Environment and economic growth: is the rule of law the go-between? The case of high-income countries

Background: The links between pollution, institutions, and economic growth may be not so univocal as argued inthe literature, as these factors may influence each other since some reverse causality may exist between them. Theunderstanding of this relationship is important for identifying appropriate policies for sustainable development.Methods: We investigate the long-run relationship between pollution, institutions, and economic growth,considering as variables carbon dioxide emissions, rule of law, and income. The model offers an analysis ofcausality direction using a panel-VAR approach for the period 1996–2010 for 33 high-income countries thatinclude advanced, emerging, and former-transition economies.Results: The results demonstrate a positive reverse causality relationship between the rule of law and income,indicating that higher income implies stronger rule of law and vice versa. The rule of law is found to have anegative relationship with pollution, confirming that the enforcement of rules is “a conditio sine qua non” tocontrol emissions. No causality relationship is found for pollution and income that can be due to thedifferent stages of economic development of emerging, former-transition, and developed economies, implyingheterogeneity in their environmental protection policies.Conclusions: We argue that the rule of law matters both for economic growth and environment, working asa go-between and creating a win–win situation, where stronger institutions increase the levels of income andvice versa. In order to enhance sustainable development, a policy maker should allocate additional resourcesfor both monitoring the application of the rule of law and its enforcement.