Development economics report impact of economic growth and institutional efficiency on biodiversity loss

6 CHAPTER 1: LITERATURE REVIEW ON THE IMPACT OF ECONOMIC GROWTH AND INSTITUTIONAL EFFICIENCY ON BIODIVERSITY LOSS.... 8 CHAPTER 2: THEORETICAL BACKGROUND ON THE IMPACT OF ECONOMIC GROWTH

FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS

DEVELOPMENT ECONOMICS REPORT

IMPACT OF ECONOMIC GROWTH AND INSTITUTIONAL EFFICIENCY

TABLE OF CONTENTS

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CHAPTER 1: LITERATURE REVIEW ON THE IMPACT OF ECONOMIC GROWTH AND INSTITUTIONAL EFFICIENCY ON BIODIVERSITY LOSS 6

1.1 Literature review on the impact oŸ economic growth on blodIversify 6

1.2 Literature review on the impact of institutional quality on biodiversity 7

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CHAPTER 2: THEORETICAL BACKGROUND ON THE IMPACT OF ECONOMIC GROWTH AND INSTITUTIONAL EFFICIENCY ON BIODIVERSITY LOSS 9

2.1 Definitions na 9

2.1.1 Ecomomic gTOWtH sec nh ng gu HH HH 9 2.1.2 Institutional quality 9

2.1.3 Biodiversity .e 10

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3.1 Research na 13

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3.3 Model selection ố 14

CHAPTER 4: RESULTS AND [IMPLICATIONS 2c nhe 16 4.1 Results discussions and ImpÏlCaf1OT óc ng ngư 16 CC in 0 on ẻ 17

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REFERENCES 22

ABSTRACT

This study examines the impact of economic growth and institutional quality

on biodiversity loss in 11 Southeast Asian countries over the period from 2013 to

2022 Drawing on panel data and employing a Fixed Effects Model, the research incorporates key explanatory variables including GDP per capita, forest area, carbon dioxide (CO ) emigsions, and terrestrial protected land, alongside institutional quality indices derived from the Worldwide Governance Indicators The dependent variable, protected species richness (PSR), is estimated based on terrestrial protected area data and species-area relationships The empirical results reveal that institutional quality exerts a statistically significant and positive influence on biodiversity, suggesting that stronger governance frameworks can effectively mitigate biodiversity degradation In contrast, economic growth—measured as the inverse of the natural logarithm of GDP per capita—demonstrates a robust negative relationship with species richness, indicating a trade-off between economic expansion and environmental preservation Additionally, both forest area and protected land coverage contribute positively to biodiversity conservation, while CO emissions show a significant negative effect These findings underscore the importance of integrating institutional reforms and environmental policy into national development agendas to address biodiversity challenges in the context of rapid economic growth

INTRODUCTION

The decision to investigate the “Impact of Economic Growth and _ Institutional Efficiency on Biodiversity Loss” stems from the growing global concern over the rapid decline in biodiversity—a crisis that threatens ecological integrity, human well- being, and the sustainability of future development Biodiversity represents the environmental pillar among the three core pillars of sustainable development: economic, social, and environmental Particularly in recent years, global biodiversity has been under severe threat According to the IUCN Red List of Threatened Species, over 169,000 species have been documented, with more than 47,000 classified as endangered Moreover, the extinction rate in the Holocene—the current epoch shaped

by human activity—far exceeds the natural extinction rate (Briggs, 2017) Some scientists even estimate that 15-37% of currently known species could become extinct

by 2050 (Thomas et al., 2004) This presents a bleak outlook, as the loss of even one keystone species can trigger the collapse of entire ecosystems (National Geographic)

While economic growth remains a key objective for most nations—often linked

to improvements in living standards and development—unchecked industrialization can severely damage natural habitats Biodiversity loss, accelerated by deforestation, land-use change, habitat fragmentation, and pollution, is a pressing consequence of this development model However, recent literature highlights the role of institutional quality— manifested through governance effectiveness, regulatory strength, and policy enforcement—as a potential mitigating factor Institutional structures can influence how economic activities impact the environment and whether sustainability goals are integrated into national development agendas

This research is particularly relevant to the East Asia and Pacific region, one of the most dynamic and rapidly growing areas in the world ASEAN member states— including Vietnam, the Philippines, and Thailand—are experiencing significant GDP growth Simultaneously, the region is undergoing shifts in institutional quality While some countries, such as Myanmar, are experiencing internal conflict and institutional breakdown, others are making slow but steady improvements in governance This variation creates a complex socio-economic landscape that warrants deeper analysis

