Heterogeneous Moderating Influence of Economic Growth on Financial Development and Environmental Quality in Africa

Journal of Critical Reviews

ISSN- 2394-5125 Vol 7, Issue 14, 2020

HETEROGENEOUS MODERATING INFLUENCE OF ECONOMIC GROWTH ON FINANCIAL DEVELOPMENT AND ENVIRONMENTAL QUALITY IN AFRICA

Aminu Hassan Jakada1, Suraya Mahmood2, Ali Umar Ahmad3 Suleiman Abdullahi Bambale4

1Department of Economics and Development Studies, Federal University Dutse, Jigawa State Nigeria 1,2,3,4Faculty of Business and Management, Universiti Sultan Zainal Abidin, Terengganu, Malaysia Email:[email protected], [email protected], [email protected], [email protected]

Corresponding Author: Ali Umar Ahmad

Received: 08.04.2020 Revised: 10.05.2020 Accepted: 05.06.2020

A b s t r a c t The requirement to devise strategies for reducing global warming necessitated knowledge of the sources of carbon emissions. We apply heterogeneous techniques to investigate the interacting influence of economic growth on the connection between financial development and the quality of the environment for the top 10 leading African countries throughout 1970–2018. Empirical results indicate that, without interaction, the escalation in financial development leads to environmental degradation within the model. Hence, by considering the moderating role of economic growth upon the association that exists amid the development of the financial sector and the quality of the environment, the recent study reveals that the level of economic development determines the capability of the financial industry in enhancing the quality of the environment. Because the relationship between financial development and the quality of the environment is positive with the interacting role of GDP, but the coefficient is small when compared with the result without interaction. Recent findings not only accelerate knowledge but also have a range of consequences for policy on sustainable development.

Key Word: Economic Growth; Environmental Quality; Financial Development; Second-Generation Methods

INTRODUCTION (Mt) increment, having a 32.5-gigaton (Gt) peak record after Starting in 2015, a sum of 196 nations joined the United Nations nearly three years earlier remaining flat. Henceforth, this general Framework Convention on Climate Change (UNFCC), prompting increment in carbon dioxide outflows corresponds with the anxieties about the pressing need to ensure the climate. Since specified Paris Agreement on Climate Change, which expects to 1995, UNFCC individuals have held yearly gatherings to figure decrease carbon dioxide emissions. (Jakada, et al., 2019) out what steps ought to be taken to address both Global warming contends that the heightening of worldwide carbon dioxide is and greenhouse gas (GHG) issues. The main striking result of the because of the fast, extensive economic development, more slow UNFCC was the Kyoto Protocol, which set compulsory duties on vitality use, and lower fossil fuel derivative costs. cutting edge countries to diminish their GHG levels. Nevertheless, the Kyoto Protocol has never indeed been a genuine worldwide Henceforth, over 200 years back, the rapid growth of new understanding because lone the European Union and maybe exercises might be viewed as a central point behind the ascent of some coupling developing nations incorporated the significant interest for oil, which is centered transcendently around non- alteration and the second chance to the Kyoto Protocol and, inexhaustible on non-renewable fossil fuels. The treatment of the shockingly, the convention has not been endorsed by the world's connection between economic growth and environmental biggest producers, the USA, Canada and India. The United assurance is incredibly hazardous for policymakers (Ahmad et Nations Conference on Climate Change (UNCCC) has since al., 2020). Varieties of studies on the environmental degradation occurred in Paris among November and December 2015, with and economic growth relationship, characterized as the unquestionably over 190 nations taking part, in consistence with Environmental Kuznets Curve (EKC) by (Ahmad et al., 2020; the Kyoto Protocol and the UNFCCC). The Paris Protocol parties Dabachi et al., 2020), has been completed. The EKC hypothesis have consented to continue a dangerous atmospheric deviation noticed that the weakening of the environment mostly trails beneath 2 C ° above pre-modern level by 2100. Regardless, it is economic growth, yet also that environmental quality will, in obscure whether different countries (e.g., the U.S.) would cast a general, improve as the economy arrives at the per capita salary ballot to help the understanding for the time being. The Paris limit. For, e.g., Researchers have carried out comprehensive work Protocol ought to be viewed as an advancement in this issue with using various models and techniques that provide scientific specific questions, and accomplishing the objectives is extremely evidence for the association between financial development and basic for improving the climate (Dogan & Seker, 2016). carbon emissions; nevertheless, these studies still do not provide consensus. Empirical work typically has three critical viewpoints: Global associations have consequently concentrated on financial development decreases carbon emissions, raises carbon alleviating the antagonistic impacts of environmental change on emissions, and other outcomes. Henceforth some groups of steps to decrease carbon dioxide (Acheampong, Adams, and studies conclude that the amount of carbon emissions is reduced Boateng, 2019; Tamazian, Chousa, and Vadlamannati, 2009). by financial development. For example Tamazian & Rao (2010); Globally, carbon dioxide emissions had risen despite endeavors Saidi & Mbarek (2017); Shahbaz, Kumar Tiwari, & Nasir (2013); to decrease it everywhere throughout the globe. Worldwide Omri et al. (2015); Dogan & Seker (2016); Zaidi, Zafar, Shahbaz, carbon dioxide emissions of the sort of vitality expanded by 1.4% & Hou (2019). in 2017, as demonstrated in the International Energy Agency (IEA) (2018) report. It shows an extraordinary 460 million-ton

