MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH, AND ENVIRONMENTAL QUALITY: EVIDENCE FROM DEVELOPING COUNTRIES DOCTOR OF PHILOSOPHY THESIS IN ECONOMICS Ho Chi Minh City, 2022 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH, AND ENVIRONMENTAL QUALITY: EVIDENCE FROM DEVELOPING COUNTRIES Major: Development Economics Code: 9310105 ACADEMIC ADVISOR: Prof Dr Ho Chi Minh City, 2022 i COMMITMENTS I declare that the thesis has been composed by myself and that the thesis has not been submitted for any other degree or professional qualification I confirm that the thesis submitted is my own, except where thesis which has formed part of jointly authored publications has been included My contribution and those of the other authors to this thesis have been explicitly indicated below I confirm that appropriate credit has been given within this thesis where reference has been made to the work of others Some works demonstrated in Chapter 1, Chapter 2, Chapter 3, Chapter 4, and Chapter were previously published in an international journal, Cogent Economics & Finance, 9(1) as “Impacts of openness on financial development in developing countries: Using a Bayesian model averaging approach” by (the first and corresponding author) & Nguyen Trong Hoai (co-author) (2021) The rest of works demonstrated in Chapter 1, Chapter 2, Chapter 3, Chapter 4, and Chapter can be combined into two papers for further publications The work presented in Chapter was previously published in three national publications including: (i) Tạp chí Phát triển & Hội Nhập, 55(65), 109-116 as “Financial development and economic growth: A review of the literature” by Pham Thi Thuy Diem (the first and corresponding author) & Nguyen Trong Hoai (coauthor) (2020); (ii) Tạp chí Cơng Thương, Số 1-Tháng 1/2021, 72-80 as “Trade openness and environmental quality: A review of the literature” by Pham Thi Thuy Diem (the first and corresponding author) & Nguyen Trong Hoai (co-author) (2021); (iii) Review of Finance, 4(1), 9-12 as “Impacts on financial development: A review of the literature” by (the first and corresponding author) & Nguyen Trong Hoai (co-author) (2021) of openness ii The thesis has been done under the supervision of Professor Nguyen Trong Hoai, the University of Economics Ho Chi Minh City 10 July 2022 iii TABLE OF CONTENTS COVER PAGE COMMITMENTS TABLE OF CONTENTS ABBREVIATIONS LIST OF TABLES LIST OF FIGURES ABSTRACT CHAPTER - INTRODUCTION 1 Research problems 1 The impacts of openness on financial development The impact of financial development on economic growth The impact of trade openness on environmental quality Research objectives 11 Research contributions 13 Structure of the thesis 14 CHAPTER - LITERATURE REVIEW 16 Openness and financial development 16 1 Impacts of openness on financial development: A theoretical review 16 2 Impacts of openness on financial development: An empirical review 21 Impacts of openness on financial development: Research hypotheses and a conceptual framework 2 Financial development and economic growth 30 32 iv 2 Impact of financial development on economic growth: A theoretical review 32 2 Impact of financial development on economic growth: An empirical review 35 2 Impact of financial development on economic growth: Research hypothesis and a conceptual framework Trade openness and environmental quality 42 45 Impact of trade openness on environmental quality: A theoretical review 45 Impact of trade openness on environmental quality: An empirical review 49 3 Impact of trade openness on environmental quality: Research hypothesis and a conceptual framework 55 2 An integrated conceptual framework for the links between