Motivated by these considerations, the study seeks to analyze how institutional efficiency interacts with economic growth in shaping patterns of biodiversity loss It uses protected species richness as the dependent variable to represent ecological preservation The study’s objectives are twofold: (1) to assess whether economic growth—measured as the inverse of the natural logarithm of GDP per capita—is associated with biodiversity decline, and (2) to evaluate whether institutional quality

—measured as the average of six governance indicators—can offset these negative effects

The empirical analysis is based on a cross-sectional sample of countries with consistent and reliable data on biodiversity, institutional quality, and macroeconomic variables To control for policy-related and environmental influences, the model includes variables such as forest area, terrestrial protected land, and annual CO, emissions The scope is limited to recent years to ensure the relevance and comparability of findings across nations

MAIN CONTENTS CHAPTER 1: LITERATURE REVIEW ON THE IMPACT OF ECONOMIC

GROWTH AND INSTITUTIONAL EFFICIENCY ON BIODIVERSITY LOSS

1.1 Literature review on the impact of economic growth on biodiversity

Most studies on the impact of economic growth on biodiversity in recent times have resulted in mixed results However, The consensus has mostly been that there exists a non-linear relationship between the two variables

The relationship between economic growth and indicators of environmental quality has been widely looked into One of the most used theories when it comes to measuring the impact of income to the environment has been revolving around the

“Kuznet’s environmental curve” This curve was first developed in the 1950s, when a link between economic growth and income inequality was found (Kuznet, 1955) The basic shape is represented by an “inverted U-shape curve”, which is characterised by positive relations between the two variables first, then after a certain threshold it becomes a negative one The author suggested that in the long run, the effect of increased income per capita would gradually have a weaker reduction effect on income inequality level, to such a point that the effect might turn to a negative one This finding became the foundation for the formation of the future curve

Moreover, most papers focusing on the way economic growth affects the environment have generally been adapting to this curve Still, some researchers have yielded contradictory results For example, according to Grossman & Krueger, 1995, the researchers hypothesized more complex non-linear relationships between economic growth and pollution Using cubic equations to analyse the impact of GDP growth on the level of urban pollutants and utilizing the General least square method (GLS), the researchers regressed a result showing the continuously fluctuating effect

of the two variables

In terms of biodiversity, most researchers have adapted the non-linear approach

to explain the impact from economic growth According to Fuentes, 2011, economic growth represents the increasing people’s satisfaction for their own preferences, with some clashing with biodiversity The researcher argues that personal preferences and human’s inefficiency are the culprit in such negativity This is why many researchers found that economic growth correlates negatively with biodiversity

However, the effect is not always the one way Specifically, Asafu-Adjaye,

2003 found out that there is a weak u-shape effect of economic growth on the number

of species in certain classifications, like mammals, birds, plants Though with each class of animals and plants the patterns are slightly different, the general trend is a larger negative effect initially, and a stagnant one as the GDP grows, and a possible positive one as GDP increases more

Outside the regular non-linear hypothesis that is highly-documented (Ehrlich & Wilson, 1991), some researchers have examined the linear, downward-sloping expression of economic growth to biodiversity (Dietz & Adger, 2003) The link between economic growth and biodiversity is complex and needs more analyses, as to achieve better conservation effort and sustainable development

1.2 Literature review on the impact of institutional quality on biodiversity

Biodiversity conservation is now seen not just as an environmental issue but also as a social and political one Institution action—meaning the rules, norms, and organizations that guide behavior—are important in determining the success of conservation efforts As a result, when there is more attention paid on _ biodiversity matter, more research is showing how the strength of how instintution quality affects biodiversity or to be more specific, the protection of biodiversity, management practices, and long-term sustainability

Most of the papers investigating the impact of institutional effectiveness on biodiversity point out the positive relationship The paper "Institutional Design for Biodiversity Conservation" (Clarke, 2002) talks about protecting different species and how the right organizations can help with conservation efforts It points out that biodiversity includes many aspects of natural resources, and to protect these resources well, we need strong institutions that can manage them in a_ sustainable way The author believes that successful conservation relies on institutions that can adapt, encourage community involvement, and use scientific knowledge in their decision- making A study by Orazalin, Ntim, and Kalimilo Malagila (2024), which looked at companies from 36 countries between 2009 and 2020, found that good corporate governance, along with aspects like effective management, responsible soclal behavior, and fair treatment of shareholders, is linked to better biodiversity reporting

