INTRODUCTION
Research problems
Trade and financial openness are recognized as significant drivers of financial development, which can positively impact economic growth, particularly in developing nations Research indicates that trade openness plays a critical role in enhancing environmental quality, highlighting its importance in sustainable economic practices.
Numerous studies have explored the relationships between financial development, economic growth, and environmental quality; however, most have relied on traditional panel data methodologies that utilize standard statistical inference (Gries et al., 2009; Chinn & Ito, 2002; Cecchetti & Kharroubi, 2012; Estrada et al., 2015; Zhang et al., 2012; Ergungor, 2008; Adu et al., 2013; Frankel & Rose, 2005; Antweiler et al., 2001; Cole & Elliott, 2003; Le et al., 2016) These conventional statistical methods often overlook model uncertainty, resulting in overly confident conclusions.
The challenges posed by the "all-or-nothing" constraint and omitted variable bias have led to poor generalization in empirical studies related to financial development, economic growth, and environmental quality (Raftery, 1993; Raftery et al., 1997, 2005; Hoeting et al., 1999; Chipman et al., 2001; Fragoso et al., 2018; Hinne et al., 2020) As a response to the significant model uncertainty surrounding numerous candidate regressors, Bayesian model averaging (BMA) has emerged as an effective methodology This thesis leverages the BMA approach, as proposed by influential researchers, to enhance the understanding of these complex relationships in development economics Given the inconclusive nature of previous findings, the interplay between financial development, economic growth, and environmental quality remains a contentious topic in the field.
The impacts of openness on financial development
Rajan and Zingales (2003) propose the simultaneous openness hypothesis, asserting that genuine financial development requires the concurrent liberalization of both trade and capital accounts They argue that established interest groups often resist financial development due to increased competition that threatens their profits By simultaneously opening trade and capital flows, the power of these incumbents diminishes, fostering financial growth Additionally, the new opportunities created by trade and financial openness can generate profits that outweigh the adverse effects of competition In contrast, McKinnon (1991) contends that trade liberalization should occur before financial liberalization to effectively promote financial development, particularly in developing nations.
The thesis is significantly motivated by the empirical studies of Baltagi et al (2009) and others, highlighting the complex relationship between openness and financial development Research findings vary across developed and developing economies, showing both positive correlations (Beck, 2002; Chinn and Ito, 2002; Rajan and Zingales, 2003; and others) and negative or mixed results (Svaleryd and Vlachos, 2002; Aizenman and Noy, 2003; and others) This lack of consensus underscores the need for further investigation into how openness impacts financial development globally.
The thesis examines the impact of economic factors in developing countries, an area that has been largely overlooked in existing literature, as highlighted by various studies (Kim et al., 2010a; Kim et al., 2010b; Trabelsi and Cherif, 2017) that report significant effects, contrasted by others (Wolde-Rufael, 2009; Gries et al., 2009; Hauner et al., 2013) that indicate null effects.
Over the past two decades, trade and financial liberalization have significantly impacted developing countries, driven by structural adjustment policies imposed by organizations like the IMF, World Bank, and WTO These free-market initiatives focused on reducing trade barriers, deregulation, and privatization, while financial liberalization aimed to eliminate financial repression, such as interest rate ceilings and high reserve requirements Notably, the ratio of private credit to GDP has shown considerable growth in developing nations, contrasting with stagnation in developed economies since 2009 However, trends in trade and financial openness have become increasingly unpredictable This thesis investigates the critical roles of trade and financial openness in the financial development of developing countries, emphasizing the importance of understanding the underlying causes of financial development to foster banking sector activities and stimulate economic growth.
Figure 1.1 Financial development in developing countries over the period
Source: Global Financial Development Database (GFDD) and author’s calculations.
Figure 1.2 Openness in developing countries over the period 2003-2017
Source: World Development Indicators (WDI), Annual report on Exchange Arrangements and Exchange Restrictions (AREAER),
Chinn and Ito (2019) and author’s calculations
This thesis enhances the empirical literature on openness and financial development by addressing six key areas It employs a Bayesian Model Averaging (BMA) approach, which has not been previously applied to assess the effects of openness on financial development, thereby filling a notable gap in econometrics The study measures financial development through the ratio of private credit to GDP, recognized as a suitable indicator for developing nations It also highlights the lack of empirical research on the influence of openness on financial development in developing countries, particularly regarding the legal origins variable's role in protecting corporate shareholders and creditors Furthermore, the thesis explores interactions between trade openness and other factors, such as financial openness and institutional quality, to understand the various channels through which trade liberalization impacts financial development Regional dummy variables are included to control for and compare financial development levels across different regions Lastly, the analysis utilizes data from 2003 to 2017 to maximize the sample size of developing countries, offering a more comprehensive investigation than previous studies.
The impact of financial development on economic growth
The connection between financial development and economic growth has been a pivotal topic in development economics research for several decades, as highlighted by various studies (Andersen & Tarp, 2003; Chinn & Ito, 2002; Estrada et al., 2015; King & Levine, 1993).
Empirical studies indicate that financial systems significantly impact savings and investment decisions, ultimately fostering economic growth in both developed and developing nations Levine (2005) outlines that financial systems serve crucial functions, including reducing information, enforcement, and transaction costs through five key channels: generating pre-investment information, monitoring investments and corporate governance, facilitating risk trade and management, mobilizing savings, and easing the exchange of goods and services The efficiency of a financial system is defined by its ability to perform these functions effectively, while financial development refers to enhancements in this efficiency.
Figure 1.3 Economic growth in developing countries over the period 2003-2017
Source: World Development Indicators (WDI) and author’s calculations
Over the last two decades, developing economies have experienced a wave of financial sector reforms facilitated by the elimination of government restrictions on the
Developed countries Developing countries financial system in terms of interest rates, high reserve requirements, and quantitative restrictions on credit allocation to promote economic growth (McKinnon, 1973; Shaw,
Between 2003 and 2017, economic growth in developing countries exhibited significant fluctuations, with a notable surge from 2003 to 2007 driven by financial development However, this growth faced a sharp decline during the 2007-2009 financial crisis, leading to stagnation from 2010 to 2017 This thesis seeks to explore the relationship between financial development and economic growth in these nations during this tumultuous period.
This investigation enhances the existing literature by addressing six key aspects Firstly, it examines the underexplored relationship between financial development and economic growth in developing countries, particularly considering factors of openness such as trade and financial liberalization Secondly, it utilizes Bayesian model averaging (BMA) to analyze the impact of financial development on economic growth, filling a gap left by previous studies that predominantly relied on traditional panel data methods Thirdly, it addresses controversies surrounding the measurement of financial development, specifically the reliance on the ratio of private credit to GDP as a proxy Fourthly, it highlights the lack of empirical research on the effects of financial development in developing economies, particularly regarding legal origins and their role in protecting corporate shareholders and creditors Fifthly, the thesis explores various interactions between trade openness, financial openness, and institutional quality to understand the channels through which trade liberalization affects economic growth Lastly, it incorporates regional dummy variables in the analysis to compare economic growth levels across different regions.
The impact of trade openness on environmental quality
International trade plays a significant role in influencing environmental quality, as highlighted by various studies (Antweiler et al., 2001; Liddle, 2001; Atici, 2009, 2012; Mutascu, 2018; Shahbaz et al., 2016) While trade can stimulate economic growth, it also tends to increase pollution levels, making it a key factor in environmental degradation (Harrison, 1995; Rock, 1996; Tobey, 1990) Nonetheless, research by Birdsall and Wheeler (1993), Lee and Roland-Holst (1997), and Jones and Manuelli suggests that the relationship between trade and environmental impact is complex and multifaceted.
Environmental damage linked to trade is complex, as it is influenced by both positive and negative effects While increased trade can lead to a decline in environmental quality due to the scale effect—where economic growth from trade results in higher pollution—trade can also improve environmental standards through the technique and composition effects The composition effect, driven by the displacement and pollution haven hypotheses, highlights how the production of pollution-intensive goods in one country can lead to increased pollution in others However, trade can facilitate technology transfer through foreign direct investment (FDI), potentially reducing environmental harm in underdeveloped economies Ultimately, free trade presents a dual impact on environmental quality, necessitating careful consideration of its implications.
Figure 1.4 Environmental quality in developing countries over the period
Source: World Development Indicators (WDI) and author’s calculations
In the past two decades, rising greenhouse gas emissions have posed a significant threat to global warming, making climate change a pressing issue for societies worldwide, both in developed and developing nations Data indicates that CO2 emissions per capita are considerably higher in developed countries compared to their developing counterparts Notably, from 2003 to 2017, developing countries experienced a sharp increase in per capita CO2 emissions, while developed countries saw a significant decline in this metric.
CO2 emissions (metric tons per capita)
Research objectives
The increasing demand for financial services and the expansion of markets, driven by the positive effects of trade and financial openness, have led to a reduction in the power of established players in the financial sector This shift enhances market transparency through the price mechanism in the loanable funds market, fostering a more competitive and efficient financial environment.
1973), and reducing or increasing environmental pollutants (Antweiler et al., 2001;
This thesis investigates the effects of trade and financial openness on financial development, economic growth, and environmental quality in developing countries It aims to provide new insights into how trade and financial openness influence financial development, how financial development affects economic growth, and how trade openness impacts environmental quality.
First objective: Investigating the impacts of openness on financial development in developing countries over the period 2003-2017 (Objective 1 henceforth)
Based on the several gaps mentioned in Section 1.1.1 regarding Objective 1, the thesis also considers other controlled factors which have not been investigated before as follows:
(i) Investigating the impacts of interactions between trade openness with financial openness, institutional quality, and real GDP per capita on financial development in developing countries
(ii) Investigating the impacts of regional dummy variables on financial development in developing countries (iii) Investigating the impacts of legal origins on financial development in developing countries
Second objective: Investigating the impact of financial development on economic growth in developing countries over the period 2003-2017 (Objective 2 henceforth)
Based on the several gaps mentioned in Section 1.1.2 regarding Objective 2, the thesis also considers other controlled factors which have not been examined before as follows:
(i) Investigating the impacts of interactions between trade openness with financial openness and institutional quality on economic growth in developing countries
(ii) Investigating the impacts of regional dummy variables on economic growth in developing countries (iii) Investigating the impacts of legal origins on economic growth in developing countries
Third objective: Investigating the impact of trade openness on environmental quality in developing countries over the period 2003-2017 (Objective 3 henceforth)
Based on the several gaps mentioned in Section 1.1.3 regarding Objective 3, the thesis also considers other controlled factors which have not been analysed before as follows:
This article explores the effects of various factors on environmental quality in developing countries It examines how financial openness influences environmental conditions, the role of renewable energy consumption in promoting sustainability, and the impact of legal origins on ecological outcomes Additionally, the study investigates the significance of regional differences in shaping environmental quality.
Research contributions
The thesis significantly contributes to understanding financial development, growth, and environmental quality in developing countries by adopting a regression model based on the BMA approach by Fernandez et al (2001b), addressing model uncertainty It presents a comprehensive overview of relevant issues and three conceptual frameworks focused on quantifying the effects of trade and financial openness on financial development, the influence of financial development on economic growth, and the relationship between trade openness and environmental quality Notably, it finds no substantial evidence supporting simultaneous openness to trade and capital flows as a key determinant of financial development and economic growth in these nations Additionally, it reveals a U-shaped relationship between finance and economic growth in developing countries and provides new insights into how legal origins impact financial development, economic growth, and environmental quality Furthermore, it highlights the effects of renewable energy consumption on environmental quality, an aspect overlooked in previous studies Finally, the thesis suggests critical policy implications for enhancing financial development, fostering economic growth, and improving environmental quality in developing countries.
Structure of the thesis
The structure of the thesis is as follows:
Chapter 1: This chapter presents research problems, research objectives, research contributions, and structure of the thesis
Chapter 2: This chapter reviews theoretical and empirical studies relating to three research objectives, including: (i) the impacts of openness on financial development; (ii) the impact of financial development on economic growth; (iii) the impact of trade openness on environmental quality In addition, this chapter also provides the theoretical and conceptual frameworks, and hypotheses
Chapter 3: This chapter includes the research methodology of the thesis, construction of variables, and data source relating to three research objectives
Chapter 4: This chapter provides the descriptive statistics summaries and BMA results of three research objectives including: (i) the impacts of openness on financial development in 64 developing countries over the period 2003-2017; (ii) the impact of financial development on economic growth in 64 developing countries over the period 2003-2017; (iii) the impact of trade openness on environmental quality in 64 developing countries over the period 2003-2017
Chapter 5: This chapter summarises some of the main findings in the thesis, explains policy implications, contributions, limitations, and suggestions for further research.
LITERATURE REVIEW
Openness and financial development
2.1.1 Impacts of openness on financial development: A theoretical review
Firstly, regarding financial openness, several theoretical and empirical arguments are in favor of financial openness inspired by the seminal contribution of McKinnon
The McKinnon-Shaw hypothesis, proposed in 1973, argues against the policies of financial repression, which include interest rate ceilings, administrative credit allocation, high reserve requirements, and other government-induced distortions These policies were prevalent in less developed countries during the 1960s and 1970s and are criticized for hindering economic growth and financial development.