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However, Contrary to this, other studies believe that financial of the environment is still in its earliest stages, and further sector growth raises the amount of carbon emissions, thus examinations are expected to give a complete comprehension of worsening the efficiency of the environment. For instance, Al- the effect of financial development on carbon dioxide emissions. Mulali, Ozturk, & Lean (2015); Zhang (2011); and Shahbaz et al. In a similar vein, the more significant part of the frequent (2016). In the case of members Gulf Cooperation Council (GCC) examinations focused for the most part on the immediate effect countries, Bekhet, Matar, & Yasmin (2017); Lu (2018); Cetin et of economic development on carbon emissions, with none of the al., (2018) Ali et al. (2018). Finally, the following studies groups ongoing observational work exploring the directing job of gave conflicting results. Research by Dogan & Turkekul (2015); financial development in the connection between the financial Charfeddine & Kahia (2019); and Paramati, Alam, & Apergis, turn of events and quality of the environment. At long last, little (2018). is thought about the environmental quality impacts of financial development in chose African nations. Given the logical So also, the EKC hypothesis was assessed by different inconsistency in literature along with the accessible knowledge researchers utilizing data from time series in the energy gaps, the present study intends to examine the moderating effect economics literature for individual nations. The EKC for of economic growth on the relationship between financial Cambodia, for instance, has been validated (Ozturk & Al-Mulali, development and the quality of environment considering the top 2015). Likewise, () recommend that the absence of financial 10 leading African countries for a specific period of 1980–2018 development from functions of the EKC literature leads to a respectively. misleading empirical outcome. The study expressed that financial development is a significant factor for economic growth, energy Analyzing the impact of financial development upon the dioxide consumption just as carbon dioxide emissions and that of carbon dioxide in African is significant, even though Africa environmental quality is affected by the development of the contributes minimal emissions to worldwide emissions when financial sector. By the scale impact (extending residential yield), contrasted and the other propelled countries. In this locale, the organization impacts (expanded economic activity), or the carbon emissions have been expanding, for instance, heightening riches impact (building up a competitive stock market). from 550 million tons in the year 2000 to a degree of 708 million tons in the year 2010 and went further to around 738Mt in the While it is accepted that financial development has significant year 2012 (Adams and Klobodu, 2018). Moreover, Africa is environmental ramifications, its effect on carbon dioxide considered as the locale that is viewed as the most penurious emissions stays disputable. Numerous analysts are of the view district that is considered to have 413 million occupants that are that money-related development builds environmental quality getting by underneath the line of destitution in the year 2015 by diminishing carbon emissions. It shows, for instance, that (UNFCC, 2015). In a similar vein, Africa is as of now enduring economic segment development can animate FDI just as a level of with the negative ramifications of Global warming that is coming higher research rate and degree of development that this way through raising the degree of the dry spell, neediness, wars, invigorates financial development and consequently animates spreading of malady, the high pace of relocation, just as over the the quality of the environment. Such researchers likewise top floods (Serdeczny et al., 2017). Subsequently, realizing the contend that financial development offers developing nations prevailing variables liable for the rising emissions of carbon chances to utilize present day advances, enable with a cleaner dioxide in the mainland of Africa is basic to devise series s that just as a well-disposed environment strategy for creation, and in would help in diminishing it before it deteriorates. this manner, advance economic local and worldwide development. Despite that, another network of researchers is of During the most recent four years, the African financial the feeling that financial part development is degrading framework has changed significantly. In the mid-1990s, the environmental quality. Financial sector development makes it quantity of African nations encountering a foundational banking peaceful for buyers and organizations to have a sort of access emergency has tumbled from a pinnacle of 15 to an incidental with less expensive credits. These will empower them to belittle anomaly during the 2000s. Private-part credit (as a small amount large-ticket items and grow their existing business to expand of GDP) has ascended by over 20 rate focuses since 1990. As of energy consumption along these lines boosting carbon dioxide late, there has been a worry towards national reconciliation emission levels. inside the mainland, even though that pattern began undoubtedly before 2007. Banks in Kenya, Morocco, Nigeria, and In a similar vein, the association of financial development and the South Africa are quickly extending their activities in the area. The emissions of carbon dioxide are theoretically not consistent. The problematic impact of widening and expanding economic discoveries of the prevalent empirical literature remain framework innovation has likewise gotten clear in recent years ambiguous and uncertain; for instance, one gathering of exact (Beck, Maimbo, Faye, and Triki, 2011). Following a moderate research proposes that financial development diminishes carbon yearly development of 2.2 percent in 2016, the average genuine dioxide emissions (Jakada et al., 2019). However, others record GDP bobbed back to 3.6 percent in 2017 for the development of that carbon emissions increments as an outcome of financial an African economy. It is anticipated to develop 4.1 percent a development (Boutabba, 2014; Sehrawat, Giri, & Mohapatra, year in 2018 and 2019 (ADBG, 2018). This volume of an 2015; Shahbaz, Shahzad, Ahmad, & Alam, 2016). The last economy's planned development fixates on various elements that classification of the exact type of studies additionally determines incorporate imminent asset accessibility. The development of the that there exists no connection between the financial economy can cause unfriendly environmental issues because of development part and the measure of dioxide of carbon dioxide the over-misuse of natural resources, which can prompt the (Dogan & Turkekul, 2015; Maji, Habibullah, Saari, & Abdul- incapacitation of environment life wildlife and ecological change Rahim, 2017; Omri, Daly, Rault, & Chaibi, 2015). (Lu, 2017). Not many of the past investigations which empirically inspected This paper adds to the current literature in several different the effect of the development of the financial sector on the level ways, despite the impetus for the research. The study not of carbon dioxide emissions and dependent on these presents only the effect that financial developments have directly inconsistencies of the inadequate studies (Zhang 2011). Cetin, on the number of emissions of carbon dioxide but further Ecevit, & Yucel (2018) as well as Haseeb, Xia, Baloch, & Abbas investigates the moderating role of economic growth on the (2018) pushed the requirement for further observational association concerning financial development as well as the analysis to determine this sort of research. Accordingly, take a number of carbon emissions. This study makes a significant shot at the subject of the economic turn of events, and the quality contribution by introducing the (Principal Component Analysis)

