Aid-environment-globalization nexus revisited: evidence from a dynamic panel threshold analysis

Abstract This study explores how globalization shapes the link between foreign aid and environmental sustainability across 67 aid-recipient countries from 2000 to 2019. Ecological sustainability is captured through the Load Capacity Factor (LCF), while globalization is measured using both de jure and de facto components of the KOF index. Relying on nonlinear econometric techniques, the analysis uncovers nuanced patterns. De Jure globalization tends to reduce environmental sustainability at both low and high levels, with stronger negative effects once it crosses a certain threshold. In contrast, de facto globalization only shows a harmful impact at higher levels. The role of foreign aid also shifts depending on the degree of globalization: under low de jure globalization, aid is linked to environmental harm, but its effect turns positive beyond the threshold. For de facto globalization, aid supports sustainability at lower levels, but the effect becomes insignificant as globalization intensifies. These findings suggest that deeper global integration, particularly beyond a de jure threshold of 60, can help reduce the environmental downsides of foreign aid and promote more sustainable outcomes.