Figure 2.1 The McKinnon–Shaw model
Real rat e o f i nt er es t
The McKinnon-Shaw hypothesis highlights a positive relationship between savings and real interest rates at various economic growth rates, as illustrated in Figure 2.1 In less developed countries, the real interest rate is often maintained below equilibrium due to administratively set nominal interest rates Additionally, financial repression, characterized by a fixed interest rate (r0), can result in increased savings while simultaneously limiting actual investment (I0).
When interest rate ceilings are imposed on loans, compliance is enforced through non-price rationing of loanable funds This leads to two significant outcomes: a persistently low level of savings and investment, as savings are crucial for determining the real supply of credit, and an inefficient allocation of investable funds based on non-price criteria As a result, these factors hinder the growth and development of both the financial system and the overall economy.
When higher nominal interest rates are introduced, easing financial repression positively impacts savings by increasing the real interest rate This change results in the elimination of low-yield investments, thereby enhancing overall investment efficiency Additionally, economic growth is stimulated, shifting the savings function and leading to a higher actual investment rate due to increased savings.
The McKinnon–Shaw hypothesis advocates for the elimination of interest rate ceilings in repressed financial systems during financial liberalization This policy is expected to foster higher economic growth by enhancing savings and increasing the availability of loanable funds, leading to a more efficient allocation of resources The model suggests that equilibrium is achieved when the real interest rate stabilizes at r2, with savings and investment reaching I2, as illustrated in Figure 2.1 This scenario promotes transparency in the market for loanable funds through the effective functioning of the price mechanism.
Beck (2002) presents a theoretical model illustrating the relationship between trade openness and financial development, emphasizing that a robust financial system enhances the capacity for large-scale, high-return enterprises This development allows producers to leverage economies of scale, leading to increased production and improved trade balances, particularly in manufacturing sectors (Helpman, 1981; Khan, 2001) In closed economies, Beck suggests that lower search costs for financial intermediaries reduce the share of entrepreneurs in manufacturing, while food producers benefit more from a higher debt-to-capital ratio than from increased capital stock Consequently, financial development that lowers search costs shifts production incentives towards manufacturing To maintain equilibrium in an open economy, Beck argues that if domestic financial intermediaries face higher search costs than their international counterparts, the economy will export food and import manufactured goods, aligning with the Ricardian hypothesis of international trade A well-developed financial system fosters technological advantages in manufacturing, thus creating a comparative advantage in that sector.
Openness in international trade significantly influences financial development through two primary channels: increased demand for financial services and market expansion Svaleryd and Vlachos (2002) found that greater trade openness generates demand for innovative financial products, such as trade finance instruments and risk hedging solutions Additionally, capital account openness can lower capital costs and enhance liquidity, fostering financial development Levine (2001) provided evidence that removing restrictions on international portfolio flows can improve stock market liquidity.
Fourthly, another important channel through which openness may influence financial development is via political economy factors According to Rajan and Zingales
In 2003, it was argued that incumbents oppose financial development due to its potential to intensify competition, which threatens their profits The simultaneous openness hypothesis suggests that opening both trade and capital flows can diminish the power of these incumbents, thereby promoting financial development Additionally, the new opportunities created by trade and financial openness may yield profits that outweigh the adverse effects of increased competition.
Numerous studies indicate a positive correlation between openness, institutions, and financial development Kose et al (2009) demonstrate that capital account liberalization can enhance macroeconomic policy discipline by amplifying the advantages of effective policies while highlighting the risks associated with weak ones Their research shows a positive link between financial openness and monetary policy outcomes, although no evidence supports a similar effect on fiscal policy Mishkin (2009) notes that foreign capital inflow facilitates technology transfer, prompting domestic banks to elevate their lending standards and adopt international best practices However, openness can also lead to negative consequences for financial development, including increased volatility and excessive risk-taking by domestic banks, as highlighted by Kose et al (2009) and Mishkin (2009).
According to Stiglitz (2000), the success or failure of free trade and financial liberalization hinges on management strategies When national governments tailor approaches to their unique circumstances, as seen in East Asian countries like South Korea and Taiwan, success is achievable Conversely, management by international institutions such as the IMF and World Bank often leads to failure Stiglitz advocates for "global governance without global government" to improve current globalization practices He emphasizes that hasty financial and capital market liberalization, lacking a solid regulatory framework, has been detrimental Notably, India and China, which maintained strong controls over capital flows, thrived during global economic challenges, highlighting the importance of effective management in developing countries.
A theoretical framework illustrating the impacts of openness on financial development is presented in Figure 2.2
Figure 2.2 A theoretical approach to openness and financial development
2.1.2 Impacts of openness on financial development: An empirical review
- Abolishing policies of financial repression (e.g interest rate ceilings, administrative credit allocation, high reserve requirements, and other government-induced distortions)
- Creating demand for financial services (e.g., trade finance instruments, hedging of risks)
- Decreasing in search costs for financial intermediaries
- Enhancing transparency of financial market via a price mechanism
- Encouraging domestic banks to adopt of international standards
How it is managed (Institutions)
The relationship between openness and financial development has garnered significant interest, yet empirical evidence reveals a mixed connection in both developed and developing economies.
Recent studies have explored the connection between financial development and trade openness Beck (2002) examines this relationship specifically in the context of manufactured goods, utilizing both ordinary least squares and instrumental variables estimations His research focuses on how the overall level of external finance influences the trade balance in manufactured goods, analyzing panel data from 65 countries between 1966 and 1995 Beck concludes that enhanced financial development correlates with increased export shares and trade balances in manufactured goods, particularly in nations with well-developed financial systems Similarly, Svaleryd and Vlachos (2002) investigate the link between financial development and trade openness across 80 countries from 1960 onwards.
In 1994, Svaleryd and Vlachos analyzed data from 32 manufacturing industries across 20 OECD countries between 1989 and 1991, revealing that trade openness is linked to increased risks such as exposure to foreign competition and external shocks This environment, however, can also drive financial market development, enabling firms to diversify risks and effectively manage adverse shocks or short-term cash flow challenges.
Research indicates that financial sectors play a crucial role in shaping industrial specialization across 20 OECD countries, with nations exhibiting higher financial development fostering export industries reliant on finance Additionally, a study by Kim et al (2010a) reveals that, in both high-income and low-income countries, trade openness positively correlates with long-term financial development, although a negative relationship exists in the short term Further, Kim et al (2010b) highlight a long-term complementarity between trade openness and financial development, contrasted by short-term substitution in non-OECD economies A related study conducted in Kenya supports these findings, emphasizing the complex interplay between finance and trade.
Research by Gries et al (2009) suggests that while financial development promotes growth in both imports and exports, the reverse causality from trade openness to financial development is weak Analyzing a sample of 16 Sub-Saharan African countries using VAR/VECM frameworks, they found that the relationship between trade openness and financial development varies significantly across nations Despite this variability, their estimates indicate that trade openness may enhance financial depth in certain countries.
Financial development and economic growth
2.2.1 Impact of financial development on economic growth: A theoretical review
Financial systems play a crucial role in shaping savings and investment decisions, ultimately driving economic growth (Levine, 2004; Zhuang et al., 2009) As Levine (2005) highlights, these systems reduce information, enforcement, and transaction costs, performing five essential functions: (i) generating pre-investment information and allocating capital; (ii) monitoring investments and ensuring corporate governance; (iii) facilitating risk trading, diversification, and management; (iv) mobilizing and pooling savings; and (v) simplifying the exchange of goods and services The efficiency of a financial system is measured by its effectiveness in executing these functions, with financial development reflecting enhancements in this efficiency.
Financial systems play a crucial role in generating pre-investment information and efficiently allocating capital, as individual savers often incur significant costs in gathering and analyzing data on firms and market conditions (Bagehot, 1873) Financial institutions help mitigate these costs, enhancing resource allocation and fostering economic growth through specialization and economies of scale (Allen, 1990; Bhattacharya & Pfleiderer, 1985; Boyd & Prescott, 1986; Ramakrishnan & Thakor, 1984) Improved information access enables entrepreneurs to identify optimal production technologies and successfully launch new products (King & Levine, 1993b; Acemoglu & Zilibotti, 1997; Acemoglu et al., 2006) Schumpeter (1912) emphasizes the banker's role as an enabler of innovation within society Additionally, stock markets can stimulate information generation about firms, as larger and more liquid markets incentivize agents to invest in researching enterprises (Grossman & Stiglitz, 1980; Holmström & Tirole, 1993; Kyle, 1984).
Financial systems play a crucial role in monitoring companies and enforcing corporate governance, which significantly contributes to economic growth According to Levine (2004), the ability of shareholders and creditors to oversee and influence the use of capital by firms is vital for maximizing corporate value and effectively allocating resources Furthermore, strong corporate governance mechanisms can alleviate the "agency problem" that arises from the separation of equity and debt holders from management, as highlighted by Coase (1937) and Meckling & Jensen (1976).
1984) Therefore, good corporate governance supports to improve firm efficiency in allocating and utilising resources, as well as encouraging savers to be more willing to finance for innovation and production
Financial instruments, intermediaries, and markets play a crucial role in enhancing trading activities, hedging, and risk pooling, ultimately alleviating risks associated with various entities such as countries, industries, and individual projects The effectiveness of a financial system in providing risk diversification services significantly influences long-term economic growth by encouraging savings and improving resource allocation Additionally, cross-sectional risk diversification can stimulate technological innovation by mitigating the hazards of engaging in innovative activities The ability to manage a diverse portfolio of creative projects further reduces risk and fosters investment in growth-enhancing initiatives Beyond cross-sectional diversification, financial systems facilitate inter-temporal risk sharing and smoothing across generations, while also stimulating liquidity, reducing liquidity risks, and promoting long-term investments that contribute to overall economic growth.
Financial systems play a crucial role in mobilizing and pooling savings from various individuals for investment purposes This process involves overcoming transaction costs and addressing informational asymmetries, making it a complex yet vital function Effective financial systems enhance economic development by increasing overall savings, leveraging economies of scale, and addressing investment indivisibilities By aggregating resources from diverse savers to invest in a diversified portfolio of high-return projects, these systems facilitate a reallocation of investments, ultimately contributing to economic growth.
2004, p.880 as cited in Acemoglu and Zilibotti, 1997)
Financial institutions and markets play a crucial role in fostering specialization, technological innovation, and economic growth by minimizing transaction costs Unlike barter systems, which are costly due to the need for extensive product knowledge, financial systems streamline the trading of goods and services This facilitation not only promotes specialization but also drives technological advancements and overall economic expansion Financial innovations effectively lower transaction and information costs, creating a cycle where increased specialization leads to more transactions, further enhancing productivity Consequently, markets encourage exchanges that boost productivity, which can, in turn, stimulate the development of the financial sector, ultimately contributing to broader economic development.
Based on Levine (2004), Figure 2.4 shows a theoretical framework for the impact of financial development on economic growth
Figure 2.4 A theoretical approach to financial development and economic growth
2.2.2 Impact of financial development on economic growth: An empirical review
Numerous studies have investigated the relationship between financial development and economic growth, employing various econometric methods such as cross-sectional, time-series, and panel data analyses at both international and country levels Despite extensive research, including works by Beck et al and Levine, the results remain inconclusive Additionally, the complex and multifaceted nature of financial development contributes to these mixed findings.
- Producing information and allocating capital
- Monitoring firms and exerting corporate governance
Economic growth the most important explanations for the inconsistent results of the impact of financial development on economic growth
Research consistently shows that a well-developed financial market significantly enhances economic growth Early studies, such as King and Levine (1993), established a positive relationship between financial depth and economic growth across 77 countries from 1960 to 1989 Levine and Zervos (1998) further confirmed this correlation, revealing that banking development and stock market liquidity positively affect output growth, capital accumulation, and productivity in 47 countries between 1976 and 1993 Additionally, Levine et al (2000) utilized GMM estimators on a dataset of 71 countries from 1960 to 1995, finding a strong link between financial intermediation development and economic growth Calderón and Liu (2003) demonstrated that financial development leads to real GDP per capita growth in 109 countries from 1960 to 1994, highlighting a causal relationship Beck and Levine (2004) re-examined this dynamic using data from 40 countries between 1976 and 1998, reinforcing the notion that both stock market and banking development positively influence economic growth.
From 1990 to 2008, Estrada et al (2010) utilized the least squares dummy variable model to analyze the impact of financial development on economic growth in Asian developing countries Their research revealed that advancements in banking and stock markets, along with overall financial development, have a substantial positive influence on economic growth in both developed and developing nations.