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PCA to devise a systematic index of financial development that CO2 = f (FD, GDP, FD ∗ GDP, FDI, ) (1) will integrate all financial development indicators to stand as a single index that will solve the problem of multicollinearity as The mathematical functional form of the model represented by few studies have considered this technique. Understanding the equation ( 1) can be transformed into econometric model which impact of the development of the financial sector on Africa's can be classified into two types of model which is a model emissions of carbon dioxide will, therefore, have consequences without interaction signified by equation ( 2) as well as model for policies on sustainable development and climate change. with interaction symbolized by equation ( 3), and all variables Sustainable development goals in Africa will thus become more are transformed into logarithmic form. The Empirical Equations comfortable to achieve if the development of the financial sector log-linear functional form is as follows: found to lessen the emissions of carbon dioxide. lnCO2it = β1 + β2lnFDit + β3lnGDPit + β4lnFDIit + μit (2) On the other hand, if the development of the financial sector is In order to research the impact of the development of the perceived to escalate the number of carbon emissions, then this financial sector on carbon dioxide emissions indirectly equation may impact Africa's pollution prediction models and climate (2), the term reflecting the relationship concept of financial change policy. The remaining aspect of the research is bound to development and economic growth (lnFD) is expanded to be organized into different sections with Section 2, offering the include. Thus, the empirical form of the model given and literature summary, accompanied by the discussions of the represented in equation (3) is applied to investigate the indirect methods of analysis as well as the data that would be used in the effect of financial growth on carbon dioxide emissions. study in Section 3. Henceforth, section 4 discusses findings offered by the study, accompanied by conclusions as well as the lnCO2it = β1 + β2lnFDit + β3lnGDPit + β4lnFDIit policy implications in Section 5, respectively. + β5ln(FD ∗ GDP)it + μit (3)

