Openness, financial development, economic growth and environmental quality evidence from developing countries

Openness, financial development, economic growth and environmental quality evidence from developing countries.Openness, financial development, economic growth and environmental quality evidence from developing countries.Openness, financial development, economic growth and environmental quality evidence from developing countries.Openness, financial development, economic growth and environmental quality evidence from developing countries.Openness, financial development, economic growth and environmental quality evidence from developing countries.Openness, financial development, economic growth and environmental quality evidence from developing countries.

INTRODUCTION

Research problems

Trade and financial openness are recognized as significant drivers of financial development, which can subsequently impact economic growth, particularly in developing nations Research indicates that trade openness plays a vital role in enhancing environmental quality, highlighting its importance in sustainable development.

2009, 2012; Baek et al., 2009; Nasir and Rehman, 2011; Shahbaz et al., 2016; Mutascu, 2018).

Despite extensive research on financial development, economic growth, and environmental quality, most studies have primarily relied on traditional statistical inference methods for panel data analysis Key studies in this field include Gries et al (2009), Chinn & Ito (2002), Cecchetti & Kharroubi (2012), Estrada et al (2015), Zhang et al (2012), Ergungor (2008), Adu et al (2013), and Frankel.

Standard statistical methods often overlook model uncertainty, resulting in overconfident conclusions and biases that hinder generalization (Raftery, 1993; Raftery et al., 1997, 2005) The literature on financial development, growth, and environmental quality has produced competitive theories and empirical studies, creating challenges for development economics To address model uncertainty, Bayesian model averaging (BMA) offers a tailored solution by considering a wide range of candidate regressors This thesis utilizes BMA, as suggested by influential works (Raftery, 1993; Raftery et al., 2005; Hoeting et al., 1999), to enhance methodological rigor Additionally, the lack of conclusive findings in previous research has rendered studies on financial development, economic growth, and environmental quality contentious within the field of development economics.

The impacts of openness on financial development

Rajan and Zingales (2003) propose the simultaneous openness hypothesis, asserting that genuine financial development requires the concurrent liberalization of trade and capital accounts They argue that this dual approach diminishes the power of incumbent interest groups that resist financial progress due to increased competition, ultimately fostering financial development While trade and financial openness can create new profit opportunities that outweigh competitive pressures, McKinnon (1991) contends that trade liberalization should occur first to effectively promote financial development, particularly in developing nations The empirical evidence surrounding the relationship between openness and financial development remains inconclusive, with studies yielding both positive outcomes (Beck, 2002; Chinn and Ito, 2002; and others) and negative or mixed results (Svaleryd and Vlachos, 2002; Aizenman and Noy, 2003; and others), highlighting the complexity of this dynamic across different economies.

The thesis examines the impact of economic factors in developing countries, an area that has been underexplored in previous research Notable studies have reported null effects, highlighting a gap in understanding the dynamics at play (Kim et al., 2010a; Kim et al., 2010b; Trabelsi and Cherif, 2017; Wolde-Rufael, 2009; Gries et al., 2009; Hauner et al., 2013).

Over the past two decades, trade and financial liberalisation have significantly impacted developing countries, driven by international organisations like the International Monetary Fund, World Bank, and World Trade Organisation, which implemented structural adjustment policies These policies focused on free-market initiatives, including reducing trade barriers, deregulation, and privatisation, while financial liberalisation involved eliminating financial repression such as interest rate ceilings and high reserve requirements Notably, financial development in developing countries has steadily increased, contrasting with stagnation in developed economies since 2009 This thesis aims to investigate the roles of trade and financial openness in the financial development process of developing countries, addressing the ambiguous findings of previous research Understanding the factors influencing financial development is essential for fostering banking sector activities and promoting economic growth in these nations.

Figure 1.1 Financial development in developing countries over the period

Source: Global Financial Development Database (GFDD) and author’s calculations.

Figure 1.2 Openness in developing countries over the period 2003-2017

Source: World Development Indicators (WDI), Annual report on Exchange Arrangements and Exchange Restrictions (AREAER),

Chinn and Ito (2019) and author’s calculations.

This thesis enhances the empirical literature on the relationship between openness and financial development in six key areas It employs a Bayesian Model Averaging (BMA) approach, drawing on foundational studies by Raftery (1993) and Raftery et al (2005), to provide robust insights into this dynamic.

This thesis addresses the gap in econometrics literature regarding the impact of openness on financial development, an area previously unexplored It employs the ratio of private credit to GDP as a key indicator of financial development, recognized as particularly relevant for developing countries Additionally, it highlights the lack of empirical research on how openness influences financial development, especially considering legal origins as a determinant of corporate shareholder and creditor protection The study examines various interactions between trade openness, financial openness, institutional quality, and real GDP per capita to identify the channels through which trade liberalization affects financial development Regional dummy variables are incorporated to compare financial development levels across different regions Finally, the research utilizes data from 2003 to 2017 to maximize the sample size of developing countries, enhancing the robustness of the findings compared to prior studies.

The impact of financial development on economic growth

The interplay between financial development and economic growth has been a pivotal topic in development economics research for several decades, as highlighted by various studies (Andersen & Tarp, 2003; Chinn & Ito, 2002; Estrada et al., 2015; King & ) Understanding this relationship is crucial for policymakers aiming to foster sustainable economic growth through effective financial systems.

Empirical studies indicate that financial systems play a crucial role in shaping savings and investment decisions, which in turn fosters economic growth in both developed and developing nations Levine (2005) identifies five key functions of financial systems: they generate information about potential investments, monitor corporate governance, facilitate risk management and diversification, mobilize savings, and streamline the exchange of goods and services The efficiency of a financial system is determined by its ability to perform these functions effectively, while financial development signifies enhancements in this efficiency.

Figure 1.3 Economic growth in developing countries over the period 2003-2017

Source: World Development Indicators (WDI) and author’s calculations.

In the past twenty years, developing economies have undergone significant financial sector reforms, driven by the removal of government restrictions on interest rates, reserve requirements, and credit allocation These changes aim to stimulate economic growth and enhance the efficiency of the financial system.

Between 2003 and 2017, developing economies experienced fluctuating economic growth, with a notable surge from 2003 to 2007 due to heightened financial development However, this growth faced a sharp decline during the 2007-2009 financial crisis, leading to a significant downturn in 2009 and subsequent stagnation from 2010 to 2017 This thesis seeks to offer new insights into the relationship between financial development and economic growth in developing countries during this period.

This investigation enhances the literature by addressing six key areas: Firstly, it explores the under-researched relationship between financial development, economic growth, and openness factors in developing countries Secondly, it utilizes Bayesian statistics, specifically the Bayesian model averaging (BMA) approach, to analyze the impact of financial development on economic growth, filling a gap left by previous studies that primarily relied on traditional panel data methods Thirdly, it critiques the common use of the private credit to GDP ratio as a proxy for financial development, questioning its suitability for developing nations Fourthly, it highlights the lack of empirical research on the influence of legal origins on financial development and economic growth in developing economies Fifthly, it investigates the interactions between trade openness, financial openness, and institutional quality to identify various channels through which trade liberalization affects economic growth Lastly, it incorporates regional dummy variables in the regressions to compare economic growth levels across different regions.

