in: Recent Economic Approaches and Financial Corporate Policy, S. Çoban,S. W. Dalpour,C. Marangoz,E. Bulut, Editor, IJOPEC publication, London, pp.71-94, 2019
Emerging countries have growth enthusiasm to catch up with the level of developed countries. But insufficient domestic savings and thus low capital accumulation needs foreign direct investment (FDI) inflows. So, countries apply different kinds of incentives to attract FDI to their homeland. Those incentives might be tax reduction, fewer legal obligations, establishment facilities, and even loose environmental policies. But heavily dependence on inflows might turn the host country to pollution heaven for foreign investors by loose environmental policies. On the other side, dependence also causes currency volatility and a high balance deficit and thus, countries become financially fragile. This ‘fragility’ term is firstly used for five countries.
Coined by Stanley in 2013, the term “fragile five” represents the vulnerability of five emerging market economies, namely: India, South Africa, Brazil, Indonesia, and Turkey, to emphasize their dependence on FDI. Their incentives and facilities for foreign capital accumulation could take in environmental insensitive investments. Furthermore, they could also become fragile to external shocks. FDI is the main polluting factor for environmental polluting and also might be the center of the being financially fragile. This paper contributes to the literature by analyzing the link between PHH and fragility in the context of FDI-emissions for fragile five countries. Furthermore, the paper also shows whether countries' classifications by some similarities/aspects are sufficient to make specific groups. For this purpose, autoregressive distributed lag (ARDL) co-integration analysis is run to catch up on the relationship between fragile five and pollution heaven hypothesis.
The result shows that the pollution haven hypothesis (PHH) is valid only in Indonesia and Turkey for the long term. However, the increasing effect of FDI on environmental pollution is more powerful in Turkey. Brazil and India have a long-run relations but FDI is not statistically important. And South Africa does not show long-term pattern. In a nut shell, all fragile five are not also pollution heaven. Moreover, a financial similar outlook does not mean that environmental attitudes look like each other.