Methods and Empirical Findings Econometrics Analytical Techniques Data The analytical techniques used in this research include the latest Many studies estimate the association between the emissions of econometric analytical techniques listed in sequential order. carbon dioxide and financial growth but have mixed empirical Firstly, the study uses the Breusch-Pagan LM test as well as the findings. In this regard, this study includes the interaction term Scaled LM. test to verify the existence of cross-sectional reflecting financial development and economic growth (FD*GDP) dependence in study variables across the country panel. in the environmental-finance nexus model as well enhancing the Secondly, the analysis will use the CIPS panel unit root test as earlier works of Zafar, Saud, & Hou (2019), and Shahbaz et al. well as CADF to check the existence of stationarity of the (2016), where carbon dioxide (CO2) emissions are considered to variables of concern. Thirdly, Wester-lund 's cointegration panel be a feature of financial development (FD), economic growth technique is used to determine the extent of cointegration among (GDP), and foreign direct investment (FDI). The general form of the troubling variables. Table 1 displays descriptive statistics. the equation for carbon dioxide emissions is the following: Table 1: Variables Descriptive Statistics LNCO2 LNFD LNFDI LNGDP Mean 4.305699 1.27E-15 8.279392 10.49743 Std. Dev. 0.704287 1.553314 1.087263 0.557712 Skewness 0.226702 -0.267138 -0.720246 -0.002093 Kurtosis 1.874256 2.367264 3.245436 2.216326 Jarque-Bera 30.68492 14.28762 44.48456 12.79505

LNCO2 1.00000

LNFD 0.7152* 1.000000 (0.000)

LNFDI 0.5295* 0.3334* 1.000000 (0.000) (0.000)

LNGDP 0.7274* 0.5759* 0.5792* 1.000 (0.000) (0.000) (0.000)

Table 1: Provide a concise overview of statistics and a list of Second generation Techniques correlations. The distributions of all the variables are distinctly Crossectional Dependency and Unit root Test distorted, and the kurtosis values indicate that the distributions This study employed a CD test to follows the normal distribution, of the series are more clustered with longer tails than the normal and is also accurate under the null hypothesis, without cross- distribution type. On the other hand, the equation of the sectional dependence. The Breusch & Pagan (1980) analysis was correspondence shows that CO2 and F.D., FDI and CO2, and CO 2 used expansively in the existing literature to search for cross- and GDP have a positive correlation. Such associations merely sectional dependence, but the approach has several setbacks of reflect the future relationship between all of the variables. econometrics (Pesaran, 2007). Then Pesaran (2007) suggested the following scaled form of L.M. test:

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1 Q−1 Q 1 2 CDLM = ( ) ∑ ∑ (Tρ̂2 − 1) (4) Q(Q − 1) ik i=1 K=i+1

Q−1 Q 2S CD = √ (∑ ∑ ρ̂ ) (5) Q(Q − 1) ik i=1 k=i+1

I n the presence of cross-sectional dependency in the panel data, Chen, Haseeb, Khan, & Imran, 2019). Hence, CADF (Cross- the current study applied the second-generation unit-roots test, sectional Augmented Dickey-Fuller) panel techniques, as well as which is more appropriate for providing reliable results when CIPS (Cross-sectional IPS) Pesaran unit root test (2007), are the data contained an item of interdependence between the applied. The test of CADF raises the unit root cross-section of research panel countries (Ahmad et al., 2018 and 2020; Saud, ADF form of regressions by using the following Eq. (6): k k

