear regression model show that energy consumption and economic growth have a positive and statistically significant impact on CO2 emissions whereas the impact of private investment on CO2 emissions is negative. It means that in Pakistan, private investment is environment friendly. Based on study results, it is recommended that when formulating policies for economic growth and development, motivation should be given to private inverters in order to increase private investment. Β© 2021 The authors. Published by SPCRD Global Publishing. This is an open access article under the Creative Commons Attribution- NonCommercial 4.0 Keywords: Private Investment; Financial Development; Energy Consumption; Economic Growth: CO2 Emissions JEL Classification: R42, R49, D92, O13 DOI: 10.47067/reads.v7i1.313 Corresponding author’s email address: shabana_economist@yahoo.com 1. Introduction Economic health of a country is reflected by its economic growth which is indicated by an Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 14 increase in Gross Domestic Product (GDP). GDP is defined as the total market value of all final goods and services produced by an economy during one financial year. A general agreement in all countries is that, economic growth and investment are closely inter connected as investment/capital formation leads to GDP growth. Economists such as New classical and Marxist suggested capital formation for GDP growth and consider investment as an engine for economic growth of a country. Due to investment, an increase occurs in capital goods that in turn leads to the production of other goods and boost the growth and income (Anwar and Sampath,1999). All growth models consider capital as one of the two central components for determining economic growth. Increase in capital is must for increasing production as GDP is higher in those countries that have high investment to GDP ratio. Likewise, endogenous growth theory suggests that investment is a key component for long run economic growth. Similarly, empirical studies confirmed the role of investment for better economic performance as investment promotes employment opportunities, improve technical progress, brings new techniques of production that helps in economic growth. Investment maintains long run economic growth through capital accumulation as suggested by Tadele (2014). Investment in any country consists of public and private investment. Public investment means investment done by government on services like education and health etc. Private investment is investment done by private investers for the sake of profit. To answer whether public or private investment is better for robust economic growth, empirical studies presented that private sector investment is better as it increases economic growth by bringing more innovation, job creation, high revenue and improve the performance of human resources. Majid and Khan (2008) concluded that economic growth is higher in the countries that have more private investment. Tadele (2014) added that private investment brings robust economic growth due to less corruption and other such factors. Similarly, Muhammad and Shaheen (2016) proved that the effect of private investment is stronger on economic growth as private investment is more transparent and efficient as compare to public investment. So it plays a crucial role for uplifting economic growth. Attention has been given to increase private investment especially in developing economies in order to reduce unemployment and increase economic growth. Private investment accelerates economic growth but economic growth is the cause of environmental problem as increase in production contributes to more pollution. Some of the studies considered it as a greatest challenge for all economies (Cederbary and Snobohn, 2016). Yousaf et al. (2016) showed that in Pakistan, GDP per capita, energy consumption, and Foreign Direct Investment (FDI) are positive determinants of environmental degradation. The study suggests that attention should be given to reduce Carbon Dioxide (CO2) emissions with improvement in GDP and FDI. As CO2 emissions contributes about 60% of global warming (Sinha and Bhatt,2017). As Pakistan is a victim of global warming and environmental degradation so attention is needed to look at the impact of economic growth and private investment on environmental quality. Although in Pakistan, a lot of research work has been done on many other determinants of CO2 emissions such as GDP growth, energy use, urbanization, industrialization, trade openness as well as FDI, but it is dicorvered that private investment is a missing variable. The main purpose of the present study is trying to fill this research gap. This research work is a good contribution to the literature in general and in case of Pakistan in particular for analyzing the impact of private investment on degradation of environment in Pakistan. The rest of the study is organized as follows. Section 2 represents the previous literature. Section 3 comprises the data and methodology. Section 4 is about the results and in section 5, the research Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 15 work is concluded along with some policy implications. 