Economic integration and environmental quality: accounting for the roles of financial development, industrialization, urbanization and renewable energy

Abstract

This study investigates the effect of economic integration on the environment in a sample of 36 African countries from 1990 to 2018. We employ the fixed-effect D&K estimator and the mediation analysis to examine direct and indirect effects, respectively. The findings reveal that economic integration improves the environment only when its negative indirect effects are neutralized. Precisely, economic integration has a direct negative effect on carbon dioxide (CO2) emissions and an indirect positive effect through urbanization, renewable energy consumption, financial development, and industrialization. The net effect is positive, and therefore, economic integration undermines the environmental quality in Africa. This result is robust when economic integration is split into trade and financial integration. The main implication of this study is that integration policies in Africa should also target greening the financial sector, sustainable urban planning, energy efficiency in the industrial sector, and renewable energy use.