Impact of institutional quality, trade openness, and foreign direct investment on environmental outcomes in the Union of Comoros

Abstract

Exploring the economic-environmental nexus is important for devising effective economic policies, particularly for small, resource-constrained emerging nations with evolving institutional quality (IQ). This study examines the impact of economic growth (EG), foreign direct investment (FDI), trade openness (TO), and IQ on CO2 emissions in Comoros from 1990 to 2022. The study employs the autoregressive distributed lag (ARDL) approach to ascertain the short-term and long-term effects. Further, dynamic ordinary least squares (DOLS) and fully modified ordinary least squares (FMOLS) regression approaches are used for robust interpretations. The study finds a long-run cointegration among the variables. The estimation further reveals that TO deteriorates, while FDI enhances, and the impact of EG on environmental quality is statistically insignificant. Contrary to our expectations, IQ worsens the environmental quality in the long run, reflecting weak environmental regulations. Based on these empirical results, the study concludes that the economic-environmental nexus results in environmental degradation in Comoros, advising regulators to reduce harmful trade and exercise rigorous control in implementing environmental regulations to achieve environmental sustainability.