The Causal Relationship between Government Spending and Environmental Quality: The Case for Bangladesh

A M Muhib Morshed, Aroni K. Porna and Sakib B. Amin

Government spending plays an important role in the development of a country. However, amidst such development, the environment is often overlooked, resulting in the deterioration of air quality and depletion of resources. Our study aims to investigate the possible relationship between government spending and environmental quality in Bangladesh over a period of 1976 – 2014, using a multivariate model. We use economic growth, capital stock and trade as control variables and two environmental indicators to represent the environmental quality. We employ the Augmented Dickey Fuller (ADF) unit root test followed by the Johansen cointegration technique and Granger Causality test to identify if a long run relationship exists between the variables. Next, we run the Dynamic OLS approach to find out if the increase in government expenditure impacts the environment in a positive or negative manner. We also run the Vector Error Correction Model (VECM) to find out if any short run causality exists among the variables. The study reveals that government expenditure degrades the air quality as well as depletes the resources in the long run. In the short run, the environmental problems affect the public health leading to a rise in the government expenditures. The government must undertake initiatives to prevent pollution and the depletion of resources, but at the same time promote growth through the increase in government expenditures.

DOI : https://doi.org/10.21102/jbpr.2018.07.131.08