∆yit = αi + ρiyit−1 + βiy̅t−1 + ∑ γij ∆y̅it−1 + ∑ δijyit−1 + εit (6) j=0 j=0

k k

∆yit = αi + ρiyit−1 + βiy̅t−1 + ∑ γij ∆y̅it−1 + ∑ δijyit−1 + εit (6) j=0 j=0

Q 1 CIPS = ∑ s (Q, S) (7) Q i I=1 Where “si (Q, S)” exhibits the statistics of the cross-sectional augmented Dicky–Fuller. The results presented in table 3 below:

Table 2: CD Test and Unit root Results CIPS CADF Variables BP-LM PS-LM BS-LM CD Level 1st Diff Level 1st Diff LNCO2 1512.507*** 154.688*** 154.586*** 38.139*** -2.113 -6.341*** -1.778 -5.034*** LNFD 1091.086*** 110.267*** 110.165*** 24.681*** -2.283 -5.833*** -2.592 -4.477*** LNFDI 951.403*** 95.543*** 95.441*** 30.393*** -1.935 -4.126*** -1.872 -3.608*** LNGDP 1076.386*** 108.717*** 108.615*** 26.720*** -1.562 -4.999*** -2.152 -3.841***

***, ** and * specifies the level of significance at 10%, 5%, and 1%, correspondingly. Second generation Cointegration Test We use the cointegration method introduced by Westerlund The result presented in Table 2 indicates that all of the study's (2007) to explore the existence of long-term relationships within concern variables result in a statistically relevant level of variables in this study. Westerlund's error-correction approach significance at 1 percent, as the study strongly rejects the null (2007) is stated as: hypothesis reflecting the absence of cross-sectional dependency across the variables panel sequence. The analysis concludes from ′ ′ ρi ∆Yit = δidt + αiYit−1 + λiXit−1 + ∑j=1 αij ∆yit−j + now on that any research variable includes cross-sectional ρi 1 N α̂i ∑j=0 γ ∆Xit−j + μ (8) Gτ = ∑i=1 and Gα = dependence. Besides, The results of the unit root test reported in ij it N SE(α̂i) Table 2, and the results of the CIPS test indicate that LNCO2, FD, 1 N Tα̂i ∑i=1 (9) FDI, and GDP are not stationary at the point. Therefore, after N α̂i(1) taking the first difference, all selected variables of the sample are α̂ P = and P stationary; this happens at the statistical level of significance of 1 τ SE(α̂) α percent. At the same time, the results of the CADF test show that = Tα̂ (10) LNCO2, FD, FDI and GDP does not turn out to be stationary at level. Still, all the series of concerns turn out to be stationary The results of the Westerlund panel techniques of cointegration after taking the first difference at a level of significance of 1 are presented in Table 3 below percent. Therefore, the sequence analyzed is I(1), which implies they are combined with order one.

Table 4: Second-generation Cointegration Constant Constant with Trend Statistics Values P-value Value P-value Gt -3.767 * 0.000 -2.802 ** 0.028 Gα -11.588 0.939 -10.462 0.590 Pt -10.926* 0.000 -9.016* 0.003 Pα -13.766 0.253 -12.723* 0.006

***, ** and * specifies the level of significance at 10%, 5%, and The results are set out in Table 4, there is a presence of a 1%, correspondingly cointegration type of association among the study's concern

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variables for the top 10 leading African countries. The existence ̂∗ In the number (8) equation, tβGFM represents the t-statistic for of a panel cointegration relationship between the study variables the coefficient of the cointegration generated for the panel as a explains the presence of a long-term relationship between the whole. index of financial growth, foreign direct investment, and environmental quality indicators, thereby allowing us to analyze Ki the influence of the independent variables on the dependent Y퐢퐭 = αi + βiXit + ∑ γik∆Xit−k + μit (14) variable. K=−Ki

