MODERATING ROLE OF INSTITUTIONAL QUALITY IN THE ECONOMIC GROWTH–CARBON EMISSIONS NEXUS: PANEL EVIDENCE FROM SOUTH ASIAN BRI PARTICIPANT COUNTRIES

Abstract

Carbon emissions constitute a primary environmental problem for developing economies striving to maintain economic growth while fulfilling climate-related policy obligations. This study investigates the long-term relationship between economic growth and carbon emissions in specific South Asian nations included in the Belt and Road Initiative, focusing on the moderating influence of institutional quality. Utilising the Environmental Kuznets Curve framework, the study examines whether the relationship between per capita income and carbon emissions exhibits an inverted U-shaped trajectory and whether enhanced institutional quality mitigates the environmental costs of economic growth. Annual panel data for Pakistan, India, Bangladesh, and Sri Lanka from 1984 to 2019 are evaluated via a panel Autoregressive Distributed Lag methodology. The empirical model includes per capita income, squared per capita income, energy consumption, export diversification, foreign direct investment, technological advancement, and the interaction between per capita income and institutional quality. The results substantiate the Environmental Kuznets hypothesis. The curve hypothesis posits that per capita income positively influences carbon emissions, whereas squared income exerts a negative effect. Energy consumption is recognised as the primary catalyst of emissions, highlighting the ongoing reliance of South Asian BRI economies on carbon-intensive energy infrastructure. Foreign direct investment and technological advancement reduce emissions over time, reinforcing the notion that technology transfer, innovation, and sustainable industrial methods can improve environmental outcomes. Export diversification exerts a negative, albeit statistically negligible, impact, indicating that diversity alone is inadequate for emission reduction unless it redirects output towards cleaner, higher-value sectors. The substantial, negative coefficient of the interaction term between per capita income and institutional quality indicates that robust institutions mitigate the emissions-increasing impact of economic growth. The report indicates that sustained growth in South Asian BRI nations requires not only economic expansion but also institutional strengthening, energy transition, and technological advancement.