Trade Liberalization, Economic Growth and Environmental Quality Nexus: An Empirical Evidence from Pakistan

Noreen Safdar, Hina Ghaffar, Fatima Farooq, Malka Liaquat Assistant Professor, Department of Economics, The Women University Multan, Pakistan, noreen.safdar@wum.edu.pk M.Phil Scholar, Department of Economics, The Women University Multan, Pakistan, Assistant Professor, School of Economics, Bahauddin Zakariya University Multan, Pakistan, fatimafarooq@bzu.edu.pk Assistant Professor, Institute of Management Science, The Women University Multan, Pakistan ARTICLE DETAILS ABSTRACT History Revised format: November 2020 Available Online: December 2020 The linkage between trade liberalization, environmental quality and economic growth is becoming an increasingly popular issue in environmental economics in recent decades. In view of Pakistan’s position as one of the main contributors to carbon dioxide emissions in Asia, it is vital to identify the main determinants of carbon dioxide emissions. The present study empirically investigates the long run association among trade liberalization, environmental quality and economic growth along with other variables energy use and capital labor ratio in Pakistan for the period 1980-2018. The results also indicate that there is inverted U shape relationship between economic growth and carbon dioxide emissions, hence the environmental Kuznets curve hypothesis is valid in Pakistan during 1980-2018. Trade openness has a negative significant impact on carbon dioxide emissions. Capital labor ratio effects and energy use have a direct relationship with carbon dioxide emissions. The results show that environmental quality is first declined by economic growth but with further increase in growth, environmental quality is improved which supports the existence of Environmental Kuznet curve hypothesis in Pakistan during that time span. Furthermore, results also show that trade openness has positive significant impact on environmental quality.

The linkage between trade liberalization, environmental quality and economic growth is becoming an increasingly popular issue in environmental economics in recent decades. In view of Pakistan's position as one of the main contributors to carbon dioxide emissions in Asia, it is vital to identify the main determinants of carbon dioxide emissions. The present study empirically investigates the long run association among trade liberalization, environmental quality and economic growth along with other variables energy use and capital labor ratio in Pakistan for the period 1980-2018. The results also indicate that there is inverted U shape relationship between economic growth and carbon dioxide emissions, hence the environmental Kuznets curve hypothesis is valid in Pakistan during 1980-2018. Trade openness has a negative significant impact on carbon dioxide emissions. Capital labor ratio effects and energy use have a direct relationship with carbon dioxide emissions. The results show that environmental quality is first declined by economic growth but with further increase in growth, environmental quality is improved which supports the existence of Environmental Kuznet curve hypothesis in Pakistan during that time span. Furthermore, results also show that trade openness has positive significant impact on environmental quality.

Introduction
Trade liberalization and clean environment are the most dynamic factors that donate very essential role for attaining economic development. Economic development is directly and indirectly affected by these factors. Some critics claim that subsequently increased trade liberalization encouraged higher growth and this must be cause to more industrial pollution and environmental degradation in developing countries. Furthermore, trade liberalization can deliver developing states with the encouragement to accept, the contact to new machineries which may give a cleaner or greener means of producing the good concerned. Trade is deliberated to be a catalytic agent for growth of economy. Trade has turn out to be an increasingly important economic movement, apparent from statistic that per year volume of trade expending sixteen times over period of last half century and grade of world's exports to gross domestic product achieving twenty percent. It is seen that trade improves standard of living of countries through descending their living costs thus eventually leads to growth. These are known economic returns or monetary profits related with the trade openness. While we consider the economic payoffs, the social returns are often neglected and here social payoffs mean environmental costs.
Trade openness may have positive or negative impact on environmental quality depending upon economic growth generally economic growth has negative environmental impact at initial stage of development due to increasing use of energy. Environmental quality is being worsen by increasing economic activities and energy use initially but at later stage of growth and development, it is being improved due to increasing demand of cleaner environment to accomplish higher living standard. Demand for clean energy and technology also upsurges at later stage of growth and development. It can be summarized as growth and environment degrades environment initially but helps to improve environmental quality later. This quadratic effect is also identified as environmental Kuznet curve hypothesis. This study also tests and supports the presence of EKC hypothesis in Pakistan for years 1990-2018 and highlights the positive environmental impact of trade.
This study inspects the impact of growth, trade liberalization and energy use on environmental quality in Pakistan for years 1990-2018. Hakimi and Hamdi (2015) investigated financial effect of liberalization of trade on quality of environment in case of Morocco and Tunisia economies. This study covered the period from 1971-2013 with time series data. The conclusion revealed that liberalization of trade had an adverse influence on environmental quality. Therefore, study recommended to policymakers of these countries to focus on the dramatic significances of trade openness on wellbeing of their peoples and encourage liberalization of green trade. Hellen (2015) inspected the causality between trade liberalization, environmental quality and growth of economy in Kenya. The time series data was taken from 1970-2012 for a period of 42 years. The ecological footprint was used as a dependent variable while trade openness, real Gross domestic product, energy structure, energy use, and urbanization were used as an independent variable in this study. The study found that there was a negative association among environment and growth of economy. In a short time of period, there was a negative relation between trade openness and environmental quality, and trade had an optimistic consequence on the environment in long period of time.