The impact of trade openness on environmental quality

International trade plays a significant role in determining environmental quality, as it can lead to economic growth and increased pollution levels While some researchers argue that trade is the primary driver of environmental degradation, others contend that the environmental damage associated with trade is not directly caused by it The scale effect suggests that as trade volume rises, the economy expands, potentially harming environmental quality Conversely, trade can also improve environmental conditions through the technique and composition effects, where increased income from trade leads to stricter environmental regulations The production of pollution-intensive goods in one country can exacerbate environmental issues in others, a phenomenon explained by the displacement and pollution haven hypotheses Ultimately, both hypotheses emphasize the importance of comparative advantage in international trade and its complex relationship with environmental outcomes.

International communities face challenges related to CO2 emissions (metric tons per capita) as underdeveloped economies seek to leverage technology transfer through foreign direct investment (FDI) to mitigate environmental pollution Consequently, free trade presents a dual impact on environmental quality, offering both beneficial and detrimental effects.

Figure 1.4 Environmental quality in developing countries over the period

Source: World Development Indicators (WDI) and author’s calculations.

Research objectives

The increasing demand for financial services and the expansion of markets, driven by the positive effects of trade and financial openness, have led to a reduction in the power of established players in the industry This shift has been facilitated by a more transparent price mechanism in the market for loanable funds, enhancing competition and efficiency Additionally, the impact of financial openness on environmental pollutants remains a critical consideration, highlighting the complex interplay between economic growth and environmental sustainability.

This thesis explores the effects of trade and financial openness on financial development, economic growth, and environmental quality in developing countries It aims to provide new evidence regarding how trade and financial openness influence financial development, how financial development affects economic growth, and how trade openness impacts environmental quality.

First objective: Investigating the impacts of openness on financial development in developing countries over the period 2003-2017 (Objective 1 henceforth).

Based on the several gaps mentioned in Section 1.1.1 regarding Objective 1, the thesis also considers other controlled factors which have not been investigated before as follows:

(i) Investigating the impacts of interactions between trade openness with financial openness, institutional quality, and real GDP per capita on financial development in developing countries

(ii) Investigating the impacts of regional dummy variables on financial development in developing countries (iii) Investigating the impacts of legal origins on financial development in developing countries

Second objective: Investigating the impact of financial development on economic growth in developing countries over the period 2003-2017 (Objective 2 henceforth).

Based on the several gaps mentioned in Section 1.1.2 regarding Objective 2, the thesis also considers other controlled factors which have not been examined before as follows:

(i) Investigating the impacts of interactions between trade openness with financial openness and institutional quality on economic growth in developing countries

(ii) Investigating the impacts of regional dummy variables on economic growth in developing countries (iii) Investigating the impacts of legal origins on economic growth in developing countries

Third objective: Investigating the impact of trade openness on environmental quality in developing countries over the period 2003-2017 (Objective 3 henceforth).

Based on the several gaps mentioned in Section 1.1.3 regarding Objective 3, the thesis also considers other controlled factors which have not been analysed before as follows:

This article explores the relationship between financial openness and environmental quality in developing countries, highlighting how increased financial integration can influence ecological outcomes It also examines the role of renewable energy consumption in enhancing environmental quality, emphasizing the potential benefits of transitioning to sustainable energy sources Additionally, the research investigates how different legal origins affect environmental quality, suggesting that legal frameworks play a crucial role in environmental governance Lastly, the study considers the impact of regional variables on environmental quality, underscoring the importance of geographical context in shaping environmental policies and outcomes in developing nations.

Research contributions

The thesis significantly contributes to the understanding of financial development, growth, and environmental quality in developing countries by adopting a regression model based on the BMA approach, as proposed by Fernandez et al (2001b), to address model uncertainty It introduces three conceptual frameworks focused on quantifying the effects of trade and financial openness on financial development, the influence of financial development on economic growth, and the relationship between trade openness and environmental quality Notably, it finds no substantial evidence supporting simultaneous openness to trade and capital flows as a key factor for financial development and economic growth Additionally, it reveals a U-shaped relationship between finance and economic growth specific to developing nations, while also providing new insights into how legal origins affect financial development, economic growth, and environmental quality Furthermore, it highlights the impact of renewable energy consumption on environmental quality, an aspect overlooked in previous studies Finally, the thesis outlines essential policy implications for enhancing financial development, fostering economic growth, and improving environmental quality in developing countries.

Structure of the thesis

The structure of the thesis is as follows:

Chapter 1: This chapter presents research problems, research objectives, research contributions, and structure of the thesis.

Chapter 2: This chapter reviews theoretical and empirical studies relating to three research objectives, including: (i) the impacts of openness on financial development; (ii) the impact of financial development on economic growth; (iii) the impact of trade openness on environmental quality In addition, this chapter also provides the theoretical and conceptual frameworks, and hypotheses.

Chapter 3: This chapter includes the research methodology of the thesis, construction of variables, and data source relating to three research objectives.

Chapter 4: This chapter provides the descriptive statistics summaries and BMA results of three research objectives including: (i) the impacts of openness on financial development in 64 developing countries over the period 2003-2017; (ii) the impact of financial development on economic growth in 64 developing countries over the period 2003-2017; (iii) the impact of trade openness on environmental quality in 64 developing countries over the period 2003-2017.

Chapter 5: This chapter summarises some of the main findings in the thesis,explains policy implications, contributions, limitations, and suggestions for further research.

LITERATURE REVIEW

Openness and financial development

2.1.1 Impacts of openness on financial development: A theoretical review

Financial openness is supported by both theoretical and empirical arguments, particularly stemming from the McKinnon-Shaw hypothesis established by McKinnon and Shaw in the early 1970s This hypothesis critiques financial repression policies, such as interest rate ceilings, administrative credit allocation, and high reserve requirements, which were prevalent in less developed countries during the 1960s and 1970s, highlighting the negative impact of government-induced distortions on economic growth.

Figure 2.1 The McKinnon–Shaw model

R ea l r at e of in te re st

The McKinnon-Shaw hypothesis posits a positive relationship between savings and real interest rates across different economic growth rates, as illustrated in Figure 2.1 In less developed countries, the real interest rate is often kept below its equilibrium due to administratively set nominal interest rates Additionally, financial repression, characterized by a fixed interest rate (r0), can result in increased savings, which ultimately constrains actual investment (I0).

Establishing interest rate ceilings on loans leads to two significant consequences: a persistent low level of savings and investment, as savings are crucial for the real supply of credit, and an inefficient allocation of investable funds based on non-price criteria These factors hinder the growth and development of both the financial system and the overall economy.

A higher institutional nominal interest rate, combined with reduced financial repression, positively impacts savings by increasing the real interest rate This leads to the elimination of low-yielding investments, thereby enhancing overall investment efficiency Additionally, economic growth is boosted as the savings function shifts, resulting in a higher actual investment rate due to increased savings.

The McKinnon–Shaw hypothesis advocates for the removal of interest rate ceilings in repressed financial systems during financial liberalization This policy is expected to foster economic growth by enhancing savings and increasing the availability of loanable funds, leading to a more efficient allocation of resources The model suggests that an equilibrium is achieved when the real interest rate aligns with r2, and savings and investment reach I2, indicating a transparent market for loanable funds driven by the price mechanism.

Beck's (2002) influential model highlights the significance of financial development in fostering large-scale, high-return enterprises within the context of trade openness The model illustrates that enhanced external finance enables businesses to leverage scale economies, allowing producers with higher returns to scale to benefit more significantly from advanced financial systems Consequently, in economies with well-developed financial structures, there is an increase in production and an improved trade balance, contributing positively to overall economic output (Helpman, 1981; Khan, 2001).

