An Empirical Analysis of the role of Institutional Quality in the Relationship between Foreign Development Assistance and Environmental Degradation in Developing Countries

Abstract

This study examines the issue of environmental quality in 69 developing countries from the perspective of the Foreign Development Assistance (FDA) and the role of institutional quality over the period of 2000-2018, using the Generalized Method of Moment (GMM) and Least Square Dummy Variable Corrected (LSDVC). The results show that FDA have a positive but insignificant impact on the environment in the GMM approach, while it is significant in the LSDVC estimator. This indicates that the FDA does significantly increase the levels of environmental degradation in developing countries. In other words, it can be concluded that the FDA may significantly determine the levels of environmental degradation in developing countries. Furthermore, the results revealed that the interaction between FDA and institutional quality is negative and significant. This implies that FDA may reduce the levels of environmental degradation in developing countries if the governments effectively channel the funds received from foreign donors into several development agenda especially in the presence of good institutions, since FDA are other means of filling the financial gap that exists in developing countries. Therefore, we recommend that policymakers concentrate on improving the quality of institutions since it significantly determines the environmental impact of FDA.