2. Literature Review From the famous study of Grossman and Krueger (1991), the environmental Kuznets Curve (EKC) hypothesis has been empirically analyzed by researchers in different countries, by employing various indicators of environmental quality. Results provided by different researchers are not the same. Some studies Grossman and Krueger (1991) and Selden and Song (1994) support EKC hypothesis whereas some like, Saboori et al. (2012) contradict it. The EKC presents that degradation of environment first rises with the increasing level of income, then stabilize but after a turning point, it starts declining. Rich literature is available that empirically worked on the association of financial development and emissions of CO2 on the basis of EKC hypothesis and presented mixed results. Studies like Sadosky (2011),Shahban and Lean (2012), Islam et al. (2013) and Tang and Tan (2014) presented a positive association of financial development and energy usage and emissions of CO2 whereas other studies like Jalil and Feridun ( 2011), and Shahbaz et al. (2013) confirmed negative association of financial development ,energy usage and emissions of CO2. Likewise, other researchers reported that financial development effects CO2 emissions in many ways like, Zhang (2011) argued that financial intermediaries help in increasing loan availabilities to consumers that contribute to increase demand for houses and home appliances that is automobiles, refrigerators, air conditioners. All the things make life comfortable but also increase CO2 emissions. Sehrawat et al. (2015) provided that investment is the second reason of positive contribution of financial development on CO2 emissions. When more credit facility is provided to people by financial intermediaries, they invest money in new projects and business and directly contributes to CO2 emissions. Third, Tamazian and Rao (2010) presented that financial development has important role in increasing Foreign Direct Investment (FDI) inflows, accelerates economic growth as well as CO2 emissions. Fourth, Tamazian et al. (2009), and Kivyiro and Arminen (2014) showed that industrialization as well as economic growth accelerates due to financial development which contributes to pollution. In most of the empirical studies, researchers modeled the relationship of CO2 emissions and financial development by EKC and found a unidirectional relationship between the two, based on GDP growth and energy use ( Albiman et al., 2015). In addition, Tamazian and Rao (2010) in twenty four transition countries, Sadorsky (2011) for nine Central and Eastern European countries; Al-Mulali et al. (2013) for Middle East and North America (MENA) countries, and Mohapatra and Giri (2015) for India, found a positive cointegration between financial development and CO2 emissions. On the other hand, Jalil and Feridun (2011) in China presented a negative association between the two. The assocaition between GDP growth and emissions of CO2 has been analyzed by researchers like, Yang et al. (2007), Song et al. (2008), Dhakal (2009), Jalil and Muhammad (2009), Fodha and Zaghdoud (2010), Wolde (2015). All the studies accepted the EKC hypothesis meaning that environmental degradation reduces due to economic growth, in long run. On the contrary, Akbostanci et al. (2009) not accepted the presence of EKC hypothesis between emissions of CO2 and income for Turkey. Researchers also found mixed result for the association of energy use and CO2 emissions. Studies such as, Hummami and Saidi (2015), Jamel and Derbeli (2016), Siddique et al. (2016) and, Pata (2017) presented a positive cointegration between energy use and CO2 emissions i.e. negative impact on environment. On the other hand, Zue et al. (2011) and Gokmenoglu and Sadeghieh (2019) suggest negative impact of energy consumption on emissions of CO2 i.e. positive impact of environment. Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 16 Similarly, literature regarding energy consumption, GDP growth and their impact on emissions of CO2 provides mixed results. Studies such as Smyth and Lean (2010), Munir and Khan (2010), Borhan et al. (2012) and Kizilkaya (2017) presented a positive impact of GDP growth and energy use on CO2 emissions. Likewise, Ali et al. (2016) studied the impact of energy usage and GDP growth for Nigeria and presented a significant positive impact of both the variables on emissions of CO2. On the contrary, Thao and Chon (2015) found a negative impact of GDP growth and energy use on CO2 emissions. Azam et al. (2016) conducted a study for the association between energy consumption, trade and emissions of CO2. The study found a significant cointegration among the variables for USA, Japan, China and India. Similarly, Poumanyvong and Kaneko (2010) also confirmed a statistically significant cointegration between energy consumption and emissions of CO2 for USA, China, India and Japan. Moreover, studies are conducted to analyze empirically the effect of many other macro economic variables like FDI, trade openness, industrialization, urbanization with association of energy consumption on emissions of CO2 yet, it is discovered that private investment is a missing variable in the literature. To mention just few studies like, Talukdar and Meisner (2001) for developing countries, Fu et al.