Beck (2002) highlights that in a closed economy, reduced search costs for financial intermediaries lead to a decline in the share of entrepreneurs within the manufacturing sector In contrast, the food industry experiences lower returns for entrepreneurs due to these decreased search costs Manufacturing entrepreneurs benefit from scale efficiencies, enabling them to secure greater earnings through increased external financing Additionally, food producers gain more from a higher debt-to-capital ratio instead of relying solely on a larger capital stock Consequently, financial development that reduces search costs is likely to shift production incentives towards a more robust manufacturing sector.

To maintain equilibrium in an open economy, Beck (2002) asserts that if domestic financial intermediaries incur higher search costs compared to their global counterparts, the economy will export food while importing manufactured goods This observation aligns with the Ricardian hypothesis of international trade, suggesting that a robust financial system enhances technological capabilities in manufacturing, ultimately leading to a comparative advantage in this sector.

In addition to the McKinnon-Shaw hypothesis and Beck's (2002) theoretical model on financial development and international trade, there are two primary channels through which openness influences financial development: the increased demand for financial services and the expansion of market size Svaleryd and Vlachos (2002) found that greater trade openness generates demand for innovative financial products, such as trade finance instruments and risk hedging solutions Additionally, capital account openness can lower capital costs and enhance liquidity, contributing to improved financial development Levine (2001) provided evidence that eliminating restrictions on international portfolio flows can enhance stock market liquidity.

Openness significantly impacts financial development through political economy factors, as highlighted by Rajan and Zingales (2003) They assert that established interest groups resist financial development due to the heightened competition it fosters, which threatens their economic advantages The simultaneous opening of trade and capital flows, referred to as the simultaneous openness hypothesis, can diminish the power of these incumbents, thereby promoting financial development Additionally, the new opportunities created by trade and financial openness may generate profits substantial enough to outweigh the adverse effects of increased competition.

Numerous studies indicate a positive correlation between openness, institutions, and financial development Kose et al (2009) demonstrate that capital account liberalization can enhance macroeconomic discipline by amplifying the advantages of sound policies and the risks associated with poor ones They find that while financial openness positively influences monetary policy outcomes, there is no evidence of its effect on fiscal policy discipline Mishkin (2009) highlights that foreign capital inflows facilitate technology transfer, prompting domestic banks to elevate their lending standards and adopt global best practices However, openness can also lead to negative consequences for financial development, such as increased volatility and heightened risk-taking by domestic banks (Kose et al., 2009; Mishkin, 2009).

According to Stiglitz (2000), the success or failure of free trade and financial liberalization hinges on management approaches National governments that recognize and adapt to their unique circumstances, as seen in East Asian nations like South Korea and Taiwan, tend to succeed In contrast, management by international institutions such as the IMF, World Bank, and WTO often leads to failure Stiglitz advocates for "global governance without global government" to improve globalization processes He emphasizes that hasty financial and capital market liberalization, lacking a solid regulatory framework, has been detrimental Notably, India and China, which maintained strong capital flow controls, thrived during global economic challenges, illustrating the importance of effective regulation in developing countries.

A theoretical framework illustrating the impacts of openness on financial development is presented in Figure 2.2.

Openness Figure 2.2 A theoretical approach to openness and financial development

- Abolishing policies of financial repression (e.g interest rate ceilings, administrative credit allocation, high reserve requirements, and other government-induced distortions)

- Creating demand for financial services (e.g., trade finance instruments, hedging of risks)

- Decreasing in search costs for financial intermediaries

- Enhancing transparency of financial market via a price mechanism

- Encouraging domestic banks to adopt of international standards

How it is managed (Institutions)

2.1.2 Impacts of openness on financial development: An empirical review

The relationship between openness and financial development has been extensively studied, yet the empirical evidence reveals a varied connection between these factors in both developed and developing economies.

Recent studies have explored the relationship between financial development and trade openness, revealing significant insights Beck (2002) found that a higher level of financial development correlates with increased export shares and trade balances in manufactured goods across 65 countries from 1966 to 1995 Svaleryd and Vlachos (2002) demonstrated that trade openness can drive financial market development by exposing firms to foreign competition and external shocks, while their 2005 study indicated that financial development influences industrial specialization in 20 OECD countries Kim et al (2010a) identified a long-run positive correlation between trade openness and financial development, contrasting with a short-run negative relationship, which was also observed in non-OECD economies (Kim et al., 2010b) In Kenya, Wolde-Rufael (2009) supported the notion that financial development promotes both import and export growth, although the reverse causality was weak Gries et al (2009) found mixed results in 16 Sub-Saharan African countries, indicating that while trade openness may enhance financial depth in some cases, the overall connection is weak Braun and Raddatz (2005) highlighted that trade liberalization could improve financial systems by diminishing the influence of groups resistant to financial development Lastly, Do and Levchenko (2007) suggested that a country’s comparative advantage in international trade influences external finance demand, with economies specializing in financially dependent goods generating greater demand for external finance, thereby fostering financial intermediation.

The ongoing debate among policymakers and scholars regarding the impact of complete financial openness on financial development is highlighted by Chinn and Ito (2002), who analyze the relationship between capital controls, institutions, and financial development across 105 countries from 1970 to 1997 Their study employs six indicators to assess financial development, including liquid liabilities to GDP and private sector credit from deposit banks, using KAOPEN as a proxy for financial openness Their findings suggest that capital controls are linked to enhanced stock market activity and private credit creation In a subsequent study, Chinn and Ito (2006) extend their analysis to 108 countries from 1980 to 2000, revealing that financial openness fosters equity market development only when a sufficient level of legal and institutional maturity is present, particularly in emerging markets Additionally, Ito (2006) investigates the relationship between financial openness and development in 87 less developed countries, further contributing to the understanding of this complex nexus.

Financial development and economic growth

2.2.1 Impact of financial development on economic growth: A theoretical review

Economists assert that financial systems play a crucial role in shaping savings and investment decisions, ultimately driving economic growth (Levine, 2004; Zhuang et al., 2009) Levine (2005) highlights that these systems significantly reduce information, enforcement, and transaction costs, fulfilling five essential functions: (i) generating pre-investment information and allocating capital; (ii) monitoring investments and ensuring corporate governance post-financing; (iii) facilitating risk trading, diversification, and management; (iv) mobilizing and pooling savings; and (v) simplifying the exchange of goods and services Therefore, the efficiency of a financial system is measured by its effectiveness in performing these functions, while financial development indicates an enhancement in this efficiency.

Financial systems generate valuable information prior to investment decisions, aiding in capital allocation Individual savers often encounter significant costs when gathering and analyzing data on firms and market conditions, which can hinder optimal capital distribution Financial institutions play a crucial role in minimizing these information costs, enhancing resource allocation, and fostering economic growth through specialization and economies of scale.

According to various studies, improved information plays a crucial role in helping entrepreneurs identify optimal production technologies and successfully launch new products Schumpeter (1912) emphasizes the banker's role in facilitating innovation by authorizing individuals to innovate on behalf of society Additionally, stock markets can stimulate the generation of information about firms, as larger and more liquid markets provide greater incentives for agents to invest in research, ultimately enhancing their ability to profit from this knowledge.

Financial systems play a crucial role in monitoring firms and enforcing corporate governance, which is essential for promoting economic growth Levine (2004) highlights that the ability of shareholders and creditors to supervise and influence capital utilization significantly impacts resource allocation Effective corporate governance mechanisms can alleviate the “agency problem” that arises from the separation of equity and debt holders from managers (Coase, 1937; Meckling & Jensen, 1976; Myers & Majluf, 1984) Consequently, strong corporate governance enhances firm efficiency in resource allocation and utilization, while also encouraging savers to invest in innovation and production.

