Eco-Labeling, Sustainability and Trade: Evidence from Pakistan

Abstract

Eco- labeling is recognized as an effective measure to control environmental pollution by the manufacturing firms. Given the increasing global demand for eco- labeled products, this study seeks to examine its implications for Pakistan. In the first part of this study, we analyze the existing pattern of eco-labeling schemes adopted by Pakistani textile firms and evaluate the effect of eco-labeling on their environmental and economic performance. We also identify the factors influencing a textile firm’s decision to acquire an eco- label for its products. For these objectives, we use data for 128 firms from the textile industry listed on the Pakistan Stock Exchange from 2009 to 2015. The results show that, out of 128 textile firms in the sample, the firms with eco- labeled products are only 32%, which include 21% exporting firms and 11% nonexporting firms. Regression results from three stage least squares (3SLS) estimator show that the textile firms with an eco- label have higher environmental and economic performance. This indicates that the adoption of eco- labels promotes the sustainable growth of the textile firms. Regression results from logit model show that a large textile firm is more likely to adopt an ecolabel relative to the medium or small firm, while an old textile firm is less likely to adopt an ecolabel relative to a new textile firm. As expected, an exporting textile firm is more likely to adopt an eco- label. The environmental performance, as well as the financial performance of the textile firm, increases the likelihood of eco- label adoption. Pakistan exports various products including textiles, apparel, food, fish, pulp, paper leather products, sports goods, cement, and other products. Pakistan’s exports account for 8.5 percent of GDP while its imports account for 19.4 percent. The increasing global demand for eco-labeled products in the international markets poses a potential risk of the exports opportunities for Pakistan. Given the importance of exports in Pakistan economy and increasing demand for eco- labeled products, in the second part of this study, we investigate the potential impact of eco- labeling on the exports of Pakistan. For this part, we use panel data of 24 industrialized trading partners of the country from 2003 to 2014. Results of the Gravity model show that the number of eco- labels in the trading partner country has a negative and significant impact on the exports of fish, food and textiles products of Pakistan. The cost of acquiring ecolabels has a negative and significant impact on the fish, food, textiles, pulp, papers, and building materials exports of Pakistan. The impressive environmental performance of the Blue Angel as a national eco- label scheme of Germany motivated other countries to introduce their own national eco-label schemes. However, there are various factors which determined a country government to introduce a national eco- label scheme. In the third part of this study, we identify the factors which determined the government to introduce a national eco-labeling scheme. For this part, we use panel data of 54 countries that are Pakistan’s trade partners from 1994 to 2014. The results of the panel logit model show that a country with high economic growth and high government integrity is more likely to introduce a national eco- label scheme. A country with a reasonable number of environmentally conscious consumers is more likely to introduce a national eco- label scheme. A country which devoted a significant share of its expenditures for research and development (R&D) is more likely to introduce a national eco- label scheme, while a country which heavily depends on exports is less likely to introduce a national eco- label scheme. A country which X exports high technology products is more likely to introduce a national eco-label scheme. A country which faces a diverse range of eco- labels in its trade partner countries is more likely to introduce a national eco- label scheme, while an economically free country is less likely to introduce a national eco- label scheme.