Long-Run Estimation Results In this setting, panel estimator of the DOLS is made as follows: After the cointegration relationship exists, this study employed N ∗ ∗ FMOLS and DOLS to estimate the long-run relationship. FMOLS β̂ = N−1 ∑ β̂ (15) and DOLS panel regression model presented below, GD D,i i=1

Yit = αit + δitt + βxit + μit (11) In the number (10) equation, the estimated results for the DOLS ∗ are gotten for the cross-section that represents β̂ for each Xit = Xit−1 + eit (6) D,i cross-section in the panel.: N ∗ −1 ∗ N β̂ = N ∑ β̂ (12) 1 GFM FM,i ∗ − ∗ ̂ 2 ̂ i=1 tβGD = N ∑ tβD,i (16) i=1 ̂∗ In equation (7) above βFM,i represents the estimation of FMOLS ∗ In number (11) equation tβ̂ positions the t-statistic for the attained for cross-section that forms part of each cross-section of GD the panel. coefficient of the cointegration attained for the whole panel.

N 1 ∗ − ∗ ̂ 2 ̂ tβGFM = N ∑ tβFM,i (13) i=1

Table 5: Long-run Assessment Results Variable Panel FMOLS Panel DOLS Coefficient t-statistic Coefficient t-statistic Model without Interaction LNFD 0.232375*** 10.19634 0.219807*** 9.001483 LNFDI 0.122500** 3.121218 0.131664** 2.693254 LNGDP 0.312976*** 10.03952 0.306368*** 7.915505 R-squared 0.668289 0.763401 Model with Interaction LNFD -1.351238** -3.294686 -1.103203** -2.801641 LNFDI 0.100623** 2.679964 0.139492** 3.122145 LNGDP 0.322479*** 10.86750 0.296185*** 8.467160 LN(FD*GDP) 0.151716** 3.863399 0.127525** 3.381265 R-squared 0.696800 0.825637

***, ** and * indicates significance at the level of 1%, 5%, and 0.12 percent in the number of carbon emissions, while for DOLS, 10%, correspondingly a rise of 1 percent would result. Furthermore, the findings show that the relationship between GDP and the amount of carbon The DOLS results, as well as FMOLS results, are defined in Tables dioxide emissions has a positive correlation, and the effect is 5, respectively. The informed coefficients are statistically statistically significant at a level of 1 percent for both FMOLS and relevant at a point of 1 or 5 percent. Since the value of the natural DOLS outcomes. Still, the magnitude 1 percent change in GDP will logarithm relating to the panel type of time series data is applied result in an increase of 0.31 percent in the amount of carbon in this analysis, the long-run estimate coefficients for LNFD, emissions for FMOLS. LNFDI, LNGDP as well as LN(FD*GDP) are econometrically equal to the elasticity of LNCO2 emissions in terms of FD, FDI, GDP and However, when considering the moderating impact of GDP on the FD*GDP respectively. Although the magnitudes of coefficient relationship between FD and CO2 emission, the findings of the estimates in model without interaction and model with study are optimistic and essential, as such an increase of 1% in interaction vary across the used estimators, the overall outcome FD*GDP will lead to the rise in carbon emissions of 0.15%, which of the FMOLS is the same as the DOLS. means that the growth of the financial sector deteriorates the quality of the environment but the pace at which the carbon Henceforth, for the non-interaction Model, FD is related emissions are increased. The experiment's positive outcome is positively and substantially to carbon dioxide emissions at a level consistent with the results of. The study findings confirm the fact of 1 percent in both the FMOLS and DOLS tests. Still, the that the role that the financial sector plays in environmental magnitude differed; for FMOLS, an increase of 1 percent in FD quality depends on the level of economic growth; the higher a would result in a rise of 0.23 percent in carbon emissions, while nation's level of growth, the greater the financial sector 's for DOLS, the coefficient is 0.21, which means an increase of 1 capacity to enhance environmental quality. percent in carbon emissions. Furthermore, the findings suggest that FDI is positively related to the amount of carbon dioxide CONCLUSION emissions and is statistically significant at a level of 1 percent for The primary purpose of this study is to investigate the both FMOLS and DOLS findings. Still, the magnitude differed; for moderating influence of economic growth on the quality of FMOLS, an increase of 1 percent in FDI would result in a rise of environmental effects of financial development, FDI, just as FD to

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