The role of financial development and institutional quality in environmental sustainability: panel data evidence from the BRI countries.

Abstract

The belt and road countries are mostly emerging and developing countries and heading to attain economic prosperity; however, this development process leads to ecological footprint. The factors of ecological footprint need to be identified and sound level of quality institutions might be helpful to overcome the issue of environmental degradation. Utilizing data from 1985 to 2019 of the belt and road initiative (BRI) countries, this study explores the effect of institutional quality indicators and financial development on carbon dioxide emission by including energy consumption and economic growth to the model. By using OLS, fixed effect, and two-step generalized method of moments, the results indicate that financial development, economic growth, and energy consumption increase carbon dioxide emission and degrade environmental quality. Three out of six institutional quality indicators that include government effectiveness, voice and accountability, and corruption control effect carbon dioxide emission positively, while the other three that include rule of law, regulatory quality, and political stability significantly rise environmental quality. The interaction terms of voice and accountability, government effectiveness, and political stability with financial development also give negative coefficients and reduce emission; however, the interaction of control of corruption with financial development is positive and the interaction of rule of law and regulatory quality with carbon dioxide is insignificant. The findings have considerable policy implication for the sample countries on each individual institutional quality indicator and financial institutions in rising environmental sustainability.