Research from 2011 employing cointegration tests across 71 countries from 1960 to 2004 indicates a long-term equilibrium between financial development and GDP per capita, supporting bidirectional causality between finance and economic growth Bittencourt (2012) further explores this relationship in four Latin American countries from 1980 to 2007, finding that financial development enables entrepreneurs to invest in productive activities, thus enhancing economic growth Similarly, Caporale et al (2014) analyze 10 new EU member states from 1994 to 2007, revealing that while stock and credit markets have limited effects on growth due to insufficient financial depth, a more efficient banking sector could foster economic advancement Their Granger causality test suggests that causality flows from financial development to economic growth, not vice versa Valickova et al (2015) conduct a meta-analysis of 1,334 estimates from 67 studies, concluding that stock markets contribute to economic growth more rapidly than other financial intermediaries.
The second division of studies emphasizes the relationship between financial development and economic growth in developing economies Al-Yousif (2002) employs a Granger causality test within an error correction framework, analyzing data from 30 developing countries between 1977 and 1999 The findings indicate a bidirectional causality between financial development and economic growth, although these results vary by country and depend on the financial development proxies used Additionally, Kargbo and Adamu utilize the autoregressive distributed lag (ARDL) approach to further explore this relationship.
Numerous studies have explored the relationship between financial development and economic growth across various countries and time periods In Sierra Leone, research from 2009 indicates that financial development promotes economic growth primarily through investment channels Similarly, Zhang et al (2012) found a positive correlation between financial development and economic growth in 286 Chinese cities from 2001 to 2006, utilizing system GMM estimators for dynamic panel data Uddin et al (2013) applied a Cobb–Douglas production approach to analyze Kenya's financial development and economic growth from 1971 to 2011, concluding that a developed financial sector positively impacts growth Additionally, Adu et al (2013) investigated Ghana's financial development effects from 1961 to 2010 using the autoregressive distributed lag model (ARDL), revealing that the effects of financial development on economic growth can vary based on the indicators employed.
Secondly, several other studies purport the existence of a threshold impact of financial development on economic growth For instance, Cecchetti and Kharroubi
Research indicates an inverted U-shaped relationship between financial sector size and productivity growth, suggesting that beyond a certain point, further financial development may hinder real economic growth Financial sector expansion can compete with other economic sectors for limited resources, making financial booms generally non-conducive to growth In high-income countries, a negative finance-growth link emerges when credit to the private sector exceeds 100% of GDP, supporting the "vanishing effect" hypothesis of financial development This phenomenon is not attributed to factors such as low institutional quality or banking crises Additionally, financial development positively impacts economic growth only when it surpasses a specific threshold, with significant effects observed in economies at intermediate levels of financial development, while its influence diminishes in highly developed economies Conversely, in low-level financial development economies, its effect on growth is negligible An inverse U-shaped relationship has also been identified, with a finance threshold evident in the finance-growth nexus across various countries from 1980 to 2010.
Research shows that the relationship between financial development and economic growth varies across income levels Rioja and Valev (2004b) found no significant link in low-income economies, while a positive relationship exists in middle-income economies, albeit weakly significant in high-income countries Conversely, studies by De Gregorio and Guidotti (1995) and Huang and Lin (2009) suggest that financial development's positive impact on economic growth is less pronounced in high-income economies compared to low- and middle-income ones This inconsistency highlights the complex and nonlinear relationship between financial development and economic growth at different income levels Estrada et al (2015) utilized the Arellano–Bond GMM approach to analyze 108 countries from 1977 to 2011, including 20 developing Asian economies, and concluded that financial system development significantly contributes to economic growth, with a stronger impact observed in developing countries compared to advanced economies.
Some studies challenge the link between financial development and economic growth Lucas (1988) argued that the significance of financial issues is often overstated Research by Kar et al (2011) on 15 Middle Eastern and North African countries from 1980 to 2007 found no bidirectional causality between financial development and economic growth using advanced regression techniques Similarly, Menyah et al (2014) applied a panel bootstrapped Granger causality approach to data from 21 African countries between 1965 and 2008, revealing no evidence that financial development or trade liberalization fosters economic growth, nor any causality between financial development and real GDP per capita.
Based on this empirical analysis of the literature, the thesis finds several research gaps regarding the impact of financial development on economic growth as the following:
Trade openness and environmental quality
2.3.1 Impact of trade openness on environmental quality: A theoretical review
As noted by Arrow et al (1995), Stern et al (1996), Ekins (1997) and Rothman
The relationship between consumption and international trade is influenced by structural changes in production, leading to the migration of pollution-intensive industries from developed to less developed countries due to varying environmental regulations Developed nations, with strict environmental oversight, tend to become net importers of pollution-heavy goods, while poorer nations, facing weaker regulations, are often net exporters This shift in trade patterns reflects a specialization where wealthier economies focus on cleaner, service-oriented industries, and poorer economies remain entrenched in dirty, material-intensive sectors Consequently, rather than reducing environmental impacts, pollution is transferred across borders, supporting the displacement hypothesis Furthermore, trade liberalization may accelerate the growth of pollution-heavy industries in developing countries as wealthier nations tighten their environmental standards.
Trade liberalization can positively impact environmental quality by increasing real income in poorer economies, which often leads to a greater demand for stricter environmental protections Higher income individuals typically seek cleaner environments However, this dynamic can also lead to negative consequences, as the pollution haven hypothesis suggests that multinational corporations may relocate their highly polluting operations to countries with weaker environmental regulations This shift can create a comparative advantage for nations with lax standards, resulting in rich countries losing dirty industries while poorer countries absorb them Therefore, while trade openness can enhance environmental quality, it also poses risks if it encourages pollution to migrate to less regulated regions.
Lowering environmental standards to attract foreign direct investment (FDI) can create pollution havens in developing countries, which often rely on FDI for technology transfer While this can lead to the adoption of efficient and clean energy technologies that reduce pollution, the increasing global eco-awareness and the intertwining of trade, investment, and environmental issues may disrupt these capital flows.
Figure 2.6 A theoretical approach to trade openness and environmental quality
Displacing production of dirty industries from developed countries to less developed countries
- Increasing demands in stricter environmental protection
- Migrating pollution-intensive goods industries to nations with weaker environmental standards
Reducing environmental pollution via technology transfer
- Suffering higher regulatory and supervision costs of environmental pollution in developed countries
- Reallocating of international capital impose developed country governments to relax environmental requirements
- Triggering the environmental “race to bottom”
- Enhancing environmental quality via an increase in employment and income
The "race to the bottom" scenario highlights how stringent environmental regulations in developed countries lead to increased costs for polluters, as noted by Jaffe et al (1995) and Mani and Wheeler (1998) This situation incentivizes heavily polluting sectors to relocate to less regulated economies, resulting in a shift of international capital Consequently, the outflow of capital may pressure governments in developed nations to ease environmental standards, potentially flattening the environmental Kuznets curve and exacerbating pollution levels (Dasgupta et al., 2002).
Trade liberalisation has highlighted the importance of technological innovation in closed market economies, emphasizing that developed nations must continuously innovate to sustain economic growth and real incomes The diffusion of technology enables emerging economies to achieve greater efficiency, requiring fewer energy and material inputs per unit of GDP compared to their industrialized predecessors Moreover, free trade facilitates the spread of clean technologies, potentially allowing less developed countries to navigate the environmental Kuznets curve more effectively.
Globalization can lead to a competitive "race to the bottom" in environmental standards, as countries strive to attract investments and jobs, according to Wheeler (2001) However, for less developed nations, increased investment can improve environmental quality and standards by boosting employment and income Overall, globalization has been found to align with pollution reduction efforts (Dessus).
Economic globalization is a key driver of global economic growth, though its benefits remain a subject of debate This process, along with liberalization and economic openness, presents potential conflicts, particularly in relation to the widely adopted market-oriented economic reforms and the imperative of environmental protection.
Figure 2.6 illustrates a theoretical framework for understanding the channels through which trade openness impacts on environmental quality in developing countries
2.3.2 Impact of trade openness on environmental quality: An empirical review
Over the past few decades, numerous empirical studies have employed various statistical and econometric models to explore the relationship between trade openness and environmental indicators, such as CO2 and SO2 emissions, fossil fuel usage, and greenhouse gas levels However, the results of these studies remain inconclusive.
Trade openness significantly impacts environmental quality, as demonstrated by Antweiler et al (2001), who analyzed 43 countries from 1971 to 1996 Their study highlights the scale, technique, and composition effects on environmental degradation, using sulphur dioxide (SO2) as a proxy Increased trade openness correlates with higher emissions due to economic growth, particularly in the industrial sector However, the composition effect shows minimal negative impacts on environmental degradation, while the technique effect suggests that trade can promote cleaner production methods Additionally, Atici (2009) examined the relationship between GDP, energy use, and trade openness on CO2 emissions in Central and Eastern European countries from 1980 to 2002, finding evidence of an environmental Kuznets curve, where rising GDP leads to a decrease in CO2 emissions over time This indicates that globalization does not contribute to increased CO2 emissions in the region through trade openness.
Trade openness significantly impacts environmental degradation, as evidenced by Managi's (2004) study on 63 developed and developing countries from 1960 to 1999 The findings indicate that trade liberalization adversely affects environmental quality However, the study also suggests that income growth could mitigate some of the environmental damage caused by increased trade activities.
Research from 2009 indicates a negative correlation between CO2 emissions and factors such as technology transfer, research intensity, and the absorptive capacity for foreign technology within the Chinese economy, utilizing the autoregressive distributed lag (ARDL) estimator The study also highlights that energy consumption, income levels, and trade openness positively influence CO2 emissions Additionally, Chebbi et al (2011) employed cointegration techniques to examine both short-run and long-run relationships between trade openness, real GDP per capita, and CO2 emissions from 1961 onward.
Research from 2004 in Tunisia indicates that trade openness positively influences CO2 emissions in both the short and long run, though it also has a negative indirect effect in the long run, emphasizing the need for trade reforms alongside robust environmental policies A study by Le et al (2016) using cross-country panel data reveals a significant long-term relationship between trade openness and particulate matter emissions, suggesting that increased trade can lead to environmental degradation, particularly in middle and low-income countries, while high-income countries experience a less harmful impact Additionally, Shahbaz et al (2016) analyze data from 105 countries and find that trade openness generally reduces environmental quality, with varying effects depending on the income level of the countries involved.
Numerous studies indicate that the impact of trade openness on environmental quality varies between developed and developing economies, as well as across different environmental indicators For instance, Cole and Elliott (2003) replicate the methodology of Antweiler et al (2001) using emissions and pollution intensity data, revealing evidence for both the pollution haven and factor endowment hypotheses concerning CO2 and SO2 emissions, though not for BOD and NOx emissions They suggest that trade liberalization may lower per capita BOD emissions, while its effects on SO2 emissions remain uncertain; conversely, a positive correlation exists between trade liberalization and NOx and CO2 emissions Furthermore, their analysis of pollution intensity data indicates that trade liberalization could decrease pollution intensity for all four pollutants Additionally, Frankel and Rose (2005) examine trade's endogeneity through instrumental variables linked to geographic trade determinants, finding that trade significantly reduces air pollution, particularly SO2 and to a lesser extent NO2, but shows no impact on particulate matter Overall, they conclude there is minimal evidence to suggest that trade negatively affects the environment.
In a 2008 study, researchers utilized instrumental variables to assess the long-term and short-term impacts of trade openness on environmental quality Their findings revealed that while trade openness has a significant positive effect on the environment in OECD countries, it negatively influences SO2 and CO2 emissions in certain non-OECD countries, despite reducing biochemical oxygen demand (BOD) emissions The study concluded that trade openness influences emissions through environmental regulation and capital-labor dynamics Further insights were provided by Managi et al using an alternative estimation technique.
A study by Baek et al (2009) re-examines the trade-environment relationship for OECD and non-OECD countries, revealing that while trade openness can benefit environmental quality in developed nations, it negatively impacts most developing economies due to the migration of polluting industries This concern is particularly acute for poorer nations, which increasingly shoulder the pollution burdens from affluent countries Choi et al (2010) analyze CO2 emissions data from China, Korea, and Japan, identifying varying environmental Kuznets curves: Japan exhibits a U-shaped curve, while China shows an N-shaped curve, highlighting national differences in the relationship between emissions and trade openness Their research indicates significant heterogeneity among countries and variables Additionally, Mutascu (2018) employs wavelet analysis to explore the relationship between CO2 emissions and trade openness in France from 1960 to 2013, finding no short-term comovement but suggesting that long-term interactions are influenced by business cycles.
An integrated conceptual framework for the links between openness, financial development, economic growth, and environmental quality in developing countries
financial development, economic growth, and environmental quality in developing countries
Figure 2.8 illustrates a comprehensive conceptual framework that connects openness, financial development, economic growth, and environmental quality, grounded in both theoretical and empirical foundations to achieve three key objectives.
