The Heterogeneous Effect of Economic Complexity and Export Quality on the Ecological Footprint: A Two-Step Club Convergence and Panel Quantile Regression Approach

Abstract

This research aims to answer two fundamental questions of the present time: First, what is the impact of the increasing complexity of economic structures and the production of complex goods on the environment? Second, can increasing export quality lead to the improvement of the environment? Given that the relationship of the ecological footprint and its determinants has been revealed to be nonlinear, the use of the quantile approach is supported. This finding led us to the central hypothesis of this research: economic complexity and export quality first deteriorate the ecological footprint (i.e., in lower quantiles), and the middle and higher quantiles contribute to reducing or mitigating environmental damage. The effect of economic complexity and export quality on the ecological footprint was researched using a two-step approach. First, club convergence was applied to identify the countries that follow a similar convergence path. After this, panel quantile regression was used to determine the explanatory power of economic complexity and export quality on the ecological footprint of 98 countries from 1990 to 2014. The club convergence revealed four convergent groups. Panel quantile regression was used because the relationship between the ecological footprint and its explanatory variables was shown to be nonlinear for the group of countries identified by the club convergence approach. GDP, nonrenewable energy consumption, and the population damage the environment. Urbanisation contributes to reducing the ecological footprint. Export quality and trade openness reduce the ecological footprint, but not at all quantiles. The effect of trade openness mitigating the ecological footprint is lost at the 90th quantile. Export quality becomes a reducer of the ecological footprint in the 50th quantile or above, and in the higher quantiles, its contribution to reducing the footprint is vast. Economic complexity aggravates the ecological footprint in low quantiles (10th), becomes non-statistically significant in the 25th quantile, and reduces the ecological footprint in higher quantiles. Policymakers must identify the impact of the ecological footprint and consider the demand and supply side of economics.