Openness, financial development, economic growth, and environmental quality: evidence from developing countries

Abstract

Motivated by trade and financial liberalisation policies have become increasingly important in developing countries over the past two decades. Besides, the existing gaps in the literature regarding financial development, economic growth, and environmental quality research need to be addressed. Therefore, this thesis aims to provide new evidence on the impacts of trade and financial openness on financial development, financial development on economic growth, and trade openness on environmental quality from a sample of 64 developing countries over the period 2003-2017. One major contribution of this thesis for three objectives is the adoption of the regression model based on the Bayesian model averaging approach to consider model uncertainty (Raftery et al., 1997; Hoeting et al., 1999; Chipman et al., 2001; Fragoso et al., 2018). Regarding the impacts of openness on financial development, the thesis demonstrates that the contribution of trade openness to financial development is important in developing economies with better institutions. However, financial openness has an insignificant positive effect on financial development. There is no evidence supporting the Rajan and Zingales hypothesis that the simultaneous openness to both trade and capital flows promotes financial development. The findings also indicate that a better institutional environment allows a developing economy to exploit the benefits of openness to financial development. Concerning the impact of financial development on economic growth, the main findings indicate that financial development has a significant U-shaped effect on economic growth, providing new insight regarding the relationship between financial development and economic growth in developing countries sampled. The results also demonstrate that investment to gross domestic product ratio and foreign direct investment have significant positive effects on economic growth, whereas population growth has a significant negative impact on economic growth. For the impact of trade openness on environmental quality, the empirical results reveal that trade openness in developing countries sampled does not cause environmental degradation. Besides trade openness, the findings provide strong evidence in favour of financial openness and renewable energy consumption as two of the most important determinants of environmental quality by reducing carbon dioxide emissions. Meanwhile, inward FDI stock to domestic capital stock and income have harmful effects on environmental quality in the context of developing countries.