As mentioned above, the five hypotheses are as follows:
H 1A : Trade openness has significantly positive effect on financial development in developing countries
H 1B : Financial openness has significantly positive or negative effect on financial development in developing countries
H 1C : The interaction between trade openness and financial openness has significantly positive effect on financial development in developing countries
H 2 : The impact of financial development on economic growth presents as an inverted U-shaped curve
H 3 : Trade openness has significantly negative effect on environmental quality in developing countries
Figure 2.8 An integrated conceptual framework for three objectives
Notes: (+), (-), and (+/-) denote the positive effect, negative effect, and positive or negative effect, respectively
RESEARCH METHODOLOGY
Methodology
The issue of model uncertainty
Model uncertainty has been a significant focus in both statistics and econometrics for decades, as highlighted by various studies (Draper, 1995; Chatfield, 1995; Clyde & George, 2004; Wit et al., 2012; Onatski & Williams, 2003; Park et al.).
Classical methods relying on traditional or frequentist statistics often focus on a single model, which can lead to a significant underestimation of uncertainty due to their inability to effectively address model uncertainty This limitation has been highlighted in various studies, emphasizing the need for more robust approaches to account for the complexities of model selection and uncertainty (Raftery, 1993; Raftery et al., 1997, 2005; Hoeting et al., 1999; Chipman et al., 2001; Fragoso et al.).
In the realm of econometric modeling, various estimation techniques such as ordinary least squares, two-stage least squares, and generalized methods of moments are utilized (Fragoso et al., 2018) However, challenges like overconfident inferences and risky decision-making often arise when selecting a model without accounting for model uncertainty To address this, employing multiple models can provide comprehensive insights into the data's distributions To identify the best-fit model, it is essential to evaluate criteria like predictive capabilities and penalized likelihood measures, including the Akaike Information Criterion and Bayesian Information Criterion Ultimately, inferences are drawn only after selecting the most suitable model, leading to conclusions based on the assumption that this model is accurate.
Bayesian model averaging methodology and model uncertainty
The Bayesian Model Averaging (BMA) methodology, as an extension of Thomas Bayes's Bayesian inference, is increasingly recognized across various fields for addressing model uncertainty through both prior and posterior distributions (Fragoso et al., 2018; Raftery et al., 1997; Hoeting et al., 1999; Chipman et al., 2001) Hinne et al (2020) highlight several advantages of the BMA framework over traditional frequentist statistics, including a reduction in overconfidence regarding model uncertainty, improved predictions under various loss functions, avoidance of the binary acceptance or rejection of models, decreased variance in parameter estimates, robustness to model misspecification, and a significant reduction in the risk of omitted variable bias.
Bayesian Model Averaging (BMA) generates a weighted average of numerous models that encompass all possible subsets of explanatory variables, effectively functioning as a meta-analysis of meta-analyses This method utilizes posterior model probabilities as weights, serving as a goodness-of-fit measure akin to information criteria or adjusted R-squared, where models with higher posterior probabilities indicate better fit Additionally, the posterior inclusion probability, representing the total posterior probability of all true models, is calculated for each explanatory variable, reflecting its likelihood Ultimately, this process allows for the derivation of the posterior coefficient distribution across all models.
Bayesian Model Averaging (BMA) allows for the estimation of "true" regressions for each explanatory variable through the analysis of posterior coefficient distributions, enabling the calculation of posterior means and standard deviations Despite its conceptual simplicity, BMA is infrequently used in applied research related to financial development, growth, and environmental quality due to challenges such as the complexity of computing average accuracy from posterior distributions, the potentially vast number of terms in these distributions that complicate exhaustive summation, and the limited availability of user-friendly software However, advancements like Markov Chain Monte Carlo Model Composition provide efficient solutions for navigating large model spaces.
1995), reversible jump (Koop et al., 2012)
Bayesian Model Averaging (BMA) offers a systematic approach to incorporate model uncertainty, allowing for a thorough evaluation of result robustness across various competing theories and potential determinants Our methodology is primarily aligned with the work of Fernandez et al (2001a), while also drawing significant insights from Hoeting et al (1999), Eicher et al (2011), Fernandez et al (2001b), Feldkircher and Zeugner (2009), and Ley and Steel.
(2009), and Koch (2007) The BMA scheme can be briefly described as follows
BMA methodology is conducted in the context of linear regression, e.g., in Hoeting et al (1999), Fernandez et al (2001a, 2001b), Feldkircher and Zeugner
In this study, we employ a linear regression model to analyze various response variables, including the ratio of private credit to GDP, real GDP per capita growth, and CO2 emissions The model is structured as follows: y = +γ π X +ψ Z +υ, where y represents the response variable, γ is the constant term, X is a set of explanatory variables, Z includes additional control variables, and υ denotes the error term, which is assumed to have homoscedastic and normally distributed disturbances Detailed descriptions of the selected variables for each objective are provided in Section 3.2.
In our analysis, we examine a dataset comprising n observations, specifically 64 developing countries, and k regressors corresponding to our objectives—where k represents the first two objectives and k! denotes the third objective We define Μ as the collection of all considered models, with K equaling 2 raised to the power of k, indicating the potential models based on the selection of regressors All probabilities in our study are implicitly conditional on the model space Μ.
We begin from the Bayes’s theorem Let us consider two random variables,A and B The simplest form of the Bayesian theory is defined:
The equation pr A (3.2) illustrates the relationship between events A and B, where pr B A( | ) represents the likelihood of observing event B given that event A has occurred Additionally, pr B( ) indicates the overall probability of event B occurring, while pr A B( | ) denotes the probability of event A occurring after event B has taken place Lastly, ( )pr A signifies the probability of observing event A.
In Bayesian analysis, let \( y \) represent a vector or matrix of data, while \( \theta \) denotes a vector or matrix of parameters that aim to explain \( y \) By substituting \( B \) with \( \theta \) and \( A \) with \( y \) in the specified equation, we obtain significant results that enhance our understanding of the model's explanatory power.
( ) pr y pr pr y pr y θ θ θ = (3.3) where pr y( ) denotes the marginal likelihood of y, ( )pr θ denotes the prior density, ( | )pr y θ denotes the likelihood function, ( | )prθ y denotes the posterior density
Because ( )pr y does not involve θ, we can ignore the term ( )pr y to get:
Thus, the posterior is proportional to likelihood times the prior: posterior prior likelihood∝ ×
Suppose we have Kdifferent models, k=1, , K, which all seek to explain y
M k depends on parameters θ k By using M k , the posterior for the parameters is written as:
According to Hoeting et al (1999), if ∆ is the quantity of interest, then the posterior distribution of given data D is:
Using the Bayes’s theorem, the posterior model probability for M k is given by:
( ) ( ) k k k K l l l pr D M pr M pr M D pr D M pr M
The integrated likelihood for model \( M_k \) is represented by the equation \( pr D M ( k ) = \int pr D ( \theta_k , M pr k ) ( \theta_k M d k ) \theta_k \) In this context, \( \theta_k \) refers to the parameter vector for model \( M_k \), while \( pr D(\theta_k, M) \) signifies the likelihood associated with the model Additionally, \( pr(\theta_k | M_k) \) indicates the prior density of the parameters under model \( M_k \), and \( pr(M_k) \) represents the prior probability that \( M_k \) is the actual model This prior structure suggests that a specific variable is likely to be part of the true model, independent of other variables included, with a probability of 0.5 for its inclusion (Barbieri & Berger, 2004; Durlauf et al., 2012; Piironen & Vehtari).
The above principles provide a straightforward application of the BMA estimate of a parameter θ that this value can be calculated as follows:
The posterior mean (E ∆ D ) and posterior variance (Var ∆ D ) of ∆are defined as follows:
Based on Raftery (1993) and Draper (1995), ∆ = ∆ ˆ k E D M , k (3.12)
This thesis addresses the challenges of computing a large number of models by employing the Markov Chain Monte Carlo Model Composition (MC3) method, as introduced by Madigan et al (1995) The MC3 technique relies on Markov chain simulation, requiring sufficient draws to accurately approximate the relevant posterior quantities To ensure accuracy, this study utilizes 1,000,000 burn-ins followed by 3,000,000 draws from the MC3 sampler.
This thesis utilizes the Bayesian Model Averaging (BMA) approach to analyze our research data, operating under the assumption of uninformative priors for the models This choice reflects a moderate degree of belief regarding our empirical regressions, which focus on the interconnections among financial development, economic growth, and environmental quality.
The priors influence the marginal likelihood in (3.8), which parameter priors are preferable (Eicher et al., 2011; Feldkircher and Zeugner, 2009; Ley and Steel,
This thesis addresses predictive performance by utilizing the Unit Information Prior (UIP) introduced by Kass and Wasserman (1995) and hyper g-priors recommended by Fernandez et al (2001b) These methods enhance the estimation of parameter priors and model priors, leading to more robust results and improved accuracy in predictions compared to alternative approaches.
The first prior (labeled as UIP) is given by:
Where BIC K = n log(1 − R K 2 ) + p K log( ) n (3.8 3.14); c is a constant; R K 2 denotes the coefficient of determination; p K for the number of regressors
Construction of variables
3.2.1 Openness, financial development, economic growth, and environmental quality
Measuring financial development is crucial in understanding the relationship between openness and financial growth, particularly in developing countries Various indicators have been proposed, including stock market capitalization and private credit, but this thesis emphasizes the ratio of private credit to GDP as the most relevant measure This approach excludes credit from central and development banks, focusing instead on the private banking sector's role in funding entrepreneurship This indicator effectively reflects the dynamics of bank-based financial systems, highlighting the importance of financial institutions and markets in fostering private sector growth.
Trade openness depicts the extent of actual exposure to trade interactions and accounts for the effective level of integration (Kim et al., 2010a, 2010b; Kim & ctg,
Trade openness in an economy is quantified by the total exports and imports of goods and services expressed as a percentage of its GDP, as highlighted in various studies (Antweiler et al., 2001; Beck & Levine, 2004; Cole & Elliott, 2003; King & Levine, 1993a; 1993b; Levine et al., 2000; Levine & Renelt, 1992; Rajan & Zingales, 2003).
This thesis utilizes the KAOPEN index, a measure of de facto capital account openness developed by Chinn and Ito (2006), to assess financial openness The index is derived from four binary dummy variables that reflect restrictions on external accounts across various countries, as documented in the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) Specifically, the variables k1, k2, k3, and k4 denote the presence of multiple exchange rates, limitations on current account transactions, constraints on capital account transactions, and the obligation to surrender export proceeds, respectively.
To emphasize financial openness over restrictions, Chinn and Ito (2006) have inverted the binary variables, assigning a value of one when capital account restrictions are absent Furthermore, for assessing controls on capital transitions, the authors analyze the proportion of a five-year period during which capital account controls are not imposed.
The capital account openness index (KAOPEN t), derived from the principal components k 1t, k 2t, SHARE 3,t, and k 4t, reflects the level of an economy's openness to cross-border transactions Higher values of KAOPEN signify greater financial openness within the economy.
Economic growth is commonly measured using indicators such as real per capita GDP growth, productivity growth, and average per capita capital stock growth (Levine, 1996) This thesis focuses on real per capita GDP growth, which has been supported by various studies (Caporale et al., 2014; Menyah et al., 2014; Zhang et al., 2012; Calderón and Liu, 2003; Bittencourt, 2012; Levine et al., 2000; Levine and Zervos, 1998; Beck and Levine, 2004; Rioja and Valev, 2004a, 2004b).
This thesis evaluates environmental quality through the measurement of carbon dioxide (CO2), the most prevalent greenhouse gas The author selects CO2 emissions due to their significant impact on global warming and climate change.
1991) According to the Intergovernmental Panel on Climate Change (IPCC),
Carbon dioxide (CO2) is the leading greenhouse gas produced by human activities, as highlighted by the Intergovernmental Panel on Climate Change (IPCC, 2007) The main contributors to anthropogenic CO2 emissions are the burning of fossil fuels and emissions from industrial processes (EPA, 2019).
3.2.2.1 The impacts of openness on financial development: Evidence from developing countries
To strengthen the empirical results, this thesis includes controlled variables in the relationship between openness and financial development These include the following:
Institutional quality is a critical factor in financial development, as highlighted by various studies (Feng and Yu, 2021; Kutan et al., 2017) Acemoglu et al (2001) emphasize the importance of strong institutions, while Law (2009) argues that in developing countries, institutions are more effective than competition in promoting the benefits of openness on financial growth Additionally, Mishkin (2009) points out that globalization fosters financial development and economic growth through necessary institutional reforms.
This thesis incorporates institutional quality by utilizing the indicators established by Kaufmann et al (2005) It calculates the average of six governance dimensions for each country: (i) voice and external accountability, (ii) political stability and absence of violence, (iii) government effectiveness, (iv) regulatory burden, (v) rule of law, and (vi) control of corruption The index ranges from -2.5 to 2.5, with higher values reflecting superior institutional quality.
The legal origin of a country significantly influences the protection of corporate shareholders and creditors, as highlighted by Porta et al (1998) Historical experiences are crucial, yet financial development varies widely even within similar legal frameworks Rajan and Zingales (2003) emphasize that only a portion of financial development is linked to the inherited legal system, demonstrating considerable differences in financial development over the past century This thesis employs a set of dummy variables to categorize each country's legal origin as British, German, Scandinavian, or French.
