Impact of financial development, trade flows, and institution on environmental sustainability in emerging markets

Abstract

The present study is motivated by the need to decouple economic growth from environmental degradation given the new wave of chase for higher economic growth trajectories comes with its environmental cost implications, especially among developing blocs like the Emerging 7 (E7) countries. There is a consistent trade-off between economic growth versus environmental quality. Government apparatus are perpetually on the chase for low-carbon emission policies via the pursuit for green economy. To this end, this present study extends the conventional environmental Kuznets curve (EKC) argument by incorporating the role of institution in emerging industrialized economies (E7) and using second-generation panel analysis methods like mean group (MG), augmented mean group (AMG), common correlated effects mean group (CCEMG), and the Dumitrescu and Hurlin causality test for more robust estimates and inferences. To this end, we explore the long-run and causality relationship between economic growth, quadratic form of economic growth, institutional quality, trade flow, investment in energy sector, and financial development in an EKC environment. Empirical analysis established a long-run equilibrium relationship among the outlined variables over the study period. The long-run regression shows the presence of EKC in the E7. Thus, suggesting the preference for GDP growth over environmental quality at the earlier stage of growth curve. Interestingly, investment in energy, trade flow dynamics across the blocs, and financial development dampens the detrimental effect of environmental pollution as we observed negative relationship with the ecological footprint. On the contrary, quality of institution is weak as institutional quality increase (worsen) the quality of environment in the E7 economies. From a policy perspective, this current study proposed the need for more stringent environmental treaties and regulations and promotion of green economy without compromising economic growth. In the conclusion part of the study, more details and specifics about the policy blueprint are presented.