Financial development and environmental quality in sub-Saharan Africa: Is there a technology effect?

Abstract

In this paper, we extend the debate on environmental quality in sub-Saharan Africa (SSA) by examining the nexus between financial development and environmental quality. While doing this, we also investigate the technology effect of financial development on environmental quality and the direction of causality between financial development and environmental quality. Unlike prior studies, we use a novel composite index of financial development. We rely on a panel dataset of 35 SSA countries for the period 1985–2014. Through the augmented mean group estimator, we offer the following findings. First, financial development is a positive (negative) driver of environmental quality (CO2 emissions). Second, financial development has an unfavourable technology effect on environmental quality. Lastly, lower environmental quality is associated with increase in population, affluence and technology. We also find, via the Dumitrescu-Hurlin panel causality test, that there is a bidirectional causal relationship between financial development and CO2 emissions. We document the policy implications in the concluding section.