Literature Review
Honma (2015) analyzed the influence of trade openness on environmental quality. The following study covered time span from 1970 to 2008 for 98 countries. The finding exposed that freer trade was positively related to environmental quality. Though, the influence of freer trade on quality of environment differed over countries. The conclusion showed greater income per capita was leading to additional advantage of trade on quality of environment. Jabeen (2015) analyzed the casual linkage between trade openness, income growth, emissions and energy use for the case study of Pakistan by taking annual data over the period of 1980 -2013. The Cointegrated Vector Autoregressive technique and Johansen's Cointegration method were employed. The conclusion exposed that trade had a positive impact on environmental quality for Pakistan economy. On other side, energy use, income growth and energy had the negative influence on environmental quality thus provide indication for the Environmental Kuznets Curve in Pakistan. Jadon et al. (2015) estimated the linkage between liberalization of trade, human capital and growth for selected Asian economies. The panel data had been used from the period of 1981 to 2012. The fixed effect model was used to analyze influence of trade liberalization on growth of economy and human capital. The dependent variable was economic growth while independent variables total labor force, capital stock, trade openness was used in this study. The study concluded that there was positive linkage between these variables for selected period and for selected Asian economies. The influence of trade on human capital had positive for all Asian countries but because of skilled human capital it significant only for the developed nations. The developing countries had not been achieved this level due to less skilled human capital. The study recommended that developing countries should be focused on investment in human capital to gain more useful effects of trade openness.
Bernard and Mandal (2016) analyzed influence of liberalization of trade on efficiency of environment for 60 emerging countries. This study analyzed trade openness and environment nexus for the period 2002 to 2012. Random and fixed effects model were used for estimation. The conclusion showed that trade openness had no important influence on environmental performance index and had a noteworthy positive effect on carbon dioxide radiations. Mujahid et al. (2016) analyzed effect of trade openness on growth of economy in case of Pakistan economy. This study was based on time span 1971 to 2013 and time series data. The conclusion found the long run linkage between these particular variables, furthermore, finding of Error Correction technique exposed adjustment of short-run equilibrium. The Independent variables such as imports and exports were positively related to the gross domestic product.
Abdillahi et al. (2017) studied influence of trade liberalization on growth of economy in Kenya. This study used yearly data taken from 1970-2014. The conclusion showed that investment and labor force had a noteworthy effect on growth of economy. It furthermore exposed that human capital had no important impact on growth of economy and there was a encouraging and notable linkage among liberalization and economic growth.
Fakher et al. (2017) studied nexus among environmental quality and growth of economy for selected developing states. The panel data was drawn from period of 1980-2012.The results indicated that economic growth was positively and considerably affected by trade liberalization. Furthermore, there was a optimistic and important influence of environmental quality on growth of economy and foreign direct investment had a progressive and noteworthy link with growth of economy. Keho (2017) observed effect of trade on growth of economy for Cote d'Ivoire economy. This study covered the time span from 1965 to 2014. This study concluded that both in short and long run, trade had significant effects on economic growth. Moreover, there was a positive and strong linkage among freer trade and capital formation for accelerating economic growth.
Ofori and Asumadu (2017) studied the influence of FDI and trade on growth of economy of Ghana, based on annually time series data during time span 1986-2013. The result showed that gross domestic product and trade had significant optimistic effects in Ghana, while on the other hand, foreign direct investment inflows had a negative relation with gross domestic product growth. Zahonogo (2017) inspected the effect of trade openness on growth of economy in the emerging economies, through more concentration on sub-Saharan Africa over the duration of 1980 to 2012. This study used the gross domestic product as a dependent and trade openness, inflation and external debt considered as independent variables. To estimate the long run equilibrium associations, Pooled Mean Group estimation method was employed. The conclusion found the association among liberalization and growth was significant and non-linear in long run for Sub Saharan Africa. Balin et al. (2018) examined the association among trade liberalization and environmental degradation of Turkey by utilizing the time series data for 1974-2013. Variables used in this study were energy use, carbon dioxide emission, investment inflows, gross domestic product and trade openness. The consequences found that there was a long run and significant association among per capita gross domestic product, carbon dioxide emissions, foreign direct investment and per capita energy consumption.  2019) found out the influence of major factors on ecological footprint in Europe. The study used ecological footprint as dependent variable and GDP, fertility rate, non-renewable energy use, renewable energy use and trade openness were used as independent variables. Data of 16 EU countries was collected from 1997-2014. The study used PMG-ARDL methodology. The results revealed that use of non-renewable energy harmed for environmental quality although use of renewable energy improved it. Mahmood et al. (2019) studied the influences of trade openness on CO2 emissions. The study composed data of Carbon dioxide emissions and trade openness of Tunisia for years 1971 to 2014. The study applied integration analysis. The results confirmed EKC for Tunisia, moreover, the results also suggested that increased foreign trade harmfully affected the environment thus confirming PHH in Tunisia.
Arif and Ullah (2019) analyzed the relation between globalization and CO2emissions for Pakistan. Over the years from 1975 to 2014. The study used CO2 emissions as dependent variable while economic globalization index, social globalization index, political globalization index, GDP and GDP square were used as independent variables. The study applied johansen cointegration and ARDL techniques. The results showed that globalization increased CO2 emissions, thus confirming EKC in case of Pakistan. trade, tourism, FDI, renewable energy, and emissions. Moreover, the results showed that trade and economic growth increased CO2 emissions while renewable energy, FDI and tourism condensed emissions.