In "Institutional Quality, Governance and Progress towards the SDGs," Barbier and Burgess (2021) explore how the quality of institutions and governance affects the achievement of Sustainable Development Goals (SDGs) By analysing data, the research shows that countries with better institutions tend to do better in achieving their SDGs, highlighting the need to improve governance to support sustainable development and biodiversity Barra and Falcone (2024) examine how the quality of institutions impacts the success of the bioeconomy in various regions of Italy They employ fixed-effects model for their analysis and find out that higher quality institutions, along with their key elements, are connected to better performance in bioeconomy sectors which leads to better biodiversity Moreover, Behnaz Saboori, Seyed Mohammadreza Mahdavian and Riza Radmehr (2024) by analyzing data from

1996 to 2018 using Driscoll-Kraay and Newey-West standard error approaches to assess the impact of various factors on environmental quality, has found out that the

impact of institutional quality on biodiversity by other factors like income or equality

In conclusion, even though there are some researches that point out the relationship between institutional quality and biodiversity might be a complex and non-linear relationship, most of the researches still show that institutional quality has a positive impact on biodiversity These studies show that good institutions—shown by openness, responsibility, flexibility, and community involvement and also attention to environmental matters—support biodiversity

1.3 Research gap

While most of the above studies support the application of EKC (Environmental Kurznet Curve) in the relationship between income and_ biodiversity and a positive relationship between institution quality and biodiversity, some studies shows that the existence of EKC to various degrees ranging from EKC may not be universally applicable across all countries to showing that there is a _ negative relationship between income and biodiversity Whereas, in the case of institutional quality and biodiversity, some studies show that the relationship might be more complex and depend on many factors As a result, the validity of previous papers has led us to research and find out the nature of the relationship of income and institutional quality toward biodiversity Moreover, the previous study may have similarly had its limitations related to the span of time and the limited geographical scope of research This is the justification for the hardly up-to-date data, which may lead to lacking reality for the estimation to some extent In addition to this, while most

of the research took place in some developing economies, specific countries, or a certain group of countries, there are limited studies that focused specifically on ASEAN countries including Brunei, Lao, Myanmmar, Malaysia, Phillipines, Singapore, Timor-Leste and Vietnam Thus, it is our mission to analyze more on the relationship of income and _ institutional quality toward biodiversity in ASEAN countries from 2013 to 2022

CHAPTER 2: THEORETICAL BACKGROUND ON THE IMPACT OF

2.1.2 Institutional quality

Institutional quality (Kaufmann D Kraay, A & Zoido-Lobatén, P, 1999) refers

to the effectiveness of legal, governmental, and social institutions in shaping economic performance, governance, and public trust It encompasses aspects such as rule of law, control of corruption, regulatory quality, political stability, and government effectiveness

To empirically assess the role of institutions and institutional quality in economic performance, it is necessary to select the proxy variable(s) for institutional quality As institutions have different dimensions, several indicators have been used in the literature to measure the quality of institutions which are:

Government Effectiveness: captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies

Political Stability and Absence of Violence/Terrorism: measures perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism

Regulatory Quality: Percentile Rank: captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development

Rule of Law: captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement,

property rights, the police, and the courts, as well as the likelihood of crime and violence

Voice and Accountability: captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media

Since there is no consensus on which indicator is the best to measure institutional quality due to there are many dimension of institutional quality, in our paper, we will use the median value of the above indicator to represent institutional quality

2.1.3 Biodiversity

Biodiversity (National Research Council, 2013) includes not only the world's species with their unique evolutionary histories, but also genetic variability within and among populations of species and the distribution of species across local habitats, ecosystems, landscapes, and whole continents or oceans

There is no direct panel data exist for biodiversity specifically and the only data sets explicitly dealing with species give present-day numbers of species or threatened species yet it is an indicator of pressure on biodiversity, but not loss of biodiversity Therefore, we have to generate a new panel data to measure biodiversity for our research based on existing data

As a result, estimates of biodiversity change have been made using the species- area relationship This relationship relates the number of species in a given area to the size of the area A specific form of the equation is:

S=c A’

In which:

S: the number of species

A: area

c: constant reflecting the density of species per unit

z: the slope of the relationship between S and A when S and A are expressed as logarithms varying by region, taxa and between island and (subsets of) continental flora and fauna

Research has generated a range of values of Z between 0.15 and 0.35 (MacArthur and Wilson, 1967) A median value of 0.25 is taken here

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biodiversity in our research and A - area - will use the data of Terrestrial Protected Land (ER.LND.PTLD.ZS) from the World Bank which Terrestrial protected areas are totally or partially protected areas of at least 1,000 hectares that are designated by national authorities as scientific reserves with limited public access, national parks, natural monuments, nature reserves or wildlife sanctuaries, protected landscapes, and areas managed mainly for sustainable use

Ss In_ conclusion, we will have” - Protected Species Richness as_ our

€

measurement for biodiversity

2.2 Theoretical background

2.2.1 Theoretical background on how biodiversity reacts to GDP growth

In the case for biodiversity, where theoretical frameworks are still limited, the interaction of economic growth to biodiversity is rather vague In fact, it was proposed that at a lower level of economic development, the government tends to favor economic growth, compared to putting effort into decreasing natural degradation (Nwani & Adams, 2021), considering the fact that ASEAN consists of 10 developing economies out of the 11 members Nevertheless, as an economy passes a certain threshold, with better economic structure and better green technologies, the negative effect can shift into a positive one (Li et al., 2023) According to Dietz & Adger

2003, they simultaneously investigate the linear and non-linear effect of economic growth on biodiversity richness, which is illustrated by the following graph:

Falling limb Rising limb / Parabolic,

Per capita income

Fig 1 Possible forms of the income biodiversity relationship

Figure 1.Economic growth on biodiversity

Source: Dietz & Adger, 2003

However, the same paper also theorized that the replenishment rate of species

is not as fast as the rate at which species can be decimated This means that the threshold for a rising curve to exist may be too high, thus the actual curve for this relationship is a hyperbola instead We suspect that the relationship between income and biodiversity richness in the case of the ASEAN countries also possesses such a pattern

2.2.2 Theoretical background on the mechanism of institutional quality to biodiversity

On the other hand, institutional quality influences biodiversity through the means of better policy and establishment of wild zones or protected areas According

to IUCN, 2018, 230.000 protected areas are being documented, however only 1% of their effectiveness is available This reflects how the effectiveness of institutional establishment has been largely underappreciated globally

According to Gren et al, 2016, through the same process as mentioned above, the improvement of the legal system can lead to the mitigation of biodiversity loss Therefore, it is evident to expect a positive expression of institutional quality on biodiversity richness However, different papers have been using different measurements for institutional quality, for example democracy (Dietz and Adger, 2003), corruption (Pandit et al, 2009), etc As stated in the literature review, the proxy chosen is the mean value of 5 different institutional standards

2.3 Research hypothesis

Based on literature review and theoretical background above, the researchers propose the following hypotheses:

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ñ Hypothesis I: There exists a non-linear relationship between economic growth and biodiversity richness, and this represent a diminishing downward-sloping curve

0 Hypothesis 2: There is a positive relationship between institutional efficiency and biodiversity richness

CHAPTER 3: METHODOLOGY AND DATA COLLECTION

3.1 Research model

Building upon previous research (Dietz & Adger, 2003; Li & Wang,

2023; Asafu-Adjaye, 2003), and based on the theoretical framework presented in the earlier chapter, the empirical model used to discover the influence of economic growth and institutional efficiency on biodiversity loss is presented as follows:

PSR,=B + B, 1 +B,1Q.4+B3;F.+ ByTPL,+B;CO,,+u,

In(GDP,)

In which:PSR,is the predicted series richness of country i in year t compared to the

1 reference year 2013 Meanwhile, independent variables include yp ) the inverse

of the natural logarithm of GDP per capita of country i in yr tnstitdtional

quality of country i in year t Beside, to ensure the robustness of the model, we include several control variables To be specilfic,is the percentage of forest area of country

i in year FPL, is the percentage of terrestrial protected land of country i in year t, and

CO, is carbon dioxide emissions of country i in year t Furthermore, i represents investigated countries, while t ¡is the year obsefwl.the intercept of the model, followed byf,.8,.B3;.B4.8 as the coefficients of variables it acts as the random error term for the sample regression

3.2 Data specification

measurement sign