This thesis examines the relationship between financial development and economic openness by utilizing real GDP per capita and its initial level to account for capital deepening Research indicates that these variables positively influence changes in financial development, supporting the hypothesis that higher levels of real per capita GDP contribute to enhanced financial growth.
Inflation rates serve as a crucial explanatory variable, as they can significantly influence decision-making processes Moderate to high inflation levels may hinder financial intermediation and discourage saving for real assets Consequently, inflation can act as a proxy for assessing macroeconomic stability (Boyd et al., 2001; Easterly & Rebelo, 1993; Ito, 2006).
This thesis utilizes population as a proxy for country size and examines the ratio of government expenditure to GDP as a key factor in achieving macroeconomic stability According to Keynes, government spending can enhance aggregate demand, helping to lift the economy out of recession Consequently, government expenditure is regarded as an important indicator of macroeconomic stability.
This thesis measures human capital input using a human capital index derived from years of schooling and returns to education, as indicated in the Penn World Table, version 9.0 This index serves as a proxy for a nation's human capital endowment and is linked to positive economic growth through its effect on productivity To assess the robustness of these findings in relation to openness, gross Foreign Direct Investment (FDI) is employed as a key variable.
Data sources
This thesis analyzes panel data from 64 developing countries, as classified by the United Nations Development Programme (UNDP), covering the period from 2003 to 2017 The UNDP classification utilizes the Human Development Index (HDI) as a key measure of development Data sources include the Global Financial Development Database for private credit to GDP and GNP per capita, and World Development Reports for trade openness, real GDP per capita, inflation, and other economic indicators The KAOPEN data is sourced from the updated index by Chinn and Ito (2019), while legal origins and institutional quality are obtained from Porta et al (1998) and Worldwide Governance Indicators, respectively Investment to GDP ratios and human capital indices are collected from the Penn World Table, with additional capital abundance metrics derived from both Penn World Table versions 6.3 and 9.1 Inward FDI stock data is sourced from the United Nations Conference on Trade and Development, and renewable energy consumption figures are extracted from the International Energy Agency (IEA) This comprehensive dataset was compiled to maximize the number of observations based on data availability.
This study utilizes a comprehensive panel data set comprising 64 developing countries, covering an updated analysis period from 2003 to 2017 With the largest number of observations to date, this research surpasses previous empirical studies, including those by Law and Demetriades (2006) and Do and Levchenko, providing a robust foundation for analysis.
(2004), and Aizenman (2004) for financial development research; Estrada et al
This thesis aims to enhance the existing empirical literature on economic growth and environmental quality by expanding the sample size It builds on previous research by Al-Yousif (2002), Cecchetti and Kharroubi (2012), and Antweiler et al (2001), among others, focusing on developing countries.
The detailed definitions and sources of each variable are shown in Table 3.1, Table 3.2, Table 3.3 Figure 3.1 shows the legal origins of collected developing countries
Table 3.4 The list of developing countries AFRICA (27 developing countries):
Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central African Republic, Egypt, Gabon, Ghana, Kenya, Malawi, Mali, Mauritius, Morocco, Namibia, Niger, Rwanda, Senegal, Sierra Leone, South Africa, Togo, Tunisia, Uganda, the United Republic of Tanzania, and Zambia represent a diverse array of countries in Africa, each contributing to the continent's rich cultural and economic landscape.
Bangladesh, Cambodia, China, India, Indonesia, Iran, Islamic Rep., Israel, Jordan, Kuwait, Malaysia, Mongolia, Myanmar, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, Turkey, United Arab Emirates, Viet Nam
LATIN AMERICA AND THE CARIBBEAN (16 developing countries):
Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Paraguay, Peru, Uruguay
Figure 3.1 Legal origins of developing countries
ECONOMIC GROWTH AND ENVIRONMENTAL QUALITY -
The impacts of openness on financial development: Evidence from developing
Table 4.1 provides an overview of various variables for the entire sample, with Table 4.1a detailing descriptive statistics for different groups of developing countries and Table 4.1b focusing on legal origins This summary includes key metrics such as means, standard deviations, and the minimum and maximum values for each variable Additionally, Table 4.2 illustrates the correlation coefficients among the core variables used in our models The analysis identifies the ratio of private credit to GDP (PrivCredit) as a measure of financial development, alongside other critical factors such as trade openness (TradeOpen), the financial openness index (KAOPEN), institutional quality (InsQuality), real GDP per capita (RGDP), inflation rate (Inflation), government consumption to GDP ratio (GovCons), total population (Population), foreign direct investment to GDP ratio (FDI), human capital index (Hcapital), and legal origin dummies for British, French, and Socialist legal systems, as well as regional dummies for Africa, Asia, and Latin America and the Caribbean.
Between 2003 and 2017, the average financial development measures indicated that the ratio of private credit to GDP (PrivCredit), trade openness (TradeOpen), and the financial openness index (KAOPEN) were 0.373, 0.763, and 0.057, respectively Analysis reveals that the ratio of private credit to GDP is higher in Asian developing countries and those with Socialist legal systems compared to their counterparts in Africa and Latin America, which have British and French legal systems Similarly, trade openness is highest in Asian countries (0.956) and lowest in Africa (0.660) Additionally, the financial openness index shows Africa's average at -0.586, significantly lower than Asia (0.101) and Latin America (1.087).
The analysis of correlation coefficients reveals a significant relationship between trade openness (TradeOpen) and the ratio of private credit to GDP (PrivCredit), indicating a strong connection with a coefficient of 0.470 In contrast, the correlation between the financial openness index (KAOPEN) and the ratio of private credit to GDP is considerably weaker, with a coefficient of only 0.101, suggesting limited empirical evidence for this relationship over the period from 2003 to 2017 across the entire sample.
This thesis presents OLS regression lines in Figure 4.1, illustrating the relationship between trade openness (TradeOpen), the financial openness index (KAOPEN), and the ratio of private credit to GDP (PrivCredit) from 2003 to 2017 The analysis reveals a positive and statistically significant correlation between trade openness and financial development, while the financial openness index shows only a weak correlation with the private credit to GDP ratio.
Tables 4.1, 4.1a, and 4.1b present descriptive statistics and correlation coefficients for all variables analyzed to explore the relationship between financial development and openness, encompassing both financial and trade openness.
Table 4.1 Summary statistics of the variables for Objective 1, whole sample, 64 economies, 2003-2017
Variable Mean Std.dev Min Max Variable Mean Std.dev Min Max
Table 4.2 Correlations between of the variables for Objective 1, whole sample, 2003-2017
PrivCredit TradeOpen KAOPEN InsQuality RGDP Inflation GovCons Population FDI Investment HCapital legor_uk legor_fr legor_so Africa Asia LatCar TimeTrend
HCapital 0.524 0.332 0.496 0.601 0.464 -0.115 0.080 0.008 0.131 0.080 1 legor_uk 0.088 0.070 -0.068 0.250 0.113 0.091 -0.007 0.059 0.002 0.025 0.170 1 legor_fr -0.197 -0.115 0.115 -0.167 -0.063 -0.120 0.047 -0.226 -0.076 -0.168 -0.202 -0.875 1 legor_so 0.227 0.096 -0.100 -0.152 -0.093 0.066 -0.081 0.344 0.151 0.293 0.075 -0.187 -0.312 1
Figure 4.1 Scatter plots of openness and financial development in developing countries, 2003 – 2017
This section outlines the findings of the BMA analysis within a cross-country financial development regression model, focusing on the effects of trade and financial openness on financial development The average ratio of private credit to GDP (PrivCredit) serves as the dependent variable, representing financial development from 2003 to 2017 The model incorporates 19 variables from 64 developing countries, resulting in a vast model space of 524,288 potential models Results are derived from a Markov chain comprising 20 million recorded draws, with 3,962,772 models examined after a 10 million burn-in period The average model size is approximately 13.465 regressors The analysis employs the benchmark prior (BRIC), unit information prior (UIP), and local empirical Bayes (LEB) approach, assuming uninformative priors for the parameters in each model.
Table 4.3 displays the posterior estimates, revealing that variables with posterior inclusion probabilities (PIP) exceeding 0.5 are robust determinants of financial development, based on a prior probability of 0.5 Notably, trade openness consistently shows a PIP greater than 0.5 across all three alternative prior structures, with a PIP of 0.998 indicating a significant positive impact on financial development Conversely, there is no evidence to suggest that financial openness or the interaction between trade and financial openness contributes to financial development Additionally, Figure 4.2 illustrates the PIP and the averaged point estimate of the corresponding regressor, while Figure 4.3 displays the cumulative model probabilities from BRIC.
Trade openness significantly influences financial development, alongside other critical factors such as institutional quality, government consumption, total population, and various regional and legal origin dummies, all showing a posterior inclusion probability (PIP) greater than 0.5 Conversely, factors like financial openness, human capital, and specific interactions involving trade and financial openness exhibit PIP values below 0.5, indicating they are less associated with financial development.
Recent empirical studies have focused on the effects of openness on financial development, while also considering other crucial factors like institutions and macroeconomic characteristics This methodology aligns with significant research, including the work of Chinn and Ito (2002).
Recent studies, including those by Rajan and Zingales (2003) and Baltagi et al (2009), highlight the significant role of trade openness in fostering financial development Specifically, Baltagi et al (2009) demonstrate that the ratio of total trade to GDP serves as a crucial indicator of financial growth These findings align with previous research by Law and Demetriades (2006) and David et al (2014), reinforcing the hypothesis (H1A) that trade openness positively impacts financial development in developing countries.
Table 4.3 The impacts of openness on financial development: posterior estimates under uniform model priors
Post SD PIP Post mean
Post SD PIP Post mean
Interaction between trade openness and institutional quality 1.000 0.389 0.058 1.000 0.389 0.058 1.000 0.396 0.062
Interaction between financial openness and institutional quality 0.797 -0.051 0.031 0.797 -0.051 0.031 0.855 -0.054 0.029
Latin America and The Caribbean dummy 0.743 -0.116 0.082 0.744 -0.116 0.082 0.883 -0.141 0.072
Interaction between financial openness and real GDP per capita 0.699 -0.008 0.011 0.698 -0.008 0.011 0.855 -0.054 0.029
Interaction between trade openness and financial openness 0.294 -0.021 0.038 0.294 -0.021 0.038 0.454 -0.032 0.041
Interaction between trade openness and real GDP per capita 0.161 -0.009 0.025 0.160 -0.009 0.025 0.244 -0.013 0.028
Notes: BRIC denotes benchmark prior; UIP denotes unit information prior; and LEB denotes local empirical Bayes approach
Figure 4.2 Marginal densities of trade openness, financial openness, and the interaction between trade openness and financial openness from BRIC
This thesis diverges from the findings of Baltagi et al (2009), revealing no significant evidence that the interaction between trade openness and financial openness is a key factor in financial development Unlike the strong support provided by Baltagi et al and Law and Demetriades (2006) for the Rajan and Zingales (2003) hypothesis, which posits that financial development thrives when an economy is open to both capital flows and trade, this research does not substantiate the H1C hypothesis Consequently, it concludes that the interaction of trade and financial openness does not have a significantly positive impact on financial development in developing countries.
Numerous empirical studies have examined the relationship between financial openness and financial development using various econometric methods, including the BMA approach Research by scholars such as Baltagi et al (2007), Ito (2006), Chinn and Ito (2002, 2006), and Law and Demetriades (2006) indicates both positive and negative effects of financial openness on financial development However, Hauner et al (2013) highlight that the evidence largely undermines the notion that financial liberalization fosters financial development Consequently, these findings do not support the H1B hypothesis, which posits that financial openness has a significant positive or negative impact on financial development in developing countries.
The study highlights that institutional quality significantly enhances financial development, aligning with findings by Acemoglu et al (2001) and Law (2009) Additionally, the interplay between trade openness and institutional quality markedly boosts financial development, indicating that robust institutions favor trade openness Conversely, developing countries with higher institutional quality experience diminished benefits from financial liberalization compared to those with lower institutional quality Furthermore, government consumption positively influences financial development, corroborating the evidence presented by Kim et al (2010a) and Kim et al (2010b) Lastly, a correlation exists between financial development and population growth, supporting the empirical findings of David et al (2014).
Evidence indicates that the British legal origin, along with the dummies for Africa and Latin America and The Caribbean, negatively impacts financial development, particularly in comparison to the French legal origin Developing nations in Africa and Latin America exhibit lower financial development levels than their Asian counterparts, suggesting that these regions' conditional variables diminish the benefits of financial openness Additionally, Foreign Direct Investment (FDI) shows a short-term negative relationship with financial development, while inflation positively influences it in the long run Moreover, the interaction between financial openness and real GDP per capita reveals a significant negative correlation with financial development, reflecting periods of limited international capital mobility in developing countries, a finding that contradicts Rajan and Zingales' conclusions.