Financial instruments, intermediaries, and markets play a crucial role in accelerating trading activities, hedging, and risk pooling, ultimately alleviating risks associated with various sectors and projects The effectiveness of financial systems in providing risk diversification services fosters long-term economic growth by encouraging savings and improving resource allocation Additionally, cross-sectional risk diversification enhances technological innovation by mitigating the hazards of engaging in innovative activities The ability to manage a diverse portfolio of creative projects not only reduces risk but also stimulates investment in growth-oriented initiatives Furthermore, financial systems facilitate inter-temporal risk sharing and smoothing across generations, enhance liquidity, mitigate liquidity risks, and promote long-term investments, all of which contribute to sustained economic growth.

Financial systems play a crucial role in mobilising savings from various savers for investment, a process that involves overcoming transaction costs and informational asymmetries Effective pooling of individual savings can enhance economic development by increasing overall savings, leveraging economies of scale, and addressing investment indivisibilities By aggregating funds from diverse individuals and investing in a diversified portfolio of risky projects, financial systems can redirect investments towards higher-return activities, ultimately fostering economic growth.

Financial institutions, instruments, and markets play a crucial role in fostering specialization, technological innovation, and economic growth by minimizing transaction costs Unlike barter exchanges, which are costly due to the extensive knowledge required to assess products and services, financial systems streamline the trading of goods and services This facilitation not only promotes specialization and innovation but also enhances economic growth Financial innovations are instrumental in lowering transaction and information costs, as highlighted by Levine (2005, p.881, as cited in Greenwood and Smith, 1997), where increased specialization necessitates more transactions, leading to further specialization Consequently, markets enhance exchange and drive productivity gains, which can, in turn, positively impact the development of financial markets, creating a cycle that fuels overall economic development.

Based on Levine (2004), Figure 2.4 shows a theoretical framework for the impact of financial development on economic growth.

Figure 2.4 A theoretical approach to financial development and economic growth

- Producing information and allocating capital

- Monitoring firms and exerting corporate governance

2.2.2 Impact of financial development on economic growth: An empirical review

Numerous studies have explored the relationship between financial development and economic growth using various econometric methods, including cross-sectional, time-series, and panel data analyses at both international and country levels Despite this extensive research, findings remain inconsistent A key reason for these mixed results is the multidimensional nature of financial development, which complicates the understanding of its impact on economic growth.

Research indicates that countries with well-developed financial markets experience stronger economic growth, supporting the idea that increased finance fosters economic development King and Levine (1993b) found a significant positive relationship between financial depth and economic growth by analyzing data from 77 countries between 1960 and 1989 Similarly, Levine and Zervos (1998) utilized two-stage least squares analysis on 47 countries from 1976 to 1993, revealing that both banking development and stock market liquidity positively correlate with output growth, capital accumulation, and productivity Furthermore, Levine et al (2000) employed generalized method of moments (GMM) estimators to assess the impact of financial intermediation on economic growth across 71 countries from 1960 to 1995, confirming a positive link Lastly, Calderón and Liu (2003) investigated the causality between financial development and economic growth using Geweke decomposition tests on panel data from 109 developing and industrial nations, further contributing to the understanding of this relationship.

Research from Beck and Levine (2004) indicates a significant causal relationship between financial development and economic growth, as evidenced by the positive impact of both stock market and banking development on real GDP per capita growth Analyzing data from 40 countries between 1976 and 1998, the study employs GMM estimators to reinforce the connection between financial systems and economic performance, highlighting the importance of financial development in fostering economic growth across various nations.

From 1990 to 2008, Estrada et al (2010) utilized the least squares dummy variable model to analyze the impact of financial development on economic growth in Asian developing countries Their research revealed that advancements in banking and stock markets, along with overall financial development, significantly contribute to economic growth in both developed and developing nations.

A series of studies from 2011 to 2015 highlight the intricate relationship between financial development and economic growth across various countries and regions Research spanning 71 countries from 1960 to 2004 indicates a long-term equilibrium and bidirectional causality between financial development and GDP per capita Bittencourt (2012) further supports this notion through analysis of four Latin American countries, confirming that financial development empowers entrepreneurs and fosters economic growth Caporale et al (2014) find that while stock and credit markets have limited effects due to insufficient financial depth in 10 new EU members, an efficient banking sector could enhance growth Additionally, Valickova et al (2015) reveal through a meta-analysis of 1,334 estimates that stock markets significantly accelerate economic growth more effectively than other financial intermediaries.

The second division of studies emphasizes developing economies, particularly the positive correlation between financial development and economic growth Al-Yousif (2002) employs a Granger causality test within an error correction framework to analyze this relationship across 30 developing countries from 1977 to 1999 The findings indicate a bidirectional causality between financial development and economic growth, although these results vary by country and are influenced by the proxies used to measure financial development Additionally, Kargbo and Adamu utilize the autoregressive distributed lag (ARDL) approach to further investigate this relationship.

Research has consistently shown a positive relationship between financial development and economic growth across various countries and time periods A study by (2009) in Sierra Leone from 1970 to 2008 indicates that financial development enhances economic growth primarily through investment channels Similarly, Zhang et al (2012) analyzed data from 286 Chinese cities between 2001 and 2006, finding that financial development correlates positively with economic growth In Kenya, Uddin et al (2013) employed a Cobb–Douglas production framework and found that from 1971 to 2011, the financial sector's development significantly boosts economic growth, as evidenced by the autoregressive distributed lag (ARDL) approach Furthermore, Adu et al (2013) investigated Ghana's financial development from 1961 to 2010 using the ARDL model, concluding that the impact of financial development on economic growth varies based on the indicators used to measure it.

Secondly, several other studies purport the existence of a threshold impact of financial development on economic growth For instance, Cecchetti and Kharroubi

Research from 2012 indicates an inverted U-shaped relationship between the size of the financial sector and productivity growth, suggesting that beyond a certain point, further financial development may hinder real economic growth As the financial sector expands, it can negatively impact productivity growth by competing with other sectors for limited resources Overall, financial booms are generally not conducive to enhancing economic growth.

Trade openness and environmental quality

2.3.1 Impact of trade openness on environmental quality: A theoretical review

Consumption and international trade are interconnected, particularly amid structural changes in production, as highlighted by Arrow et al (1995) and others The environmental Kuznets curve suggests that as production structures evolve in developed countries, pollution-intensive industries often migrate to less developed nations, where environmental regulations are less stringent (Copeland & Taylor, 1995) This shift underscores a disparity in changes between production and consumption structures, emphasizing the implications for energy use in trade commodities within manufacturing sectors (Agras & Chapman).

Energy consumption and exports of manufactured goods exhibit a positive correlation, with richer economies often becoming net importers of pollution-intensive goods, while poorer nations tend to export them This pattern reflects a shift in national specialization in international trade, where affluent countries focus on "clean" and service-oriented industries, and developing countries concentrate on "dirty" and material-heavy sectors Consequently, environmental impacts are transferred between nations rather than reduced, supporting the displacement hypothesis Furthermore, trade liberalization may accelerate the growth of pollution-heavy industries in poorer countries, as wealthier nations implement stricter environmental regulations.

