Analyzing the Intricate Nexus of Ecological Footprint, Urbanization & Economic Growth in South Asia: A Panel 2SLS Analysis

Abstract

The depletion of natural resources, environmental degradation, and climate change are critical global concerns. In South Asia, rapid urbanization and economic growth have improved living standards, but they have also exerted significant pressure on the environment. It is crucial to determine interconnectedness and common determinants of these factors to address the environmental challenges effectively and promote sustainable development. This study explores the relationship between environmental degradation, urbanization, and economic growth in five South Asian countries—Bangladesh, Nepal, Pakistan, Sri Lanka, and India, over the period 1994 to 2022. To analyze these connections, this study develops indices for infrastructure and governance using Principal Component Analysis (PCA). Several tests, including the Im, Pesaran, and Shin test and the Fisher and Pesaran Augmented Dickey-Fuller unit root test, are applied to ensure the stationarity of the variables. The Variance Inflation Factor is used to check for multicollinearity, and the Wald coefficient restriction test confirms the presence of simultaneity. Findings from the Panel Two-Stage Least Squares (2SLS) regression indicate a significant one-way positive relationship between economic growth and ecological footprint, suggesting that economic growth leads to an increased environmental impact. Additionally, urbanization shows a direct positive link to both ecological footprint and economic growth, although the reverse effects are not statistically significant. The study also finds that industrialization and infrastructure development significantly contribute to urbanization and environmental degradation. Infrastructure, however, negatively impacts economic growth, while globalization encourages urbanization and reduces environmental harm. Education is found to have a strong negative relationship with urbanization. The study concludes that achieving environmentally conscious economic growth in South Asia requires focusing on sustainable development goals, investing in green infrastructure, adopting eco-friendly industrial practices, and improving the education system in the region.