(2014) for China and Hassan (2018) for Malaysia, studied the impact of private investment on environmental degradation. Talukdar and Meisner (2001) found that increase in private investment reduces environmental degradation in developing economies however, the impact of financial development and GDP growth was found insignificant in case of Malaysia. The summary of the literature regarding the association between CO2 emissions with the macroeconomic variables (financial development, economc growth, energy consumption, private investment is presented below in Table 1. Table-1: Summary of Earlier Studies Authors Sample and time period Variables Methodology Results Talukdar and Meisner (2001) 44 developing countries(1987- 1995) Private investment, energy consumption, CO2 emissioons Random-effects model Increase in private investment in developing economies reduces CO2 emissions. Tamazian et al. (2010) 24 transition economies (1993-2004) Financial development, economic development, CO2 emissions Beneralized method of movement(GMM approach) Financial development and economic development increases CO2 emissions/ negative impact on environmental quality. Poumanyvon g and Kaneko China, USA, India, Japan(1971-2013) Energy consumption, trade, CO2 Panel-fully modified ordinary least All the variables are significantly associated. Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 17 (2010) emissions squares (FMOLS) method Fodha and Zaghdoud (2010) Tunisia(1961- 2004) GDP per capita, Sulfur dioxide (SO2), Carbon dioxide CO2 emissions. Cointegration test Long run cointegration was presented between per capita GDP with emissions of both both CO2 and SO2. Inverted U shaped relationship had identified between per capita GDP and emissions of SO2 . Hye et al (2013) Indonesia(1975Q1 - 2011Q4) Financial development, energy use, GDP growth, Autoregressive distributed lag model(ARDL) bound test Financial Development contribution is inverse on CO2 emissions. Sehrawat(20 15) India (1971-2011) Emissions of CO2 , Financial development, GDP, and energy consumption. ARDL and error correction model (ECM) Positive contribution of the variables towards the emissions of CO2 in India. Siddique et al (2016) South Asia (1983- 2013) Energy consumption, GDP,CO2 emissions Panel cointegration Positive contribution of the variables towards the emissions of CO2. Ali et al.(2016) Nigeria (1971- 2011) GDP,CO2 emissions, trade openness. ARDL Positive contribution of the variables towards the emissions of CO2 both in short and long period. Pata UK (2017) Turkey (1974- 2013) Per capita GDP, energy use, emissions of ARDL Positive contribution of the variables towards the emissions of CO2 both in Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 18 CO2, and financial development short and long term. Hassan (2018) Malaysia(1976- 2013) CO2, emissions, Private Investment, economic growth, financial development, energy use. ARDL, ECM Private investment, energy consumption shows positive contribution on emissions of CO2. Financial development, GDP growth shows negative impact on CO2 emissions. 3. Data and Empirical Method 3.1 Data Source and Variables Explanation The present study used time series data for the span of 1975 to 2017. The variables included in the study are CO2 emissions (metric tons per capita) which is used to represent environmental degradation, real private investment (used as a % of real GDP), economic growth (real GDP growth rate), real financial development (Real commercial bank credit provided to private sector, % of real GDP), energy consumption (kg of oil equivalent per capita. For all these variables, d ata is derived from World Bank Development Indicators (WDI). 3.2 Model Specifications Researchers used different methods for analyzing the association between carbon dioxide (CO2) emissions with other variables including energy consumption and GDP growth. The analytical techniques used by Azam et al. (2019) in his recent study are adopted for this study. First the Augmented Dickey and Fuller (1979) and Phillips and Perron (1988) tests have been adopted for cheking the stationarity of the data. Once it is confirmed that the variables are stationary at the same level, then Johansen’s (1991, 1995) cointegration test is undertaken to analyze long-term cointegration among the variables. Linear Regression model is adopted for the evaluation of the coefficients. The approach used by Jayanthakumaran et al. (2012) and Halicioglu (2009) is adopted for this research work to identify the association between CO 2 emissions, private investment and other macroeconomic variables. The model used is as follows. 𝐢𝑂2 = π‘Š0 + π‘Š1𝑃𝑅𝐼 + π‘Š2𝐸𝐺 + π‘Š3𝐹𝐷 + π‘Š4𝐾𝑇 + 1 (1) Where CO2 is used for Carbon Dioxide Emissions (Metric tons per capita), PRI represents private investment, EG stands for economic growth (Real GDP annual growth in percentage), FD stands for financial development, KT represents energy consumption (Energy use, Kg of oil equivalent per capita) https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR11 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR20 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR46 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR30 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR31 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR25 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR32 Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 19 and 1represents error term. The expection for the direction of the slope coefficients is w1 Λƒ0;w2>0;w3>0;w4>0 4. Empirical Results 4.1 Result of ADF and PP Unit root tests For identifying stationarity in the data, Augmented Dickey-Fuller (ADF) (1979) as well as Phillips and Perron (1988) tests are used. Augmented Dickey-Fuller test in mathetical