Figure 4.3 Cumulative model probabilities from BRIC for Object 1
The impact of financial development on economic growth: Evidence from
Table 4.4 provides a summary of descriptive statistics for the entire sample, while Tables 4.2a and 4.2b detail the statistics for various groups of developing countries and legal origins, respectively These tables include key metrics such as means, standard deviations, and minimum and maximum values for the different variables The correlation coefficients among core variables are shown in Table 4.5 To analyze the relationship between financial development and economic growth, this thesis employs the ratio of private credit to GDP (PrivCredit) as a financial development proxy, real GDP per capita growth (Y) as an economic growth indicator, and several additional variables, including the investment-to-GDP ratio, inflation rate, government consumption-to-GDP ratio, human capital index, trade openness, financial openness index (KAOPEN), foreign direct investment-to-GDP ratio (FDI), institutional quality, population growth, and legal origins dummies for British, French, and Socialist legal origins, along with regional dummies for Africa, Asia, and Latin America and the Caribbean.
From 2003 to 2017, the average economic growth rate was 0.028, while the average financial development measure, represented by the ratio of private credit to GDP, was 0.373 Analysis reveals that developing countries in Asia and those with Socialist legal systems experienced higher economic growth rates compared to their counterparts in Africa, Latin America, and those with British and French legal systems Correspondingly, financial development levels mirrored these trends, with Asian countries achieving the highest financial development at an average of 0.538, contrasted with Africa's lowest average of 0.245.
The correlation coefficients indicate a strong relationship between economic growth (Y) and the ratio of private credit to GDP (PrivCredit), which serves as a proxy for financial development, with a significance level of 0.001 throughout the period from 2003 onwards.
Between 2003 and 2017, an analysis of developing countries revealed an insignificant relationship between economic growth (Y) and financial development (PrivCredit) This finding, illustrated in Figure 4.4, suggests that the level of financial development does not significantly impact economic growth during this period.
Table 4.4 and Table 4.2a, 4.2b also provides descriptive statistics and the correlations’coefficients of all other the variables involved to investigate impact of financial development on economic growth in developing countries
Table 4.4 Summary statistics of the variables for Objective 2, whole sample, 64 economies, 2003-2017
Variable Mean Std.dev Min Max Variable Mean Std.dev Min Max
Table 4.5 Correlations between of the variables for Objective 2, whole sample, 2003-2017
Y PrivCredit TradeOpen KAOPEN InsQuality Inflation GovCons FDI Investment PopGrowth HCapital legor_uk legor_fr legor_so Africa Asia LatCar TimeTrend
HCapital -0.006 0.524 0.332 0.496 0.601 -0.115 0.080 0.131 0.080 -0.253 1 legor_uk -0.025 0.088 0.070 -0.068 0.250 0.091 -0.007 0.002 0.025 0.048 0.170 1 legor_fr -0.135 -0.197 -0.115 0.115 -0.167 -0.120 0.047 -0.076 -0.168 0.040 -0.202 -0.875 1 legor_so 0.322 0.227 0.096 -0.100 -0.152 0.066 -0.081 0.151 0.293 -0.175 0.075 -0.187 -0.312 1
Figure 4.4 Scatter plots of financial development and economic growth in developing countries, 2003 - 2017
The findings from the Bayesian Model Averaging (BMA) approach, as detailed in Table 4.6, focus on a cross-country economic growth regression model where the growth rate of real GDP per capita (Y) serves as the dependent variable from 2003 to 2017 The model incorporates 19 variables from 64 developing economies, resulting in a vast model space of 524,288 potential configurations The analysis is based on a Markov Chain process involving 20 million recorded draws, with 3,962,772 models evaluated after a burn-in period of 10 million The average model size is approximately 13.465 regressors Table 4.6 also compares the benchmark prior (BRIC), the Unrestricted Information Prior (UIP), and the Local Empirical Bayes (LEB) approach, providing posterior inclusion probabilities (PIPs), posterior means, and posterior standard deviations under the assumption of uninformative priors Additionally, Figure 4.6 illustrates the cumulative model probabilities derived from the BRIC approach.
Figure 4.6 Cumulative model probabilities from BRIC for Object 2
Only variables with posterior inclusion probabilities (PIPs) above 0.5 are considered robust determinants of economic growth The ratio of private credit to GDP and its square both exceed this threshold, indicating a significant impact on economic growth Notably, while financial development negatively influences economic growth, there exists a crucial threshold effect; economic growth occurs only when a specific level of financial development is reached This relationship is illustrated in the marginal densities of financial development from BRIC countries.
Table 4.6 The impacts of financial development on economic growth: posterior estimates under uniform model priors
Post SD PIP Post mean
Post SD PIP Post mean
Latin America and The Caribbean dummy 0.982 -0.014 0.004 0.981 -0.014 0.004 0.999 -0.015 0.004
Financial development 0.502 -0.495 5.326 0.501 -0.499 5.352 0.553 -2.354 11.454 The square of financial development 0.502 0.243 2.663 0.502 0.245 2.676 0.553 1.172 5.727
Interaction between financial openness and institutional quality 0.076 0.000 0.001 0.076 0.000 0.001 0.395 -0.001 0.001
Interaction between trade openness and institutional quality 0.055 0.000 0.001 0.055 0.000 0.001 0.272 0.000 0.002
Interaction between trade openness and financial openness 0.042 0.000 0.000 0.042 0.000 0.000 0.240 0.000 0.001
Notes: BRIC denotes benchmark prior; UIP denotes unit information prior; and LEB denotes local empirical Bayes approach
Figure 4.5 Marginal densities of financial development from BRIC
Table 4.6 highlights the significant role of various independent variables in economic growth, with PIPs exceeding 0.5 across three alternative prior structures Key factors include population growth, investment to GDP ratio, the Socialist legal origin dummy, time trend, the Latin America dummy, FDI, and the Africa dummy Notably, the investment to GDP ratio, Socialist legal origin dummy, and FDI negatively impact economic growth, while population growth, time trend, and the Latin America and Africa dummies positively correlate with it Additionally, the interaction between trade and financial openness shows an insignificant effect on economic growth in developing countries Other variables, such as inflation, trade openness, institutional quality, government consumption, human capital, and financial openness, have PIPs below 0.5, indicating they are not associated with economic growth.
Previous studies have investigated the relationship between financial development and economic growth, controlling for factors like macro-characteristics and institutional quality, as supported by Acemoglu et al (2005) and Klein (2005) The findings indicate a U-shaped relationship, where financial development, measured by the ratio of private credit to GDP, initially has a negative effect on growth but becomes positive after a certain threshold This suggests that enhanced financial systems can foster growth in developing countries However, these results contrast with the inverted U-shaped curve proposed by Law and Singh (2014), Shen and Lee (2006), Cecchetti and Kharroubi (2012), and Arcand et al (2015), which challenges the H2 hypothesis regarding financial development's impact on economic growth The discrepancy may arise from the fact that in developing nations, the influence of financial development on growth is more reliant on private sector investment behavior, where increased private lending may lead to lower growth due to the private sector's limited capacity to effectively utilize resources for profitable investments.
Financial development is essential for stimulating economic growth, as it fosters active and innovative entrepreneurial activities.
The analysis reveals three key variables positively influencing economic growth Firstly, the investment to GDP ratio significantly enhances economic growth, aligning with findings from Levine (2004), Caporale et al (2014), Kargbo and Adamu (2009), and Law and Singh (2014) Secondly, the research strongly supports the notion that Socialist legal origins promote economic growth more effectively than French legal origins, as posited by Porta et al (1998) and Rajan and Zingales (2003) Lastly, a notable finding is the substantial positive impact of foreign direct investment (FDI) on economic growth, corroborated by Hermes and Lensink (2003), Lee and Chang (2009), and Omran and Bolbol (2003), although this contradicts the conclusions of Zhang et al (2012).
The findings indicate that population growth adversely affects economic growth, aligning with the Malthusian theory while contradicting the views of Kelley and Schmidt (1999) and Kuznets (1967) Additionally, a notable negative time trend suggests that evolving common factors across developing nations hinder economic growth Furthermore, in comparison to Asian developing countries, the presence of Latin America, the Caribbean, and Africa reduces the beneficial effects of financial development on economic growth.
The impact of trade openness on environmental quality: Evidence from
Table 4.7 presents descriptive statistics for the entire sample, while Tables 4.3a and 4.3b in Appendix 4.3 provide insights into various groups of developing countries and their legal origins These tables detail the means, standard deviations, and the minimum and maximum values of the variables analyzed Correlation coefficients among the core variables are displayed in Table 4.8 To assess the impact of trade openness on environmental quality, the study employs CO2 emissions (metric tons per capita) as an indicator of environmental pollution and the ratio of total trade to GDP as a measure of trade openness Additional variables include the financial openness index, economic intensity, GNP per capita, relative income, human capital index, adjusted capital abundance, relative capital abundance, inward FDI stock relative to capital stock, the share of renewable energy consumption, institutional quality, and legal origin dummies for British, French, and Socialist legal systems, along with regional dummies for Africa, Asia, and Latin America and the Caribbean.
From 2003 to 2017, the average trade openness (TradeOpen) was 0.763, while average CO2 emissions per capita reached 2.714 metric tons Notably, developing countries in Asia and those with British legal systems exhibited the highest trade openness compared to their counterparts in Africa and Latin America, as well as those with Socialist and French legal systems This trend was mirrored in CO2 emissions, with Asian countries averaging 5.195 metric tons and British legal systems at 3.436 metric tons In contrast, African nations and those with French legal systems reported the lowest CO2 emissions, averaging 1.195 and 2.236 metric tons, respectively.
The correlation coefficients reveal a significant relationship between trade openness (TradeOpen) and CO2 emissions (CO2) in developing countries from 2003 to 2017, with a correlation value of 0.339 Additionally, the OLS regression analysis illustrates a positive yet insignificant relationship between trade openness and CO2 emissions during this period.
Table 4.7a and Table 4.3a, 4.3b also provides descriptive statistics and the correlations ‘coefficients of all other the variables involved to investigate impact of trade openness on CO2 emissions in developing countries
Table 4.7 Summary statistics of the variables for Objective 3, whole sample, 64 economies, 2003-2017
Variable Mean Std.dev Min Max Variable Mean Std.dev Min Max
Table 4.8 Correlations between of the variables for Objective 3, whole sample, 2003-2017
CO2 TradeOpen KAOPEN EcoIntensity K/L REL K/L Income REL.INC Inward.FDI/K REnergyUse legor_uk legor_fr legor_so Africa Asia LatCar TimeTrend
REnergyUse -0.571 -0.372 -0.291 -0.188 -0.562 -0.557 -0.483 -0.489 -0.281 1.000 legor_uk 0.118 0.181 -0.016 0.181 0.211 0.213 0.169 0.176 0.122 0.022 1.000 legor_fr -0.130 -0.194 0.069 -0.157 -0.171 -0.172 -0.120 -0.125 -0.122 0.015 -0.875 1.000 legor_so 0.033 0.038 -0.109 -0.035 -0.066 -0.069 -0.089 -0.092 0.008 -0.074 -0.187 -0.312 1.000
Figure 4.7 Scatter plots of trade openness and environmental quality in developing countries, 2003 – 2017
This section presents the findings from the Bayesian Model Averaging (BMA) approach, which incorporates any subset of up to 21 determinants of environmental quality, resulting in a model space of 2,097,152 potential models The analysis is based on Markov chain simulations, yielding 20 million recorded draws after a 10 million burn-in period, and exploring 3,954,118 models The average posterior expected model size is 15.321 regressors The study employs the benchmark prior (BRIC), unit information prior (UIP), and local empirical Bayes (LEB) approaches, assuming uninformative priors for the parameters in each model Our estimates focus on a sample of 64 developing countries from 2003 to 2017, with CO2 emissions (metric tons per capita) serving as a proxy for environmental quality Figure 4.9 illustrates the cumulative model probabilities derived from the BRIC approach.
Table 4.9 displays the posterior estimates, indicating that variables with posterior inclusion probabilities (PIP) exceeding 0.5 are robust determinants of environmental quality Notably, trade openness consistently shows a PIP below 0.5 across all prior structures, suggesting an insignificant impact on environmental quality with a PIP of 0.033 In contrast, financial openness demonstrates a strong positive effect on environmental quality, with a PIP of 1.000, significantly reducing CO2 emissions Additionally, Figure 4.8 illustrates the PIP and marginal densities of trade openness from BRIC nations in relation to environmental quality, highlighting the averaged point estimates and conditional expected values.