openness, financial development, economic growth, and environmental quality in developing countries 58 CHAPTER - RESEARCH METHODOLOGY Methodology 60 60 The issue of model uncertainty 60 Bayesian model averaging methodology and model uncertainty 60 Construction of variables 66 Openness, financial development, economic growth, and environmental quality 66 2 Controlled variables 69 3 Data sources 99 v CHAPTER - OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH AND ENVIRONMENTAL QUALITY - EVIDENCE FROM DEVELOPING COUNTRIES 102 The impacts of openness on financial development: Evidence from developing countries 102 1 Descriptive statistics results 102 Estimation results and discussions 107 The impact of financial development on economic growth: Evidence from developing countries 115 Descriptive statistics results 115 2 Estimation results and discussions 120 The impact of trade openness on environmental quality: Evidence from developing countries 126 Descriptive statistics results 126 Estimation results and discussions 131 CHAPTER - CONCLUSIONS Main findings 140 140 The impacts of openness on financial development: Evidence from developing countries 140 The impact of financial development on economic growth: Evidence from developing countries 141 The impact of trade openness on environmental quality: Evidence from developing countries 143 Policy implications 144 Overall conclusions, limitations, and further research of the thesis 148 vi Overall conclusions 148 Contributions 149 3 Limitations and further research 151 REFERENCE 154 APPENDICES 181 vii ABBREVIATIONS AREAER Annual report on Exchange Arrangements and Exchange Restrictions BMA Bayesian model averaging BRIC Benchmark prior CO2 Carbon dioxide EG Economic growth FD Financial development FDI Foreign direct investment FO Financial openness GDP Gross Domestic Product GFDD Global Financial Development Database IEA International Energy Agency KAOPEN Capital account openness index LEB Local empirical Bayes approach PWT Penn World Table SO2 Sulfur dioxide TradeOpen Trade openness UIP Unit Information Prior UNCTAD United Nations Conference on Trade and Development WDI World Development Indicators WGI Worldwide Governance Indicators viii LIST OF TABLES Table Information on variables for Objective 72 Table Information on variables for Objective 81 Table 3 Information on variables for Objective 92 Table The list of developing countries 100 Table Summary statistics of the variables for Objective 1, whole sample, 64 104 economies, 2003-2017 Table Correlations between of the variables for Objective 1, whole sample, 105 2003-2017 Table The impacts of openness on financial development: posterior 109 estimates under uniform model priors Table 4 Summary statistics of the variables for Objective 2, whole sample, 64 117 economies, 2003-2017 Table Correlations between of the variables for Objective 2, whole sample, 118 2003-2017 Table The impacts of financial development on economic growth: posterior 122 estimates under uniform model priors Table Summary statistics of the variables for Objective 3, whole sample, 64 126 economies, 2003-2017 Table Correlations between of the variables for Objective 3, whole sample, 2003-2017 130 252 Appendix Impacts of trade openness on environmental quality > mfls2 = bms(datafls, burn=1e7, iter=2e7, g="BRIC", mprior="uniform", nmodel=5000, mcmc="bd") PIP 000 000 000 000 000 000 000 000 000 997 535 527 521 507 249 077 036 035 034 034 033 KAOPEN legor_so Africa LatCar lnKLa lnIncome lnFDI K LnREnergyUse TimeTrend lnTradeOpen lnREL KL lnREL INC LagIncome lnTradeOpen lnREL KLa2 lnTradeOpen lnREL KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen lnREL INC2 lnTradeOpen lnREL INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen Mean no regressors Draws "12 5853" "2e+07" Corr PMP "0,9999" % Topmodels "100" Post SD Cond Pos Sign 011 000 066 000 037 000 046 000 009 000 016 000 008 000 003 000 008 000 065 000 85 169 000 170 339 119 44 628 000 89 256 944 032 000 030 037 19 101 978 38 201 884 31 582 000 15 791 940 008 016 No models visited "1e+07" "40 49832 mins" "1944719" No Model Prior g-Prior Obs "960" "uniform / 10,5" "BRIC" Burnins Time difference of 40 49832 mins > coef(mfls2 exact=TRUE) Post Mean -0 081 600 -0 349 -0 314 -0 112 102 -0 118 -0 052 -0 048 311 -18 881 37 575 923 -10 606 -0 016 -0 006 928 -1 855 066 -0 533 000 Time Idx 000 000 000 000 13 000 19 000 20 000 21 000 18 000 11 000 15 000 14 000 10 000 000 000 12 000 17 000 16 000 000 000 000 Modelspace 2^K % visited "2097152" ShrinkageStats "Av=0,999" "93" 253 KAOPEN legor_so Africa LatCar lnKLa lnIncome lnFDI K LnREnergyUse TimeTrend lnTradeOpen lnREL KL lnREL INC LagIncome lnTradeOpen lnREL KLa2 lnTradeOpen lnREL KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen lnREL INC2 lnTradeOpen lnREL INC lnEcoIntensity PIP 000 000 000 000 000 000 000 000 000 997 531 531 515 513 249 076 035 035 034 Post Mean -0 081 600 -0 349 -0 314 -0 112 102 -0 118 -0 052 -0 048 311 -18 930 37 674 905 -10 571 -0 016 -0 006 935 -1 870 045 Post SD Cond Pos Sign 011 000 066 000 037 000 046 000 009 000 016 000 008 000 003 000 008 000 065 000 85 276 000 170 553 119 44 574 000 89 148 944 032 000 030 037 19 180 978 38 359 883 31 280 000 Idx 000 000 000 000 13 000 19 000 20 000 21 000 18 000 11 000 15 000 14 000 10 000 000 000 12 000 17 000 16 000 000 > cor(pmp bma(mfls2)) PMP PMP (Exact) PMP (MCMC) (Exact) PMP 9998818 (MCMC) 9998818 > mfls2 = bms(datafls burn=1e7 iter=2e7 g="UIP" mprior="uniform" nmodel=5000 mcmc="bd") KAOPEN legor_so Africa LatCar lnKLa lnIncome lnFDI K LnREnergyUse TimeTrend lnTradeOpen lnREL KL lnREL INC PIP 000 000 000 000 000 000 000 000 000 Post Mean -0 081 600 -0 349 -0 314 -0 112 102 -0 118 -0 052 -0 048 Post SD Cond Pos Sign 011 000 066 000 037 000 046 000 009 000 016 000 008 000 003 000 008 000 Idx 000 000 000 000 13 000 19 000 20 000 21 000 18 000 254 LagIncome lnTradeOpen lnREL KLa2 lnTradeOpen lnREL KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen lnREL INC2 lnTradeOpen lnREL INC lnEcoIntensity2 lnEcoIntensity lnTradeOpen 997 534 528 517 511 249 077 035 035 034 034 033 Mean no regressors Draws "12 5857" "2e+07" Corr PMP "1 0000" % Topmodels "100" 311 -19 010 37 833 898 -10 558 -0 016 -0 006 918 -1 836 -0 527 054 000 065 85 448 170 896 44 543 89 085 032 030 19 005 38 010 15 709 31 418 008 No models visited "1e+07" "48 59866 mins" "1947223" No Model Prior g-Prior Obs "960" "uniform / 10,5" "UIP" Burnins Time 000 000 120 000 944 000 038 979 883 942 000 016 11 000 15 000 14 000 10 000 000 000 12 000 17 000 16 000 000 000 000 Modelspace 2^K % visited "2097152" ShrinkageStats "Av=0 999" "93" Time difference of 48 59866 mins > coef(mfls2 exact=TRUE) KAOPEN legor_so Africa LatCar lnKLa lnIncome lnFDI K LnREnergyUse TimeTrend lnTradeOpen lnREL KL lnREL INC LagIncome lnTradeOpen lnREL KLa2 lnTradeOpen lnREL KLa lnKLa2 lnKLa legor_uk lnIncome2 PIP 000 000 000 000 000 000 000 000 000 997 531 531 515 513 249 076 Post Mean -0 081 600 -0 349 -0 314 -0 112 102 -0 118 -0 052 -0 048 311 -18 929 37 672 904 -10 569 -0 016 -0 006 Post SD Cond Pos Sign 011 000 066 000 037 000 046 000 009 000 016 000 008 000 003 000 008 000 065 000 85 275 000 170 550 119 44 570 000 89 139 944 032 000 030 037 Idx 000 000 000 000 13 000 19 000 20 000 21 000 18 000 11 000 15 000 14 000 10 000 000 000 