form can be presented as βˆ†π‘§π‘‘ = πœŽπ‘§π‘‘βˆ’1 + �́� 𝛿 + πœ–π‘‘ (2) where πœŽβ€‰= ρ-1 -1 ≀ ρ ≀ 1 and the model is hypothesized as: 𝐻0: 𝜎 = 0 π‘œπ‘Ÿ 𝜌 = 1 𝐻1: 𝜎 < 0 π‘œπ‘Ÿ βˆ’ 1 ≀ 𝜌 ≀ 0 The t-ratio of the 𝜎 -coefficient of ADF test, when test statistic distribution is affected by serial correlation, is adjusted by Phillips-Perron (PP) test as follows: 𝑑�́� = π‘‘πœŽ ( 𝛾0 𝑓0 ) 1/2 βˆ’ 𝑇(𝑓0βˆ’π›Ύ0)(𝑠𝑒(οΏ½Μ‚οΏ½)) 2𝑓0 1 2𝑠 (3) Where f0 is the zero occurrence of residual and Ξ³0 is the evaluation of error variance. The results of ADF and PP tests are presented in Table 2. It shows all the variables; economic growth, private investment, financial development, energy use and carbon dioxide emissions are non stationary at level at both trend, and with a trend and intercept. The variables are converted into stationary by taking first difference in ADF as well as PP test. Table 2 Unit root test results Variables ADF Test Result PP-Test Result Intercept Intercept and Trend Intercept Intercept and Trend Real GDP -2.265 -0.046 -1.593 1.223 -4.011* -4.351* -4.011* -3.852* Real Private Investment (PRI) -0.470 -1.341 -0.501 -1.341 -6.258* -6.449* -6.258* -6.459* Financial Development (FD) -0.069 -0.382 0.980 0.674 -4.926* -5.311* -4.926* -4.907* Energy Consumption (KT) -2.056 0.152 -1.952 0.151 -5.404* -6.332* -5.471* -6.349* Environmental Degradation (CO2 emissions) -2.235 -2.149 -4.043 -1.741 -7.727* -8.260* -7.627* -17.126* *Significant at 5% significance level https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR20 https://link.springer.com/article/10.1007%2Fs11356-019-04497-4#CR46 Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 20 4.2 Cointegration Test Results Johansen (1988) suggested likelihood ratio tests to identify the presence of a long-term association among the variables. The tests can be presented in two different equations given below: π½π‘šπ‘Žπ‘₯ = βˆ’π‘‡π‘™π‘›(1 βˆ’ πœ†π‘Ÿ+1Μ‚) (4) π½π‘‘π‘Ÿπ‘Žπ‘π‘’ = βˆ’π‘‡ βˆ‘ ln (1 βˆ’ πœ†οΏ½Μ‚οΏ½ 𝑛 𝑖=π‘Ÿ+1 ) (5) Where Ξ»Λ†i is the ith largest known association. The T presents the size of the sample in the above two equations. Table 3 represents the results of cointegration test. It indicates, for all five variables, the null hypothesis of no cointegration is not accepted meaning that longrun cointegration is confirmed in all variables. Table 3 Cointegration test results N. Hypothesis A. Hypothesis Trace Test Statistics Statistics Critical Value r = 0 r = 1 106.35* 69.82 r ≀ 1 r = 2 71.51* 47.86 r ≀ 2 r = 3 40.65* 29.80 r ≀ 3 r = 4 23.10* 15.49 r ≀ 4 r = 5 6.48* 3.84 Levels of significance: *p < 0.05; 4.3 Regression Results Table 4 represents the estimates of linear regression model. The results reveal that energy consumption and GDP growth have positive significant impact on emissions of CO2. The effect of financial development is also positive but insignificant. Interestingly, the impact of private investment on emissions of CO2 is negative meaning that, with more private investment, environmental degradation got reduces in case of Pakistan. The results further show that 1% rise in energy consumption and GDP degrades environment by 1.88% and 0.033% respectively. These empirical results are like the results of Munir and Khan (2010), Hitam et al. (2012), Siddique et al (2016), Pata (2017), Pan et al. (2019). Similarly, 1% improvement in financial development leads to contaminate environment by 0.012%. The result is supported by Sadosky (2001), Shahban and Lean (2012), Islam et al. (2013) and Tang and Tan (2014). The researchers argued that due to financial development, demand of consumers’ goods i.e. home appliances like air conditioner, refregirator etc and producers’ goods; investment, increase in vehicle, machinery etc. increases thus contributing to CO2 emissions. In addition, 1% increase in private investment brings 0.005% decrease in CO2 emissions. Likewise, Talukdar and Meisner (2001) also confirmed negative cointegration between private investment and emissions of CO2 in developing countries whereas, Hassan (2018) found positive association of private investment with CO2 emissions in Malaysia. Review of Economics and Development Studies, Vol. 7 (1) 2021, 13-24 21 Table 4 Regression Results DV is CO2 Variables Coefficients C -11.906 (0.000) PRI -0.005 (0.356) EG 0.033* (0.011) FD 0.012 (0.625) KT 1.879* (0.000) R2 0.965 DV Dependent variable *significant at 5% significant level 5. Concluding Remarks Private investment has an important role in the growth process of an economy but its impact on environmental degradation is ignored by researchers. The main purpose of this study was to analyse the relationship of private investment with environmental degradation in Pakistan. The estimates of linear regression model confirmed a negative impact of private investment on CO2 emissions in Pakistan. It means that private investment is in favour of environment in case of Pakistan however, the impact of energy consumption, Financial development and GDP growth on emissions of CO2 is positive meaning that all the variables are degrading environment in Pakistan. On the basis of the results, it is recommended that in Pakistan, policies regarding GDP growth and financial development should be revised and more attention should be given to private investment to reduce emissions of CO2 in the country. References Akbostanci, E., Turut-AsIk, S., & Ipek, T. G. (2009). 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