Table 4.9 The impacts of trade openness on environmental quality: posterior estimates under uniform model priors
Post SD PIP Post mean
Post SD PIP Post mean
Latin America and The Caribbean dummy 1.000 -0.314 0.046 1.000 -0.314 0.046 1.000 -0.314 0.046
Inward FDI stock/capital stock 1.000 0.102 0.016 1.000 0.102 0.016 1.000 0.102 0.016
Interaction between trade openness, relative capital-abundance and relative income 1.000 -0.048 0.008 1.000 -0.048 0.008 1.000 -0.048 0.008
Interaction between trade openness and the square of relative capital-abundance 0.535 -18.881 85.169 0.534 -19.010 85.448 0.533 -18.421 84.171
Interaction between trade openness and relative capital-abundance 0.527 37.575 170.339 0.528 37.833 170.896 0.527 36.656 168.343
The square of capital-abundance (adjusted) 0.521 5.923 44.628 0.517 5.898 44.543 0.514 5.729 43.875 Capital abundance (adjusted) 0.507 -10.606 89.256 0.511 -10.558 89.085 0.513 -10.218 87.750
Interaction between trade openness and the square of relative income 0.036 0.928 19.101 0.035 0.918 19.005 0.034 0.921 19.035
Interaction between trade openness and relative income 0.035 -1.855 38.201 0.035 -1.836 38.010 0.034 -1.841 38.070
The square of economic intensity 0.034 -0.533 15.791 0.034 -0.527 15.709 0.033 -0.522 15.642
Notes: BRIC denotes benchmark prior; UIP denotes unit information prior; and LEB denotes local empirical Bayes approach
Figure 4.8 Marginal densities of openness from BRIC
In addition to financial openness, several other factors significantly influence environmental quality in developing countries, with posterior inclusion probabilities (PIPs) exceeding 0.5 across various model structures Key determinants include the Socialist legal origin, geographic dummies for Africa and Latin America and the Caribbean, adjusted capital abundance interactions with income, inward foreign direct investment (FDI) relative to capital stock, renewable energy consumption, and various interactions involving trade openness and capital abundance Conversely, variables such as British legal origin, income squared, and certain trade openness interactions exhibit PIPs below 0.5, indicating they do not significantly impact environmental quality in these regions.
Figure 4.9 Cumulative model probabilities from BRIC for Object 3
This thesis examines trade variables and finds that increased trade openness in developing countries does not lead to higher CO2 emissions, aligning with Jalil and Mahmud (2009) This contradicts Antweiler et al (2001), who argue that freer trade promotes environmental benefits through a greater demand for cleaner production methods Additionally, the findings offer limited support for the pollution haven hypothesis, which suggests that wealthy nations with strict regulations may offload polluting industries to poorer countries, as noted by Ang (2009) and others Consequently, the thesis does not provide strong evidence for this hypothesis.
The hypothesis posits that trade openness negatively impacts environmental quality in developing countries It examines the interaction between trade openness and relative capital-abundance on CO2 emissions, revealing that the outcomes differ from the predictions of Antweiler et al (2001) and Managi et al (2009), which suggested that higher capital-abundance would reduce pollution in response to trade Instead, the findings align with Cole and Elliott (2003), indicating that developing nations with lax environmental regulations experience increased pollution due to enhanced trade, as their comparative advantage lies in polluting industries The analysis shows a negative correlation between the square of relative capital-abundance and CO2 emissions, suggesting that while increased capital abundance initially raises emissions, the effect diminishes over time Additionally, the results indicate that greater trade openness can lead to increased pollution, supporting the pollution haven hypothesis, particularly since high-income countries are capital-intensive However, the study finds no evidence that rising relative income correlates with increased CO2 emissions, with each incremental rise in income having a diminishing effect.
Elliott (2003) and Managi et al (2009) found a negative correlation between CO2 emissions and trade openness when considering factors like relative capital abundance and income levels However, this conclusion contradicts the findings of Antweiler et al.
(2001) and Cole and Elliott (2003), while it is consistent with Managi et al (2009)
This thesis presents compelling evidence that financial openness significantly influences environmental quality by lowering CO2 emissions in developing countries The findings suggest that financial liberalization fosters an increase in foreign direct investment (FDI) and research and development (R&D) investments, which subsequently drive economic growth and enhance environmental quality, as supported by the research of Tamazian et al (2009) and Tamazian and Rao.
The study reveals that, unlike the French legal origin, the British legal origin does not significantly enhance environmental quality Additionally, the Socialist legal origin diminishes the positive impacts of trade liberalization on environmental standards Notably, developing countries in Africa and Latin America and the Caribbean experience lower levels of environmental pollution than their Asian counterparts Furthermore, the research indicates that increased capital abundance, when coupled with rising income, contributes to improved environmental quality, as supported by the findings of Managi et al.
Research indicates a positive correlation between inward foreign direct investment (FDI) stock and domestic capital stock, as well as CO2 emissions, supporting the claims of Antweiler et al (2001) Additionally, CO2 emissions exhibit positive time trends, aligning with the findings of Managi et al (2009) However, these results contrast with the conclusions drawn by Cole and Elliott (2003).
A decrease in CO2 emissions is linked to a higher share of renewable energy consumption, aligning with the findings of Sebri and Ben-Salha (2014), Shafiei and Salim (2014), Jebli et al (2016), Bilgili et al (2016), and Zafar et al (2020) Unlike the conclusions drawn by Antweiler et al (2001), this thesis indicates that economic intensity, its square, and income's square do not have a strong correlation with environmental quality Additionally, the research reveals that while increases in capital abundance initially reduce CO2 emissions, beyond a certain threshold, they begin to negatively impact environmental quality, contradicting Antweiler et al.'s findings.
The findings challenge the validity of both scale and technique effects, as well as the environmental Kuznets curve, by revealing that there is an inverted-U-shaped relationship between per capita income and pollution Specifically, in developing countries, the research indicates that rising income levels lead to increased CO2 emissions.
CONCLUSIONS
Main findings
The impacts of openness on financial development: Evidence from developing countries
This thesis aims to explore the positive effects of trade and financial openness on financial development, potentially driving economic growth in developing countries Analyzing data from 64 developing nations between 2003 and 2017, the research offers new insights into how financial and trade openness influence financial development, measured by the average ratio of private credit to GDP.
Our research highlights that trade openness, measured by the ratio of total trade to GDP, plays a vital role in financial development, aligning with findings from notable studies by Rajan and Zingales (2003) and others This strongly supports the H1A hypothesis, demonstrating that trade openness positively impacts financial development in developing countries Conversely, the evidence for financial openness fostering financial development is limited, echoing the conclusions of Hauner et al (2013) and other scholars.
Research by Trabelsi and Cherif (2017) indicates that financial openness does not have a significant positive or negative impact on financial development in developing countries, contradicting the H1B hypothesis Additionally, the findings reveal an insignificant relationship between financial development and the simultaneous opening of trade and capital accounts, which challenges the Rajan and Zingales hypothesis This conclusion diverges from the perspectives of Baltagi et al (2009) and Law and Demetriades (2006) Consequently, the evidence does not support the H1C hypothesis, which posits that the interaction between trade and financial openness positively influences financial development in developing nations.
Empirical results indicate that a favorable institutional environment enables developing economies to leverage the benefits of financial openness, as highlighted by Acemoglu et al (2001) and Law (2009) Stiglitz (2000) emphasizes that hasty financial and capital market liberalization without an effective regulatory framework contributed to economic issues, noting that India and China thrived during global crises due to their strong capital flow controls Additionally, the findings support the notion that British legal origin fosters better financial development compared to French legal origin, as suggested by Porta et al (1998) Furthermore, developing nations in Africa and Latin America exhibit lower financial development levels than their Asian counterparts The thesis reveals a short-run negative relationship between foreign direct investment (FDI) and financial development, while in the long run, financial development is positively influenced by higher inflation rates, as noted by Kim et al (2010b) Notably, financial openness, when interacted with real GDP per capita, shows a significant negative correlation with financial development, contradicting the findings of Rajan and Zingales (2003).
The impact of financial development on economic growth: Evidence from developing countries
This thesis explores the relationship between financial development and economic growth, a key topic in development economics for decades The authors are driven by the scarcity of empirical studies that utilize the Bayesian Model Averaging (BMA) approach, as introduced by Fernandez et al (2001b) This research specifically examines 64 developing countries over the period from 2003 onwards.
In 2017, a thesis examined the relationship between financial development and economic growth in developing countries by utilizing the ratio of private credit to GDP as a measure of financial development and real per capita GDP growth as an indicator of economic growth.
The findings reveal a U-shaped relationship between financial development and economic growth, where financial development initially has a negative impact, but eventually contributes positively to output growth This thesis presents compelling evidence that in developing economies, a decrease in economic growth at a certain threshold can be countered by an increase in the ratio of private credit to GDP, leading to enhanced economic growth These results challenge previous studies that suggested an inverse U-shaped curve, such as those by Law and Singh (2014), Shen and Lee (2006), Cecchetti and Kharroubi (2012), and Arcand et al (2012), and do not strongly support the H2 hypothesis regarding the inverted U-shaped impact of financial development on economic growth.
Regarding control variables, the thesis suggests that investment to GDP ratio has positive effects on economic growth, which is remarkably similar to Levine
(2004), Caporale et al (2014), Kargbo and Adamu (2009), and Law and Singh (2014)
The findings of this thesis highlight the significant role of Socialist legal origins in promoting economic growth, surpassing the influence of French legal origins, as supported by previous research from Porta et al (1998) and Rajan and Zingales (2003) Additionally, it confirms that foreign direct investment (FDI) has a substantial positive effect on economic growth, aligning with the studies of Hermes and Lensink (2003), Lee and Chang (2009), and Omran and Bolbol (2003), while contradicting Zhang et al (2012) Furthermore, the thesis presents evidence for the Malthusian theory, indicating that population growth negatively affects economic growth, contrary to the findings of Kelley and Schmidt (1999) and Kuznets (1967) Lastly, it reveals that time trends, along with regional factors in Latin America, the Caribbean, and Africa, reduce the positive effects of financial development on economic growth in developing nations.
5.1.3 The impact of trade openness on environmental quality: Evidence from developing countries
The impact of trade openness on environmental quality, particularly in developing countries, has been a topic of intense debate for the past twenty years This thesis explores the relationship between trade openness and CO2 emissions per capita as a measure of environmental pollution A significant contribution of this research is the use of a regression model based on the Bayesian Model Averaging (BMA) approach, as proposed by Fernandez et al (2001b), to address model uncertainty in assessing the environmental effects of trade openness Additionally, this study incorporates financial openness, legal origins, and renewable energy consumption as crucial factors influencing environmental quality, which were overlooked in earlier studies by Antweiler et al (2001) and Cole and Elliott (2003).
Empirical evidence indicates that trade openness does not lead to environmental degradation in developing countries, challenging the pollution haven hypothesis proposed by various researchers Consequently, the findings do not strongly support the hypothesis that trade openness negatively impacts environmental quality in these nations Additionally, there is a positive correlation between relative capital abundance and CO2 emissions in the context of trade openness, aligning with Cole and Elliott's assertion that increased capital abundance can enhance environmental quality.
In the context of developing countries, this finding is not in line with Antweiler et al
Research indicates that increasing relative capital-abundance leads to a diminishing marginal effect on CO2 emissions in relation to trade openness, supporting findings by Cole and Elliott (2003) regarding NOx and BOD emissions Furthermore, evidence suggests that the interplay between trade openness, relative capital-abundance, and relative income negatively impacts CO2 emissions, aligning with the conclusions drawn by Managi et al (2009).
The thesis highlights that non-trade variables, such as financial openness, renewable energy consumption, inward FDI stock relative to domestic capital stock, income, and capital abundance, are essential for determining environmental quality Notably, financial openness and renewable energy consumption significantly enhance environmental quality by lowering CO2 emissions Conversely, inward FDI stock and income negatively impact environmental quality Additionally, the relationship between capital abundance and environmental quality is characterized by an inverted U-shaped curve.
Policy implications
The main findings draw out some key policy implications for improving financial development, economic growth, environmental quality in the context of developing countries as follows
Trade policies in developing countries should focus on a coordinated approach that includes foreign direct investment (FDI) to maximize trade benefits while minimizing adverse effects Specialization in alignment with global price relations is essential for small economies Negotiating multilateral, bilateral, and regional trade agreements through platforms like the WTO can enhance exports and support necessary trade reforms Import decisions for traditional primary commodities should be based on marginal costs equating to marginal revenue from exports, rather than mere pricing Additionally, protective measures for manufacturing, increased tariffs coupled with reduced production subsidies, and equal incentives for domestic and export markets are crucial The sequencing and timing of trade policies must be carefully considered, and customization of these policies is necessary to address the unique circumstances of each developing nation.
Financial liberalisation offers significant advantages for financial development in small developing countries compared to larger developing nations To maximize these benefits, it is essential to implement active institutional reforms that enhance the environment for successful financial liberalisation This thesis emphasizes that such reforms are critical for harnessing the advantages of openness in the financial sector Key policies should focus on eliminating financial repression, including interest rate ceilings, administrative credit allocations, and high reserve requirements However, the sequencing, timing, and specific content of these financial liberalisation policies must be tailored to the unique circumstances of each developing country.
