The Causal Nexus of Urbanization, Industrialization, Economic Growth and Environmental Degradation: Evidence From Pakistan

Abstract

The paper analyzes the causal relation between eeconomic growth, urbanization, industrialization and environmental degradation of Pakistan. The study used time series data for the sample span of 1975-2017, retrived from World Bank Development Indicators (WDI, 2017). Vector Auto Regressive (VAR) model is used for analyzing the causal link amongst the variables, namely economic growth, urbanization, industrialization and environmental degradation. The Granger causality test is used for identifying the order of the causal association. Before estimating VAR, Augmented Dickey Fuller (ADF) as well as  Phillips Perron (PP) tests are used for confirming the stationarity characteristic of all variables, first with  intercept and then, with intercept along with a linear deterministic trend. Akaike Information Criterion (AIC) is used for selection of optimum lag. The Johansen Cointegration test is adopted for identifying long run associations. The result of the VAR model reveals, If any innovation of one standard deviation from outside the model occurred, it will  take about 13 years for CO2, 19 years for urbanization,16 years for industrialization and  about 12 years for economic growth in adjustment. These results further indicate that most of the variation in all variables is explained in their own. The study confirmed two unilateral causalities, that is  runs from CO2 to urbanization as well as economic growth. The findings of the research work propose that policy makers required to develop policy helpful to the environment which will encourage verifiable economic growth in Pakistan. The policy makers need to plan for environmental issue while making policies regarding urbanization, industrialization and economic growth.