Trade liberalization can enhance environmental quality by increasing real income in poorer economies, which leads to a greater demand for stricter environmental protections as wealthier individuals seek cleaner surroundings However, this can also result in the pollution haven hypothesis, where heavily polluting industries relocate to countries with lax environmental regulations, potentially harming the environment This hypothesis posits that weaker environmental standards can create a comparative advantage, altering trade patterns and resulting in rich countries losing dirty industries to poorer nations that accept them.

Lowering environmental standards to attract foreign direct investment (FDI) could lead developing countries to become pollution havens for harmful industries Many of these nations rely on technology transfer through FDI as a key method for acquiring advanced technologies This can result in reduced environmental damage through the adoption of efficient and clean energy technologies However, the increasing global awareness of environmental issues, along with the intertwining of trade, investment, and ecological concerns, poses a risk of disrupting these capital flows.

Triggering the environmental “race to bottom”

Enhancing environmental quality via an increase in employment and income

Suffering higher regulatory and supervision costs of environmental pollution in developed countries

Reallocating of international capital impose developed country governments to relax environmental requirements

Reducing environmental pollution via technology transfer

Increasing demands in stricter environmental protection Migrating pollution-intensive goods industries to nations with weaker environmental standards

Displacing production of dirty industries from developed countries to less developed countries

Figure 2.6 A theoretical approach to trade openness and environmental quality

The "race to the bottom" scenario occurs when stringent environmental regulations in developed countries lead to high costs for polluters, resulting in increased regulatory burdens compared to less developed nations This situation incentivizes heavily polluting industries to relocate, prompting a shift in international capital Consequently, the outflow of capital may pressure governments in developed countries to ease environmental standards As a result, the environmental Kuznets curve could flatten, potentially leading to higher levels of pollution as the race to the bottom intensifies.

Trade liberalisation and technological innovation are essential for sustaining economic growth and real incomes in developed economies Continuous innovation is necessary to prevent economic latecomers from using excessive energy and material inputs, as older industrialised nations did Furthermore, free trade facilitates the diffusion of clean technology, potentially enabling less developed economies to progress through the environmental Kuznets curve.

Globalization can lead to a competitive race to the bottom in environmental standards as countries strive to attract investments and jobs (Wheeler, 2001) Conversely, developing nations may improve their environmental quality and standards as increased investment boosts employment and income Overall, globalization has been largely associated with a reduction in pollution levels.

Economic globalization serves as a driving force behind global economic growth, though its benefits remain a topic of debate The processes of globalization, liberalization, and economic openness highlight potential conflicts, particularly in relation to the widely accepted market-oriented economic reforms and the need for environmental protection.

Figure 2.6 illustrates a theoretical framework for understanding the channels through which trade openness impacts on environmental quality in developing countries.

2.3.2 Impact of trade openness on environmental quality: An empirical review

Over the past few decades, numerous empirical studies have employed various statistical and econometric models to explore the connection between trade openness and environmental indicators such as CO2 emissions, SO2 emissions, fossil fuel consumption, and greenhouse gas levels However, the findings of these studies remain inconclusive.

Trade openness significantly impacts environmental quality, as highlighted by Antweiler et al (2001), who analyzed 43 countries from 1971 to 1996 Their study reveals that increased trade openness can lead to higher emissions due to the scale effect, where economic growth boosts GDP and industrial output, resulting in more gas emissions However, they also note small negative effects on environmental degradation from the composition effect and a potential positive impact from the technique effect, where trade fosters cleaner production methods Similarly, Atici (2009) examined the relationship between GDP, energy use, and trade openness on CO2 emissions in Central and Eastern European countries from 1980 to 2002, finding evidence for an environmental Kuznets curve, indicating that as GDP rises, CO2 emissions tend to decrease over time The study suggests that globalization does not necessarily elevate CO2 emissions in this region through trade openness.

Trade openness significantly contributes to environmental degradation, as highlighted by Managi (2004), who analyzed a panel dataset of 63 developed and developing countries from 1960 to 1999 The findings indicate that trade liberalization negatively impacts environmental quality Additionally, the research suggests that increased income levels may mitigate some of the environmental harm caused by trade activities.

Research indicates that CO2 emissions in China are negatively linked to technology transfer and research intensity, while positively influenced by energy use, income, and trade openness (2009) In Tunisia, trade openness shows a direct positive effect on CO2 emissions in both the short and long run, emphasizing the need for effective trade reforms and environmental policies (Chebbi et al., 2011) A study by Le et al (2016) reveals a long-term relationship between trade openness and particulate matter emissions, suggesting that increased trade can lead to environmental degradation, particularly in middle and low-income countries, while having a lesser impact in high-income nations Similarly, Shahbaz et al (2016) find that trade openness generally reduces environmental quality across 105 countries, with varying effects based on income levels.

Numerous studies indicate that trade openness impacts environmental quality differently across developed and developing economies, as well as various environmental indicators For instance, using a methodology similar to Antweiler et al (2001), Cole and Elliott (2003) analyze emissions and pollution intensities, revealing evidence for both the pollution haven and factor endowment hypotheses concerning CO2 and SO2 emissions, while findings for BOD and NOx emissions are less definitive They suggest that trade liberalization may decrease per capita BOD emissions, but the effects on SO2 emissions remain ambiguous Conversely, a positive correlation is observed between trade liberalization and NOx and CO2 emissions.

Trade liberalization may reduce the pollution intensity of various pollutants, as suggested by multiple studies Frankel and Rose (2005) found that trade significantly decreases air pollution, particularly SO2 emissions, while showing little negative impact on the environment overall Managi et al (2008) highlighted that trade openness benefits environmental quality in OECD countries but can negatively affect SO2 and CO2 emissions in select non-OECD nations Baek et al (2009) supported the notion that trade and income enhance environmental quality in developed economies, while developing countries face adverse effects due to industry migration Choi et al (2010) explored the environmental Kuznets curve, revealing differing relationships between CO2 emissions and trade openness across countries, with Japan exhibiting a U-shaped curve and China an N-shaped curve Their analysis indicates significant variability in environmental outcomes based on national characteristics and economic conditions.

A study conducted in 2018 analyzed the relationship between CO2 emissions and trade openness in France from 1960 to 2013 The findings indicate that, in the short term, there is no significant correlation between trade openness and gas emissions, aligning with the neutral hypothesis However, in the long term, the interaction between CO2 emissions and trade openness is influenced by the business cycle.

An integrated conceptual framework for the links between openness, financial development, economic growth, and environmental quality in developing countries.58

financial development, economic growth, and environmental quality in developing countries

Figure 2.8 illustrates an integrated conceptual framework that explores the relationships among openness, financial development, economic growth, and environmental quality, grounded in both theoretical and empirical research aimed at achieving three key objectives.

As mentioned above, the five hypotheses are as follows:

H 1A : Trade openness has significantly positive effect on financial development in developing countries.

H 1B : Financial openness has significantly positive or negative effect on financial development in developing countries.

H 1C : The interaction between trade openness and financial openness has significantly positive effect on financial development in developing countries.

H 2 : The impact of financial development on economic growth presents as an inverted U-shaped curve.

H 3 : Trade openness has significantly negative effect on environmental quality in developing countries.

Figure 2.8 An integrated conceptual framework for three objectives

Notes: (+), (-), and (+/-) denote the positive effect, negative effect, and positive or negative effect, respectively.

