Asymmetrical analysis of economic complexity and economic freedom on environment in South Asia: A NARDL approach

Abstract

The environment has become a growing concern for many countries, as pollution and other environmental degradation can harm human health, economic growth, and overall well-being. This paper probes into the asymmetrical implications of economic complexity and freedom on ecological quality in four South Asian countries from 1995 to 2019. Using Nonlinear Autoregressive Distributed Lag methodology approach, our findings indicate that carbon dioxide (CO₂) emissions are intensified by economic freedom both in the long and short term, while negative and positive shocks to economic complexity increase CO₂ emissions in the long term. However, a negative economic complexity shock increases CO₂ emissions, whereas a positive shock has the opposite effect in the short run. Moreover, our results confirm the validity of the environmental Kuznets curve (EKC) hypothesis in the long run. Furthermore, we find that renewable energy usage and the interaction of FDI and renewable energy usage can help reduce environmental damage in both the short and long run. The findings suggest that countries should focus on attracting foreign direct investment that promotes the use of renewable energy. Additionally, policies aimed at encouraging renewable energy use should be implemented. It is important to note that as economic freedom and complexity increase, there is a corresponding increase in CO₂ emissions. Therefore, South Asian policy makers are advised to prioritize the reduction in fossil fuels, the promotion of energy-saving technologies and efficient production, and trade that encourages the transition of renewable energy sources to reduce CO₂ emissions.

Keywords: Carbon Dioxide (CO2) Emissions; Economic Complexity; Economic Freedom; Environmental Kuznets Curve (EKC); Nonlinear Autoregressive Distributed Lag (NARDL) Model; Renewable Energy Use; South Asia.