12 000 255 lnTradeOpen lnREL INC2 lnTradeOpen lnREL INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen 035 035 034 034 033 935 -1 870 045 -0 522 000 19 177 38 354 31 278 15 639 008 978 883 000 942 016 17 000 16 000 000 000 000 > cor(pmp bma(mfls2)) PMP PMP (Exact) PMP (MCMC) (Exact) PMP 9999529 (MCMC) 9999529 > mfls2 = bms(datafls burn=1e7 iter=2e7 g="EBL" mprior="uniform" nmodel=5000 mcmc="bd") KAOPEN legor_so Africa LatCar lnKLa lnIncome lnFDI K LnREnergyUse TimeTrend lnTradeOpen lnREL KL lnREL INC LagIncome lnTradeOpen lnREL KLa2 lnTradeOpen lnREL KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen lnREL INC2 lnTradeOpen lnREL INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen PIP 000 000 000 000 000 000 000 000 000 997 533 527 514 513 242 074 034 034 033 033 032 Post Mean -0 082 600 -0 349 -0 314 -0 112 102 -0 118 -0 052 -0 048 311 -18 421 36 656 729 -10 218 -0 016 -0 006 921 -1 841 045 -0 522 000 Post SD Cond Pos Sign 011 000 066 000 037 000 046 000 009 000 016 000 008 000 003 000 008 000 065 000 84 171 000 168 343 116 43 875 000 87 750 946 032 000 029 037 19 035 977 38 070 881 31 284 000 15 642 940 008 017 Idx 000 000 000 000 13 000 19 000 20 000 21 000 18 000 11 000 15 000 14 000 10 000 000 000 12 000 17 000 16 000 000 000 000 256 Mean no regressors Draws Burnins Time "12 5674" "2e+07" Corr PMP "1 0000" "1e+07" No Obs "960" "1 40857 hours" No models visited "1890488" Model Prior g-Prior "uniform / 10,5" "EBL" % Topmodels "100" Modelspace 2^K % visited "2097152" ShrinkageStats "Av=0 9991" "90" Time difference of 40857 hours > coef(mfls2 exact=TRUE) KAOPEN legor_so Africa LatCar lnKLa lnIncome lnFDI K LnREnergyUse TimeTrend lnTradeOpen lnREL KL lnREL INC LagIncome lnTradeOpen lnREL KLa2 lnTradeOpen lnREL KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen lnREL INC2 lnTradeOpen lnREL INC lnEcoIntensity2 lnEcoIntensity lnTradeOpen PIP Post Mean 000 -0 082 000 600 000 -0 349 000 -0 314 000 -0 112 000 102 000 -0 118 000 -0 052 000 -0 048 997 311 530 -18 396 530 36 605 515 745 513 -10 251 242 -0 016 074 -0 006 034 914 034 -1 827 033 -0 510 033 020 032 000 > cor(pmp bma(mfls2)) PMP PMP (Exact) PMP (MCMC) (Exact) PMP 9999782 (MCMC) 9999782 Post SD Cond Pos Sign 011 000 066 000 037 000 046 000 009 000 016 000 008 000 003 000 008 000 065 000 84 116 000 168 233 116 43 938 000 87 876 946 032 000 029 038 18 961 977 37 922 882 15 454 941 30 908 000 008 016 Idx 000 000 000 000 13 000 19 000 20 000 21 000 18 000 11 000 15 000 14 000 10 000 000 000 12 000 17 000 16 000 000 000 000 257 Figure 6a Posterior model size distribution from BRIC for Objective Source: Author’s analysis 258 Figure 6b Posterior model probabilities from BRIC for Objective Source: Author’s analysis 259 Figure 6c Posterior model size distribution from UIP for Objective Source: Author’s analysis 260 Figure 6d Posterior model probabilities from UIP for Objective Source: Author’s analysis 261 Figure 6e Posterior model size distribution from EBL for Objective Source: Author’s analysis 262 Figure 6f Posterior model probabilities from EBL for Objective Source: Author’s analysis 263 Figure 6g Cumulative model probabilities from UIP for Objective Source: Author’s analysis 264 Figure 6h Cumulative model probabilities from EBL for Objective Source: Author’s analysis 265 Figure 6k Marginal densities of trade openness from UIP Source: Author’s analysis 266 Figure 6i Marginal densities of trade openness from EBL Source: Author’s analysis ... presented in Chapter was previously published in three national publications including: (i) Tạp chí Phát triển & Hội Nhập, 55(65), 109-116 as “Financial development and economic growth: A review of