RESEARCH METHODOLOGY

Methodology

The issue of model uncertainty

Model uncertainty has been a significant focus in statistics and econometrics for decades, yet traditional frequentist methods often rely on a single model, leading to an underestimation of uncertainty This limitation results in riskier decision-making and overconfident inferences, as highlighted by Fragoso et al (2018) It is increasingly recognized that employing multiple models can provide more comprehensive insights into the distributions derived from observed data To identify the best-fit model, criteria such as predictive capabilities and penalized likelihood, including the Akaike Information Criterion and Bayesian Information Criterion, should be utilized Inferences are drawn only after model selection, assuming the chosen model accurately represents the underlying data.

Bayesian model averaging methodology and model uncertainty

The Bayesian Model Averaging (BMA) methodology, as outlined by Fragoso et al (2018), extends Thomas Bayes’s Bayesian inference approach, allowing for both parameter and model uncertainty estimation through prior and posterior distributions, respectively BMA has gained widespread acceptance across various fields as a robust method for addressing model uncertainty (Raftery et al., 1997; Hoeting et al., 1999; Chipman et al., 2001; Fragoso et al.).

The Bayesian Model Averaging (BMA) framework offers significant advantages over traditional frequentist statistics by addressing model uncertainty and reducing overconfidence in predictions According to Hinne et al (2020), BMA enhances predictive accuracy across various loss functions, such as squared error and logarithmic losses, thereby mitigating potential errors in forecasting.

To enhance the effectiveness of classical hypothesis testing, it is essential to avoid the “all-or-nothing” mentality, where models are seen as either fully accepted or rejected Additionally, gracefully reducing the variance of estimated parameters across experiments is crucial for obtaining reliable results A robust approach should also be resilient to model misspecification, ensuring that findings remain valid under various conditions Finally, minimizing the risk of omitted variable bias is vital for achieving accurate and trustworthy conclusions in research.

Bayesian Model Averaging (BMA) generates a weighted average of multiple models that encompass various subsets of explanatory variables, effectively functioning as a meta-analysis of meta-analyses In this process, posterior model probabilities serve as weights, acting as a goodness-of-fit measure akin to information criteria or adjusted R-squared, where models with higher posterior probabilities are considered better fitting Additionally, the posterior inclusion probability indicates the likelihood of each explanatory variable being part of the true model, allowing for the calculation of the posterior coefficient distribution across all true regressions This leads to the determination of posterior mean and standard deviation for each variable Despite its conceptual clarity, BMA is infrequently used in research related to financial development, growth, and environmental quality, primarily due to challenges such as the complexity of calculating average accuracy from posterior distributions, the overwhelming number of terms in these distributions that complicate computations, and the limited availability of user-friendly software.

2021) Fortunately, the large model space can be computed efficiently by several modern techniques such as Markov Chain Monte Carlo Model Composition (Madigan et al., 1995), reversible jump (Koop et al., 2012).

Bayesian Model Averaging (BMA) offers a systematic way to address model uncertainty, enhancing the reliability of results across various competing theories and potential determinants Our methodology is primarily inspired by the work of Fernandez et al (2001a) and is significantly informed by contributions from Hoeting et al (1999), Eicher et al (2011), Fernandez et al (2001b), Feldkircher and Zeugner (2009), Ley and Steel (2009), and Koch (2007) In essence, the BMA framework can be succinctly outlined as follows.

BMA methodology is conducted in the context of linear regression, e.g., in Hoeting et al (1999), Fernandez et al (2001a, 2001b), Feldkircher and Zeugner

In this study, we employ a linear regression model represented by the equation y = γ + πXi + ψZi + υi (3.1), where y signifies the response variable Y, specifically focusing on the ratio of private credit to GDP for objective 1, real GDP per capita growth for objective 2, and CO2 emissions for objective 3 The constant term in the regression is denoted by γ, while Xi represents a set of explanatory variables For a comprehensive understanding of the selected variables pertaining to each objective, please refer to Section 3.2.

Z i is a set of additional control variables; and  i is the error term, assumed to have homoscedastic, normally distributed disturbances.

In our model, we have a number n of observations (here n  64 developing countries) and a number k (in our context, k  19 for objective 1 and objective 2, and k  21 for objective 3) of regressors ( X 1 X K )

The set of models, denoted as  = (M1, , MK), consists of K possible models, where K equals 2 raised to the power of k, with k representing the selection of regressors All probabilities are implicitly conditioned on the model space .

We begin from the Bayes’s theorem Let us consider two random variables, A and B The simplest form of the Bayesian theory is defined: pr(B | A)  pr( A | B) pr(B) pr( A)

In probability theory, pr(B | A) represents the likelihood of event B occurring given that event A has already taken place Similarly, pr(B) indicates the overall probability of event B occurring independently Additionally, pr(A | B) denotes the probability of event A happening after event B has occurred, while pr(A) reflects the probability of event A being observed in general.

In Bayesian analysis, let \( y \) represent a vector or matrix of data, while \( \theta \) denotes a vector or matrix of model parameters aimed at explaining \( y \) By substituting \( B \) with \( \theta \) and \( A \) with \( y \) in the equation, we derive the following relationship: \( \text{pr}(\theta | y) = \text{pr}(y | \theta) \cdot \text{pr}(\theta) \).

) denotes the marginal likelihood of y , pr( ) denotes the prior density, pr( y |  ) denotes the likelihood function, pr( | y) denotes the posterior density.

Because pr( y) does not involve , we can ignore the term pr( y

) to get: pr( | y)  pr( y |  ) pr( ) (3.4)

Thus, the posterior is proportional to likelihood times the prior: posterior  prior  likelihood

Suppose we have K different models, k  1,, K , which all seek to explain y

M k depends on parameters  k By using M k , the posterior for the parameters is written as: pr( y |  k , M ) pr( k | M ) pr( k | y, M )    k    k (3.5) k pr( y, M )

According to Hoeting et al (1999), if  is the quantity of interest, then the posterior distribution of given data D is:

Using the Bayes’s theorem, the posterior model probability for M k is given pr(M D)

M k )d  k (3.8) denotes the integrated likelihood for model M k ;

 k denotes the vector of parameters for model M k ; pr(D k , M k ) denotes the likelihood; pr( k

Mk ) denotes the prior density of the parameters under model M k

; pr(M k ) denotes the prior probability that

The true model, denoted as M k, is defined by a prior structure within the model space This prior probability indicates that a specific variable is part of the true model and is independent of the other variables included Additionally, the likelihood of a variable appearing in the true model is set at 0.5, as supported by the research of Barbieri & Berger (2004), Durlauf et al (2012), and Piironen & Vehtari (2017).

The above principles provide a straightforward application of the BMA estimate of a parameter that this value can be calculated as follows:

The posterior mean ( E  D  ) and posterior variance ( Var  D  ) of  are defined as follows:

Based on Raftery (1993) and Draper

This thesis addresses the challenges of computing a large number of models by employing the Markov Chain Monte Carlo Model Composition (MC3) approach, as introduced by Madigan et al (1995) The MC3 technique focuses on utilizing a Markov chain simulation that generates sufficient draws to accurately approximate the relevant posterior quantities To ensure precision, this study implements 1,000,000 burn-ins followed by 3,000,000 draws from the MC3 sampler.

This thesis utilizes the Bayesian Model Averaging (BMA) approach to analyze our research data, operating under the premise of uninformative priors for the models This choice reflects a low degree of belief in the context of our empirical regressions, which focus on the interrelationships between financial development, economic growth, and environmental quality.

