Thresholds of external flows in financial development for environmental sustainability in sub-Saharan Africa

Abstract

PurposeThe study aims to complement extant literature by assessing linkages between financial development, external flows and CO2 emissions in 27 sub-Saharan African countries for the period 2002 to 2018.Design/methodology/approachThe empirical evidence is based on interactive quantile regressions and external flows consist of remittances, foreign aid, trade openness and foreign investment.FindingsThe findings show minimum levels of external flows that should be reached in order for the interaction between external flows and financial development to promote environmental sustainability in terms of reducing CO2 emissions. The minimum thresholds are critical levels of external flows that should be reached before financial development promotes environmental sustainability.Research limitations/implicationsPolicy implications – The disclosed external flow (i.e. FDI, foreign aid, trade and remittances) thresholds are actionable policy thresholds that the government can act upon in order to influence environmental sustainability by means of financial development. Theoretical implications – The findings below the external flow thresholds are consistent with the dependency theory in that external flows are harmful to socio-economic progress and environmental sustainability. When external flows are consolidated to the established critical masses or thresholds in the long run, the corresponding findings are in line with the extant neoclassical and endogenous growth theories, not least, because in the long run, external flows are associated with technological progress and adoption of stronger environmental legislation at the domestic level which are worthwhile in promoting environmental performance.Practical implicationsTo reach the minimum trade and FDI levels that are worthwhile for the promotion of environmental sustainability, corporations should set targets on exports and imports as well as foreign investment levels that they have to attain in contributing to the national target of external flows needed to reduce CO2 emissions. Such trade and FDI targets should be set in industries of various economic sectors.Originality/valueThe study complements the extant literature by assessing how external flows interact with financial development to influence CO2 emissions.