The Effect of Trade Liberalization on the Environment: A Case Study of Ghana

Abstract

This study seeks to contribute to the emerging economic literature on trade liberalization and the environment in developing countries. Using time series data from 1970 to 2010 obtained from the World Development Indicators (WDI) online database, the study applies least squares multiple regression technique to estimate the effect of trade openness on the environment in Ghana. We estimate the composition, scale and technique effect of trade liberalization on Ghana’s environment using Carbon Dioxide (CO2) emission and Net Forest Depletion (NFD) as proxies for environmental degradation. Our results indicate that trade liberalization has adverse effect on emissions of carbon dioxide as a result of negative scale and composition effects of trade overriding the positive technique effect of trade. This finding appears to confirm the pollution haven hypothesis. However, the effect of trade liberalization on net forest depletion is favourable as a result of the positive scale and technique effects of trade which outweigh the adverse composition effect. Meanwhile, by testing for and failing to reject the pollution haven hypothesis in the two regression equations, it is suggested that the relocation of pollution intensive industries into Ghana as a result of weak environmental policies could be contributing to Carbon dioxide emissions and the depletion of forest resources in the country. Based on the results we recommend that further trade liberalization policies in Resource- Rich Developing Countries in Africa should be accompanied by strict enforcement of environmental regulations in order to avert the adverse impact of trade on the environment.