The priors influence the marginal likelihood in (3.8), which parameter priors are preferable (Eicher et al., 2011; Feldkircher and Zeugner, 2009; Ley and Steel,

2009) This is examined by assessing the predictive performance of the model To deal with this issue, this thesis uses Unit Information Prior (UIP) proposed by Kass

K and Wasserman (1995) introduced hyper g-priors, further developed by Fernandez et al (2001b), to enhance the estimation of multiple parameter priors and model priors These methods demonstrate improved robustness and deliver more accurate predictions compared to traditional approaches.

The first prior (labeled as UIP) is given by: pr(D M K )  c 1/ 2BICK , (3.7 3.13)

2 denotes the coefficient of determination; p K for the number of regressors.

The g-prior is defined as follows: pr(1 MK )  1, (3.9 3.15) pr( MK )  1, (3.10 3.16) pr( k  , M ) ~ N(0, (g Z k  Z k

The matrix Z_k, sized n × p_K, includes the demeaned regressors from M_K, where values of g near zero indicate less informative priors, while g = 1 assigns equal weight to both research data and priors For empirical investigations into financial development, economic growth, and environmental quality, the benchmark prior (BRIC) parameters proposed by Fernandez et al (2001b) are utilized Additionally, the thesis incorporates local empirical Bayes (LEB) priors from George and Foster (2000) and Liang et al (2008) to identify the optimal model.

Construction of variables

3.2.1 Openness, financial development, economic growth, and environmental quality

One of the most important issues in assessing the relationships between openness and financial development is how to attain a satisfactory measure of

Financial development is assessed through various indicators, including the number of listed companies, stock market capitalization, and private credit levels In developing countries, the ratio of private credit to GDP is often regarded as the most relevant measure, as it excludes central bank and development bank credits, focusing instead on the growth of private banking markets This approach provides a clearer picture of financial development in these regions, highlighting the dynamics of private sector financing (Baltagi et al., 2007; Law, 2009; Rajan and Zingales, 2003; Beck et al., 2007).

The 2006 measure emphasizes the critical role of financial institutions and markets in funding the entrepreneurial private sector This focus highlights the sector's relevance for assessing financial activity within bank-based financial systems, as noted by De Gregorio and Guidotti (1995).

Trade openness depicts the extent of actual exposure to trade interactions and accounts for the effective level of integration (Kim et al., 2010a, 2010b; Kim & ctg,

Trade openness in an economy is quantified by the total exports and imports of goods and services expressed as a percentage of its GDP, as demonstrated in various studies (Antweiler et al., 2001; Beck & Levine, 2004; Cole & Elliott, 2003; King & Levine, 1993a; 1993b; Levine et al., 2000; Levine & Renelt, 1992; Rajan & Zingales, 2003).

This thesis utilizes the KAOPEN index, a measure of de facto capital account openness developed by Chinn and Ito (2006), to assess financial openness The index is derived from four binary dummy variables that reflect restrictions on external accounts across various countries, as reported in the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) Specifically, the variables k1, k2, k3, and k4 represent the presence of multiple exchange rates, restrictions on current account transactions, limitations on capital account transactions, and the requirement for the surrender of export proceeds, respectively.

Chinn and Ito (2006) emphasize financial openness by reversing binary variables, assigning a value of one when capital account restrictions are absent Additionally, they assess controls on capital transitions by measuring the proportion of a five-year period during which such restrictions are not enforced.

Then the obtained index for capital account openness (KAOPEN t ) which is the principal component of k 1t

SHARE 3, t and k 4t , attains higher values when an economy is more open to cross-border transactions Hence, KAOPEN with higher values indicates greater financial openness.

Economic growth is commonly measured using indicators such as real per capita GDP growth, productivity growth, and average per capita capital stock growth (Levine, 1996) This thesis focuses specifically on real per capita GDP growth, aligning with findings from various studies (Caporale et al., 2014; Menyah et al., 2014; Zhang et al., 2012; Calderón and Liu, 2003; Bittencourt, 2012; Levine et al., 2000; Levine and Zervos, 1998; Beck and Levine, 2004; Rioja and Valev, 2004a, 2004b).

This thesis evaluates environmental quality through the analysis of carbon dioxide (CO2), the most prevalent greenhouse gas The author focuses on CO2 emissions due to their significant impact on global warming and climate change.

1991) According to the Intergovernmental Panel on Climate Change (IPCC),

Carbon dioxide (CO2) stands out as the most significant greenhouse gas resulting from human activities, as noted by the Intergovernmental Panel on Climate Change (2007) The primary contributors to these anthropogenic CO2 emissions are the combustion of fossil fuels and emissions generated from industrial production (EPA, 2019).

3.2.2.1 The impacts of openness on financial development: Evidence from developing countries

To strengthen the empirical results, this thesis includes controlled variables in the relationship between openness and financial development These include the following:

Institutional quality: Institutional quality has received a great deal of attention in the literature (Feng and Yu, 2021; Kutan et al., 2017) Acemoglu et al.

(2001) indicates that strong institutions play a crucial role in financial development.

In developing countries, strong institutions play a crucial role in maximizing the benefits of openness for financial development, as noted by Law (2009) Additionally, Mishkin (2009) emphasizes that globalization fosters financial development and economic growth by driving necessary institutional reforms.

This thesis incorporates institutional quality by utilizing the comprehensive indicators established by Kaufmann et al (2005) It evaluates each country by calculating the average across six governance dimensions: (i) voice and external accountability, (ii) political stability and absence of violence, (iii) government effectiveness, (iv) regulatory burden, (v) rule of law, and (vi) control of corruption The resulting index spans a defined range, reflecting the overall governance quality in each nation.

2.5 to 2.5 Higher values indicate better institutional quality and vice versa.

The legal origin of a country significantly influences the protection of corporate shareholders and creditors, as highlighted by Porta et al (1998) Historical experiences are crucial, but financial development varies widely even within the same legal framework Rajan and Zingales (2003) emphasize that only a portion of this financial development is linked to the inherited legal system, noting substantial variations over the past century This thesis examines the legal origins of countries through dummy variables that categorize their legal systems as British, German, Scandinavian, or French.

This thesis examines the relationship between financial development and real GDP per capita, utilizing both the current level and initial level of real per capita GDP to account for capital deepening Research indicates that these variables positively influence changes in financial development (Beck, 2002; Kim et al., 2010a, 2010b).

Inflation rates serve as a crucial indicator, influencing decision-making processes, as moderate to high inflation can hinder financial intermediation and discourage saving in real assets Consequently, inflation may also act as a proxy for assessing macroeconomic stability (Boyd et al., 2001; Easterly & Rebelo, 1993; Ito, 2006).

This thesis utilizes population as a proxy for country size and examines the ratio of government expenditure to GDP as a key factor in achieving macroeconomic stability According to Keynes, government spending can enhance aggregate demand, helping to revive an economy from recession Consequently, government expenditure is regarded as a significant indicator of macroeconomic stability.

This thesis employs a human capital index, derived from years of schooling and returns to education, as a proxy for a nation's human capital endowment, referencing the Penn World Table, version 9.0 (Svaleryd and Vlachos, 2005) The index is anticipated to positively affect economic growth by enhancing productivity (Caporale et al., 2014) To examine the robustness of these findings in relation to openness, gross Foreign Direct Investment (FDI) is utilized.

