Essays on the twin development crises of public debt and climate distress: evidence from developing economies

Abstract

Transitioning to financially stable and environmentally sustainable economic growth is a major development challenge for developing economies awash in unsustainable public debt. Tackling the twin development crises, public debt and climate distress, would help developing countries move towards a sustainable development trajectory. As developing economies struggle to contain an increasing debt, measures to confront debt crises may collide with climate protection efforts. To this end, this thesis aims to provide a framework that will guide the policy makers pursuit a rational and sustainable economic development. The thesis comprises of three main chapters. The first chapter investigates the public debt– growth nexus, while the second and third chapters evaluate the success of existing climate change policies in developing economies. The first chapter explores the public debt–growth nexus to examine the existence of debt thresholds in developing economies. Soaring debt can dampen financial stability, thus maintaining sustainable debt thresholds could foster economic growth. Empirical studies have focused mainly on developed countries and implicitly include strong homogeneity assumptions. This chapter fills this gap by focusing on developing countries and on various heterogeneities across geographic location, income, and governance quality. Using a dynamic panel threshold regression technique on 111 developing economies over the period 1993–2017, the chapter finds debt threshold effects are not common across developing countries. In addition, heterogeneous debt threshold effects are observed across income and governance quality. Beyond the debt threshold, high debt does not impede growth for developing economies, however, the accumulation of larger debt stocks is disicouraged as a sensible policy measure for sustainable debt management. The second chapter investigates the effectiveness of the United Nations Programme on Reducing Emissions from Deforestation and Forest Degradation (REDD) in conserving tropical forests for emissions reduction. Studies on REDD policy show limited use of quantitative methods and good quality forest cover data. This chapter fills this gap by employing a novel econometric methodology, a staggered difference–in–differences approach, on Earth observation satellite data on forest cover. The results indicate that REDD is successful in curbing tropical deforestation and emissions. It takes time for the policy effect to be materialised: smaller policy effects are observed in the first few years, while much larger policy effects are seen as time progresses. Heterogeneous effects are also observed across regions and income levels. In particular, strong policy effect is seen only in the region of Latin America and the Caribbean while upper–middle income and high income countries also benefit from the policy compared to low income countries. Incorporating such heterogeneous effects in the policy–making decisions could amplify the global efforts in protecting tropical forests. The third chapter examines the effectiveness of Kyoto’s Clean Development Mechanism (CDM) on emissions reduction in developing countries. Impact assessment studies on the CDM have typically used mean–type regression estimations and been limited to aggregate effects. This chapter fills this gap by using a conditional quantile difference–in–differences strategy to understand the policy effects along the emissions distribution and across various heterogeneities. The chapter finds that the CDM is effective in reducing emissions at the lower quantiles while it has not been so effective in high–emitting developing countries. Decomposition by emission type and sectors indicates that CDM has the expected positive impact only on fluorinated gases and agriculture and industrial sectors at the upper tail. Geographic location– and income–based heterogeneities suggest policy impact is stronger in the Latin America and the Caribbean region and the low income economies only. Overall, the CDM has not been a very successful climate policy for developing countries. As such, it is important to adapt the design and implementation changes that are required to deliver better outcomes in future.