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

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.

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