Improving institutional quality is essential for fostering financial development, supporting the findings of Acemoglu et al (2001), Law (2009), and Mishkin (2009) This article advocates for active institutional reform to maximize the benefits of trade and financial openness in developing countries Key policy recommendations include enhancing government effectiveness through improved public sector efficiency, budget management, and public expenditure control; strengthening regulatory quality via trade, foreign exchange, labor market, and competition policies; reforming property rights and intellectual property laws; combating corruption through increased transparency and accountability among public officials; and decentralizing government functions.
Enhancing independent and responsibilities in local and regional governments; (vii) Improving legislative and executive transparency
To enhance foreign direct investment (FDI) in developing countries, it is essential to develop a comprehensive FDI attraction strategy that not only captures and facilitates inflows but also retains them effectively This involves maximizing the benefits of FDI spillovers through coordinated policies and regulatory approaches, improving policy effectiveness, and reducing sectoral restrictions to foster financial development Additionally, providing investment incentives such as grants, loans, and subsidized infrastructure can significantly attract investors Strengthening investor confidence is crucial, which can be achieved by upgrading the regulatory environment and implementing robust investor aftercare programs Finally, establishing an investment grievance mechanism can help prevent disputes between investors and states, further promoting a stable investment climate.
To foster financial development in emerging economies, several key policies should be implemented: Firstly, establishing a robust wholesale foreign exchange market alongside central bank intervention strategies is essential Secondly, enhancing the regulatory and institutional framework will support sustainable financial growth Thirdly, forming an integrated financial regulatory committee can streamline oversight Additionally, it is crucial to assess finance sector risks in highly dollarized economies Promoting international cooperation for early warning systems and crisis response is also vital Furthermore, developing a strategic plan to ensure compliance with the Basel Core Principles will strengthen financial regulation and supervision Lastly, creating a comprehensive framework for prudential regulation and supervision of financial institutions will enhance overall financial stability.
The investment policy focuses on enhancing the effectiveness and scope of public investment laws, ensuring diligent monitoring and corporate governance post-financing It aims to improve the ex-ante evaluation of promising investment opportunities for better resource allocation, while promoting public investment in innovation activities that drive growth Additionally, the policy seeks to minimize unproductive investments and wasteful practices, alongside restructuring and optimizing the performance of state-owned enterprises.
Population control policy is crucial for stimulating economic growth in developing countries It involves accurately predicting national population growth, assessing government policy options, and integrating measures to shape and reduce population growth within governmental frameworks Key strategies include reducing birth rates through education, particularly for women, providing family planning services, and offering positive financial incentives Additionally, creating policies that balance family obligations with work commitments is essential for achieving sustainable population levels.
The regal revolution, particularly rooted in French legal origins, emphasizes the importance of several legal policies aimed at stimulating economic growth in developing countries Key strategies include enhancing the effectiveness and reach of commercial laws, improving financial regulations, and curbing black markets and insider trading Additionally, there is a focus on fostering fair competition among financial institutions and ensuring that legal regulations support financial stability Reforming the regulatory frameworks for foreign trade and foreign currency is also essential for creating a robust economic environment.
Renewable energy policies aim to foster environmental responsibility in manufacturing and consumption by promoting cleaner technologies They encourage public-private partnerships to explore renewable energy sources, while also increasing the prices of fossil fuels to drive the adoption of renewable alternatives Enhancing regulatory measures is essential for raising public awareness about environmental protection and the benefits of renewable energy Additionally, implementing carbon pricing through stringent regulations can further support these initiatives Finally, advancing technologies that convert non-renewable energy into green energy is crucial for a sustainable future.
To enhance inward foreign direct investment (FDI) in cleaner technologies, it is essential to establish investment promotion agencies dedicated to this goal Additionally, offering fiscal and financial incentives, such as grants, loans, tax benefits, subsidized infrastructure, and regulatory concessions, can significantly facilitate the inflow of clean FDI Furthermore, investing in infrastructure is crucial to stimulate and support these clean FDI flows effectively.
Human capital policy focuses on enhancing the quality of education through increased schooling options, investing in early childhood education, and implementing mentoring programs for adolescents Additionally, it emphasizes the importance of both public and private job training initiatives, fostering collaboration among trainers, and promoting a national human resource development fund strategy Furthermore, the policy supports vocational training provided by private sector organizations to equip individuals with essential skills for the workforce.
Overall conclusions, limitations, and further research of the thesis
This thesis investigates the interplay between openness (trade and financial), financial development, economic growth, and environmental quality as key socio-economic indicators for sustainable development in developing countries Despite extensive research on these macroeconomic factors, previous findings remain inconclusive Utilizing a Bayesian Model Averaging (BMA) approach to address model uncertainty, this study aims to explore how openness influences financial development, how financial development affects economic growth, and how trade openness impacts environmental quality The analysis is based on panel data from 64 developing countries covering the years 2003 to 2017, offering a fresh perspective compared to traditional frequentist statistical methods that overlook model uncertainty.
The thesis concludes that trade openness positively influences financial development, which may initially hinder economic growth in developing countries, but eventually contributes positively to it However, trade openness does not significantly determine economic growth or correlate with environmental quality in these nations Conversely, financial openness has a minimal positive impact on both financial development and economic growth, yet it is vital for enhancing environmental quality by lowering CO2 emissions in developing countries.
This thesis significantly contributes to the understanding of financial development, economic growth, and environmental quality in developing countries by employing a Bayesian Model Averaging (BMA) regression model to address model uncertainty It examines the effects of openness on financial development, the influence of financial development on economic growth, and the relationship between trade openness and environmental quality Additionally, the research highlights a diverse range of competing theories related to these critical areas, enriching the discourse on their interconnections.
This thesis presents three key contributions regarding the effects of openness on financial development Firstly, it demonstrates that a favorable institutional environment enables developing economies to fully leverage the advantages of openness for financial growth Secondly, it challenges the Rajan and Zingales hypothesis, finding no support for the idea that simultaneous openness to trade and capital flows enhances financial development, as indicated by the private credit-to-GDP ratio in developing nations—a topic previously overlooked in financial development studies Lastly, it highlights the significance of legal origins as determinants of financial development, revealing that British legal origins diminish the positive effects of openness compared to French legal origins, an aspect not previously explored in the context of developing countries.
This thesis offers three significant insights into the relationship between financial development and economic growth Firstly, it presents new evidence indicating that financial development, measured by the ratio of private credit to GDP, influences economic growth in developing countries through a U-shaped curve Secondly, it highlights the positive impact of Socialist legal origins on economic growth, surpassing that of French legal origins, a topic previously unexplored in this context Lastly, the research confirms that implementing population control policies can be a crucial strategy for enhancing economic growth in developing nations.
Trade openness significantly influences environmental quality, revealing several key insights: (i) The results offer partial validation for the pollution haven hypothesis, particularly concerning capital abundance in developing nations; (ii) In contrast to the findings of Antweiler et al (2001), Cole and Elliott present differing perspectives on this relationship.
This thesis addresses the critical role of financial openness and renewable energy consumption in enhancing environmental quality It presents compelling evidence that financial openness significantly reduces CO2 emissions in developing countries Furthermore, it highlights that developing nations with a Socialist legal origin experience less favorable impacts from trade liberalization on environmental quality compared to those with a French legal origin, potentially due to increased pollution levels associated with rapid economic growth The research advocates for the implementation of financial liberalization policies as a vital strategy for improving environmental quality in these regions.
Although this thesis contributes to narrowing some of the existing gaps in the literature, it has three limitations
The Bayesian Model Averaging (BMA) approach is valuable for addressing model uncertainty but falls short in providing insights into causality within regression models, particularly concerning the relationships between openness and financial development, financial development and economic growth, and trade openness and environmental quality This limitation arises because BMA does not adhere to standard procedures that effectively manage issues like endogeneity and multicollinearity, which traditional frequentist statistics can handle While Bayesian inference aims to identify a true model given infinite data, BMA struggles to pinpoint the correct model in finite cases Additionally, the choice of priors can significantly influence posterior model probabilities, and as the number of potential models increases, BMA becomes computationally intensive Although modern techniques, such as Markov Chain Monte Carlo Model Composition, can help mitigate these challenges, all methods have inherent limitations, highlighting the need for further research to develop advanced solutions.
The thesis acknowledges limitations due to the lack of data on developing countries, which prevented the inclusion of important variables such as financial depth, access, stability indicators, tariffs, financial reforms index, black-market premiums, and state-owned entities in total fixed asset investments Additionally, the study covers the period from 2003 to 2017, making the data somewhat outdated Future research should aim to incorporate a broader range of variables and utilize more recent data to enhance the findings.
This thesis overlooks the connections between openness and financial development, finance and growth, as well as trade openness and carbon emissions in developing countries These significant topics are suggested for exploration in future research.
LIST OF RELEVANT PUBLICATIONS AND FORTHCOMING
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Diem, P.T.T, & Hoai, N.T (2021) Impacts of openness on financial development: A review of the literature Review of Finance, 4(1), 9-12
Diem, P.T.T, & Hoai, N.T (2021) Trade openness and environmental quality: A review of the literature Tạp chí Công Thương, 1(1), 72-80
Diem, P.T.T, & Hoai, N.T (2020) Financial development and economic growth:
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Diem, P.T.T, & Hoai, N.T Investigating the impact of financial development on economic growth in developing countries using a Bayesian model averaging approach Forthcoming paper
Diem, P.T.T, & Hoai, N.T Effects of trade openness on environmental quality:
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APPENDICES Appendix 2 Summaries of empirical studies Table 2.1 A summary of the characteristics of the previous studies for the impacts of openness on financial development
No Author(s) Countries Time periods Methodologies Dependent variables Independent variables Controlled variables Findings
24 countries 1913–1999 2SLS Number of companies listed/GDP (or population), stock market capitalization/GDP, deposits/GDP, equity issues/gross fixed capital formation
Cross-border capital flows (Taylor, 1998); total trade/GDP
(2007) 42 countries 1980–2003 DGMM (i) Banking development indicators: liquid liabilities/GDP, private credit/GDP, domestic credit/GDP
(ii) Capital market development indicator: number of companies listed/GDP
Financial openness refers to the ratio of a country's foreign assets and liabilities to its GDP, as outlined by Lane and Milesi-Feretti (2007) It encompasses six key aspects of liberalization, including credit controls, interest rate regulations, entry barriers, privatization, and international transaction regulations, as identified by Abiad and Mody (2005).
Economic institutions, per capita income TradeOpen FD (+)
FO FD (+) FO*TradeOpen FD (+)
(ii) Trade openness: Total trade/GDP
(ii) Capital market development: stock market capitalization/GDP
Financial openness is measured by the ratio of a country's foreign assets and liabilities to its GDP, as outlined by Lane and Milesi-Feretti (2007) This concept encompasses six key aspects of liberalization: credit controls, interest rate controls, entry barriers, regulatory frameworks, privatization efforts, and the facilitation of international transactions.
Institutional quality, real GDP per capita, neighbour's average trade openness
GMM, LLK Private credit/GDP (i) Financial openness: The volume of external assets and liabilities and KAOPEN
(ii) Trade openness: Total trade (exports and imports)/GDP
Real GDP per capita, institutional quality TradeOpen FD (+)
2SLS Private credit, stock market capitalization, total value of stocks traded, stock market turnover ratio
KAOPEN Per capita income, inflation rate, and trade openness (total trade/GDP)
2SLS Liquid liabilities/GDP, private credit/GDP, stock market capitalization/GDP, total value of stocks traded/GDP, the stock market turnover ratio, and equity issues/GDP
Per capita income, inflation rate, and trade openness (total trade/GDP), regional and time dummies
2SLS Private credit/GDP, stock market capitalization, total value of stocks traded, stock market turnover ratio
Per capita income, inflation rate, and trade openness (total trade/GDP), regional and time dummies
1980 – 2001 DGMM, PMG (i) Banking sector development: liquid liabilities/GDP, private credit/GDP, and domestic credit/GDP
(ii) Capital market development: stock market capitalization/GDP, total share traded/GDP and number
(ii) Trade openness: Total trade/GDP
Real GDP per capita, institutional environment TradeOpen FD (+)
FO FD (+) FO*TradeOpen FD (+) of companies listed/total population
Liquid liabilities/GDP, private credit/GDP (by deposit-taking banks), private credit/GDP (financial institutions), private credit/GDP, bank deposits/GDP, financial system deposits/GDP
(ii) Trade openness: Total trade/GDP
GDP per capita, inflation, institutional quality, financial reforms index, population density, terms of trade, quality of bureaucracy indicator
Between 1960 and 2005, a study covering 88 countries analyzed the value of financial intermediaries' credits to the private sector in relation to GDP It examined the total of currency, demand, and interest-bearing liabilities held by banks and non-bank financial intermediaries, as well as the domestic assets of deposit money banks, all measured against GDP.
Total trade/GDP Real GDP per capita; government expenditure/GDP, the inflation rate
1980–2000 DGMM Private credit/GDP, the money stock M2/GDP KAOPEN Total trade/GDP, initial financial development, the inflation rate