Safdar et al. (2019) investigated the impact of environmental degradation on growth in 50 developing
countries over the period of 1990 to 2016. By using PMG method, the study came to conclusion that energy use had positive link with growth while environmental degradation had negative link with growth. Farooq et al. (2020) explored the impact of globalization and FDI on CO2 emission in OIC countries. By using GMM method, the study concluded that globalization and FDI are causing environmental degradation in low income OIC countries while reducing environmental degradation in high income OIC countries. In low OIC countries results supported the pollution heaven hypothesis while in high income OIC countries, there was evidence of pollution halo hypothesis. Furthermore, results concluded that institutional changes and urbanization also causing environmental degradation. Murshed (2020) analyzed the effects of IC Trade on undergoing renewable energy transition, energy efficiency and clean cooking fuel access on environment in case of south Asian countries. The study employed CUP-BC and CUP-FM techniques. Data was collected from 2000-2016. The results depicted that ICT trade reduced energy intensity and increased renewable energy consumption. ICT trade was also found to be reducing CO2 emissions.

Data and Methodology
This part gives the variables that are selected on theoretical and empirical basis to find the connection between growth, trade openness and environmental quality in Pakistan. CO2 is used as the dependent variable and as a proxy of environmental quality while GDP, GDP 2 , energy use, trade openness and capital labor ratio are other independent variables.

Time Period
Time series data of Pakistan for time span 1975-2018 is being utilized to identify the association among dependent and the explanatory variables.

Data Sources
The study is grounded on the secondary type of data and the data is composed from WDI (World Development Indicator 2018) and Economic Survey of Pakistan.

