The effects of environmental regulations on industrial plant inefficiency and the determinants of plant environmental performance : a case study of Egypt
In 1994, the government of Egypt issued a comprehensive environmental law
concerning environmental protection from pollution sources in Egypt. The first main
goal of this study is to examine to what extent inefficiency scores of plants in both
private and public sectors are affected by environmental regulations done by these
plants through the period 1996-2001. Most empirical literature on this area focused
mainly on developed countries especially the U.S. due to the availability of data. Thus,
this study tries to add some to previous literature through examining this relationship
under different economic and development stages. To investigate this relationship, we
designed and executed a survey of manufacturing plants in three Egyptian cities, and
used a stochastic frontier cost function to measure inefficiency levels of plants and
test factors affecting these scores.
The results of the econometric models indicate that plants more affected by
environmental regulations are associated with higher inefficiency levels. Also, we
find strong evidence that plants working under private ownership are more efficient
than public plants. Additionally, these results reveal that plant-size has a negative
effect on inefficiency levels, which mains that larger plants are more efficient than
smaller ones. However, the effect of plant-age on cost inefficiency is ambiguous.
The second goal of this study is to examme possible factors determining
plant's environmental performance. Two methodologies (truncated regression and
ordered probit model) are used in this part depending on dependent variable used.
Results of the truncated regression highlight the role played by regulators, market
pressures, and worker security as the main factors accounting for plants'
environmental performance. Plants face high international competition, produce final
consumer goods, and subject to high rate of inspections are more likely to have better
environmental performance. Results of the probit model reveal that plant
characteristics have a significant effect on plant's environmental expenditure, where
private, older, and larger plants tend to spend more in environmental concerns. Also,
variation in inspection rates and consumer pressures are seen to have a strong impact
on plant's environmental expenditure.