Financial development, income inequality and carbon emissions in sub-Saharan African countries: A panel data analysis

Nicholas M Odhiambo

doi:10.1177/0144598720941999

Abstract

This paper examines the dynamic relationship between financial development, income inequality and carbon dioxide (CO2) emissions in a step-wise fashion, using data from 39 sub-Saharan African (SSA) countries during the period 2004–2014. The study uses three income inequality indicators – the Gini coefficient, the Atkinson index and the Palma ratio – to examine these linkages. The study employs the generalised method of moments as the estimation technique. The empirical findings show that financial development unconditionally reduces CO2 emissions in SSA countries. The findings also show that there are threshold levels of income inequality that should not be exceeded in order for the negative impact of financial development on CO2 emissions to be sustained. Specifically, the study finds that the negative impact of financial development on CO2 emissions is likely to change to positive if the following inequality levels are exceeded: 0.591, 0.662 and 5.59, respectively, for the Gini coefficient, the Atkinson index and the Palma ratio. The findings of this study have far-reaching policy implications not only for SSA countries but also for developing countries as a whole. Policy implications are discussed.

Highlights

The relationship between financial development and carbon dioxide (CO2) emissions has attracted a conglomerate of literature in recent years
The study attempts to answer three critical questions: (1) Does financial development have any effect on CO2 emissions? (2) Does the level of income inequality modulate the impact of financial development on CO2 emissions? (3) Is there a threshold level of income inequality that influences the impact of financial development on CO2 emissions in sub-Saharan African (SSA) countries? The study uses three indicators of income inequality: the Gini coefficient, the Atkinson index and the Palma ratio, while financial development is proxied by private domestic credit from deposit banks and other financial institutions
This paper examines the dynamic relationship between financial development, income inequality and CO2 emissions in 39 SSA countries during the period 2004–2014

Summary

Introduction

The relationship between financial development and carbon dioxide (CO2) emissions has attracted a conglomerate of literature in recent years. Even in countries where those studies were conducted, the effect of financial development on carbon emissions remains at best inconclusive (see, for example, Al-Mulali et al, 2015; Cetin et al, 2018; Jalil and Feridun, 2011; Omri et al, 2015) It is against this lacuna that the current study aims to examine the dynamic relationship between financial development, income inequality and CO2 emissions in 39 SSA countries during the period 2004–2014. Tamazian et al (2009), for example, while examining whether higher economic and financial development leads to environmental degradation in Brazil, Russia, India and China (BRIC) countries using panel data analysis, found that financial development lowers the quantity of carbon emissions in the studied countries. Omri et al (2015), while examining the causal relationship between financial development, environmental quality, trade and economic growth in the MENA countries, found that the relationship between financial development and carbon emissions in these countries supported the neutrality hypothesis

Methodology

Findings

Conclusion