Specification of Model
The study identifies the effect of GDP, energy use, trade openness and capital labor ratio on environmental quality. LNCO2 = β0 + β1LNGDP+ β2LNEU + β3LNTO+ β4LNK/L To test the validity of the Environmental Kuznets Curve hypothesis, the squared GDP variable is also included in above mentioned equation Therefore, the model is made as follows: LNCO2 = β0 + β1LNGDP + β2LNGDP 2 + β3LNEU + β4LNTO + β5LNK/L+ t Whereas CO2 is Carbon dioxide emissions, GDP is Gross Domestic product, GDP 2 is Square of gross domestic product, EU is Energy use, TO is Trade Openness and K/L is Capital labor ratio Here β's are the elasticities. Keeping in view of above model we evaluated the model to satisfy the hypothesis of study that is; the GDP is positively linked to environmental degradation while GDP 2 is negatively related to environmental degradation and trade openness is negatively linked to environmental degradation.

Results & Discussion
This portion of study gives results of unit root, short-run and long-run estimates of ARDL and diagnostics analysis of study.

Unit Root Test
To check that data is stationary or not we use AFD and PP tests. The results attained by these tests are as follows.   This table shows the bound method results. In this table, the F-statistics value is larger than upper bound at 5 and 10 percent level of significance so it is concluded that longrun relationship among chosen variables exists in our model. Table 3 gives longrun, shortrun results of model.  Furthermore, the coefficient value of energy use is statistically substantial and positively associated with CO2 emissions. The 1 percent rise in EU increase the CO2 emissions by 1.51 percent. The positive relationship of CO2 with EU shows that Air pollution tends to rise as energy use increases. This explains that energy use has unfavorable effect on environmental quality. Our conclusion is in accordance with Ahmad (2015); Jabeen (2015) and Balin (2018).

Estimates of ARDL Model
The long run coefficient value of Trade openness is negative and statiscally significant which explains that 1 percent rise in trade declines CO2 emissions by 0.08 percent. The negative relationship among TO and CO2 shows that openness leads to improvement in environmental quality and there is a favorable consequence of trade openness on CO2 . This finding is supported by study of Shabaz et al. (2012) who investigated that trade openness lessens carbon dioxide emissions due to technical change in Pakistan. This finding is also supported by the work of Ahmad (2015) and Jabeen (2015).
The coefficient value of K/L is positive but statistically insignificant. one percent rise in K/L rises the CO2 by 0.06 percent. This result is consistent with Cole (2006) who claimed that composition effect or K/L ratio is positively associated with energy use and carbon dioxide emissions.
The short run analysis of this Model indicates most of variables are insignificant while signs are mixed.In this model, the sign of co integration coefficient is negative and the value of co integration is -0.677542 which is statistically significant. According to this value of coefficient, 67 percent of the discrepancy or inconsistency will be closed within the next year among the long-run and short-run.

Diagnostic Analysis for Model
This section indicates the fitness of model. In our study, different diagnostic tests are used to evaluate heteroskedasticity and auto-correlation analysis. The results of Diagnostic Analysis illustrate that there is no serial correlation and heteroscedasticity problem in our model.

Conclusion & Policy Suggestion
The study identifies the impact of growth and trade openness on environmental quality in Pakistan for years 1980-2018. CO2 emission is used a proxy for inspecting environmental quality. The results show that environmental quality is first declined by economic growth but with further increase in growth, environmental quality is improved which supports the existence of Environmental Kuznet curve hypothesis in Pakistan during that time span.furthermore, results also show that the trade has positive substantial impact on environmental quality. There are some policy implications that should be useful for policy makers to suggest policies in order to lessen the environmental degradation and improve environmental quality in Pakistan. These policy recommendations are as follows, 1. As the study comes to conclusion that environmental quality is being affected at first stage of growth and is being improved with further growth and development so government of Pakistan should take serious step to improve environmental quality from initial stage. 2. The study illustrations that trade openness has vital negative impact on environmental degradation in other words environmental quality is being improved with trade openness. Government of Pakistan should formulate such policies that gains from trade could be maximized and environmental cost could be minimized.