Determinants of Environmental Quality in Indonesia: The Role of Democracy, Socio-Economics, and Financial Development

Abstract

We investigate the short-term and long-term dynamics of the Environmental Quality Index (EQI) for 34 provinces in Indonesia from 2015 to 2023 using the Panel Error Correction Model. The variables we examined included democracy index, population density, education level, wages, poverty, foreign investment, domestic investment, and Gross Regional Domestic Product (GRDP). In the short term, GRDP had a negative impact on the EQI, while the other variables did not show a significant effect. However, in the long term, the democracy index, education level, poverty, and domestic investment have a positive effect on the EQI, while GRDP and population density have a negative effect on the EQI. In the advanced stage, our study found that GRDP in the mining sector has a negative effect on the EQI, while the service sectors in education and health are able to increase the EQI. These findings emphasise the importance of synergy between regional economic development, improving the quality of democracy, and social policies to support environmental sustainability in Indonesia. Therefore, regional development policies should be directed towards economic diversification by expanding the base of environmentally friendly service sectors, while ensuring that economic growth does not sacrifice the quality of the environment.