Is Pakistan Really a Pollution Haven Country?

Abstract

In this study, the Pollution Haven Hypothesis (PHH) validity has been tested for Pakistan and its impact on exports of Pakistan has been investigated as well. The PHH predicts that environmental regulations’ variability among countries affects polluting industries location and trade flows. Autoregressive Distributed Lag (ARDL) or bound test of cointegration is used to investigate the short and long-run relationships. We found positive and statistically significant short-run and long-run relationships between CO2 (proxy for lax environmental policy) and FDI inflows. Finally, Trade Balance Index (TBI) of metal and mining, primary iron & steel, chemicals and rubber products does not support the PHH. While the pulp & paper and the textile industry validated the existence of pollution haven effect. We can conclude that PHH does exist for Pakistan and therefore such policies are needed that encourage FDI inflows that do not adversely affect the environment.