Environmental consequences of financial development in emerging and growth-leading economies: A multidimensional assessment

Abstract

The remarkable economic growth momentum in emerging and growth-leading economies (EAGLEs) raises concern about a sustainable global environment. Prior literature indicates the significant role of financial development (FD) in striking a win-win balance between economic growth and environmental sustainability. Unlike previous studies, this study takes a multidimensional approach to FD by investigating its holistic and multifaceted effects on environmental quality in the unique context of EAGLEs, which is absent from the extant literature to date. The results, based on panel data on 15 EAGLEs in 1984–2018, demonstrate that overall FD significantly reduces environmental quality in the EAGLEs. Additionally, the multidimensional analysis shows that across all the dimensions of FD—depth, access, and efficiency—development reduces environmental quality in EAGLEs. Our findings are robust to alternative measures of FD and ecological quality and alternative estimators. We offer stakeholders practical policy implications to mitigate the adverse environmental consequences of FD and achieve a win-win balance between development and ecological quality using FD as a tool.