Data sources

This thesis utilizes panel data from 64 developing countries, as classified by the United Nations Development Programme (UNDP) from 2003 to 2017, based on the Human Development Index (HDI) The data, detailed in Table 3.4, was sourced from various databases, including the Global Financial Development Database for private credit to GDP and GNP per capita Additional metrics such as trade openness, real GDP per capita, inflation, and CO2 emissions were obtained from World Development Reports The KAOPEN index was updated using Chinn and Ito (2019), while legal origins were referenced from Porta et al (1998) and institutional quality from Worldwide Governance Indicators Investment ratios and human capital indices were collected from Penn World Table version 6.3, with capital abundance metrics derived from versions 9.1 and World Development Indicators Inward FDI stock data was sourced from the same Penn World Table version and UNCTAD statistics, and renewable energy consumption data was extracted from the International Energy Agency (IEA) This comprehensive data collection aimed to maximize observations based on availability.

This study utilizes a comprehensive panel data set from 64 developing countries, covering the period from 2003 to 2017, resulting in the largest sample size compared to earlier empirical research, including the works of Law and Demetriades (2006) and Do and Levchenko.

(2004), and Aizenman (2004) for financial development research; Estrada et al.

This thesis enhances the existing empirical literature on economic growth and environmental quality by expanding the sample size, building on research by Al-Yousif (2002), Cecchetti and Kharroubi (2012), and others in the field It specifically addresses the context of developing countries, referencing studies by Antweiler et al (2001), Cole and Elliott (2003), and Atici (2012).

The detailed definitions and sources of each variable are shown in Table 3.1, Table 3.2, Table 3.3 Figure 3.1 shows the legal origins of collected developing countries.

Table 3.4 The list of developing countries AFRICA (27 developing countries):

The African continent is home to a diverse array of nations, including Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, and the Central African Republic Other notable countries are Egypt, Gabon, Ghana, Kenya, Malawi, Mali, Mauritius, and Morocco Additionally, Namibia, Niger, Rwanda, Senegal, Sierra Leone, South Africa, Togo, Tunisia, Uganda, the United Republic of Tanzania, and Zambia contribute to the rich cultural and geographical tapestry of Africa.

Bangladesh, Cambodia, China, India, Indonesia, Iran, Islamic Rep., Israel, Jordan, Kuwait, Malaysia, Mongolia, Myanmar, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, Turkey, United Arab Emirates, Viet Nam.

LATIN AMERICA AND THE CARIBBEAN (16 developing countries):

Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic,Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Paraguay, Peru,Uruguay.

Figure 3.1 Legal origins of developing countries

OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC

The impacts of openness on financial development: Evidence from developing countries

Table 4.1 presents data on various variables across the whole sample, with Table 4.1a providing descriptive statistics for different groups of developing countries and Table 4.1b detailing results based on legal origins Key statistics include means, standard deviations, and the minimum and maximum values for each variable Additionally, Table 4.2 illustrates the correlation coefficients among the core variables in our models The analysis identifies the ratio of private credit to GDP (PrivCredit) as an indicator of financial development, alongside trade openness (TradeOpen), the financial openness index (KAOPEN), institutional quality (InsQuality), real GDP per capita (RGDP), inflation rate (Inflation), government consumption to GDP ratio (GovCons), total population (Population), foreign direct investment to GDP ratio (FDI), human capital index (Hcapital), and legal origin dummies for British (legor_uk), French (legor_fr), and Socialist (legor_so) legal origins, as well as regional dummies for Africa, Asia, and Latin America and the Caribbean (LatCar).

Between 2003 and 2017, the average financial development, measured by the ratio of private credit to GDP (PrivCredit), trade openness (TradeOpen), and the financial openness index (KAOPEN), stood at 0.373, 0.763, and 0.057, respectively Analysis reveals that the ratio of private credit to GDP is higher in developing Asian countries and those with Socialist legal systems compared to their counterparts in Africa, Latin America, and the Caribbean, as well as those with British and French legal systems Similarly, trade openness is greatest in Asian nations, averaging 0.956, while African countries exhibit the lowest trade openness at 0.660 Additionally, the financial openness index shows that Africa has the lowest average (-0.586), in contrast to Asia and Latin America and the Caribbean, which average 0.101 and 1.087, respectively.

The analysis of correlation coefficients reveals a significant relationship between trade openness (TradeOpen) and the ratio of private credit to GDP (PrivCredit), indicating a strong connection with a coefficient of 0.470 In contrast, the financial openness index (KAOPEN) demonstrates a weaker correlation with the ratio of private credit to GDP, yielding a coefficient of only 0.101 for the period from 2003 to 2017 across the entire sample.

The analysis presented in Figure 4.1 illustrates the OLS regression lines for trade openness (TradeOpen) and the financial openness index (KAOPEN) in relation to the ratio of private credit to GDP (PrivCredit) from 2003 to 2017 The findings indicate a positive and statistically significant relationship between trade openness and financial development, whereas the correlation between the financial openness index and the ratio of private credit to GDP is relatively weak.

Tables 4.1, 4.1a, and 4.1b present descriptive statistics and correlation coefficients for all variables analyzed to explore the relationship between financial development and openness, encompassing both financial and trade openness.

Table 4.1 Summary statistics of the variables for Objective 1, whole sample, 64 economies, 2003-2017

Variable Mean Std.dev Min Max Variable Mean Std.dev Min Max

Table 4.2 Correlations between of the variables for Objective 1, whole sample, 2003-2017

PrivCredit TradeOpen KAOPEN InsQuality RGDP Inflation GovCons Population FDI Investment HCapital legor_uk legor_fr legor_so Africa Asia LatCar TimeTrend

HCapital 0.524 0.332 0.496 0.601 0.464 -0.115 0.080 0.008 0.131 0.080 1 legor_uk 0.088 0.070 -0.068 0.250 0.113 0.091 -0.007 0.059 0.002 0.025 0.170 1 legor_fr -0.197 -0.115 0.115 -0.167 -0.063 -0.120 0.047 -0.226 -0.076 -0.168 -0.202 -0.875 1 legor_so 0.227 0.096 -0.100 -0.152 -0.093 0.066 -0.081 0.344 0.151 0.293 0.075 -0.187 -0.312 1

Figure 4.1 Scatter plots of openness and financial development in developing countries, 2003 – 2017

This section outlines the findings from the BMA analysis within the framework of a cross-country financial development regression model, focusing on the effects of trade and financial openness on financial development The study uses the average ratio of private credit to GDP (PrivCredit) as a measure of financial development for the period from 2003 to 2017 The model incorporates 19 variables from a dataset of 64 developing countries, resulting in a total of 524,288 potential models The results are derived from a Markov chain with 20 million recorded draws, following an initial burn-in of 10 million, and explore 3,962,772 models The average number of included regressors is approximately 13.465 The analysis consistently employs the benchmark prior (BRIC), unit information prior (UIP), and local empirical Bayes (LEB) methods, assuming uninformative priors for the parameters in each model.

The posterior estimates, detailed in Table 4.3, reveal that trade openness is a robust determinant of financial development, exhibiting a posterior inclusion probability (PIP) of 0.998 across all three alternative prior structures This indicates a significant positive effect on financial development, while no evidence supports the contributions of financial openness or the interaction between trade openness and financial openness Figure 4.2 visually represents the PIP and averaged point estimates, with the green solid vertical line indicating the regressor's average, while the red lines denote conditional expected values and standard deviations Additionally, Figure 4.3 illustrates cumulative model probabilities from BRIC, further emphasizing the findings.

In addition to trade openness, several key factors significantly influence financial development, as indicated by their posterior inclusion probabilities (PIP) exceeding 0.5 These factors include institutional quality, government consumption, total population, the British legal origin dummy, the Africa dummy, and various interactions involving trade and financial openness, FDI, inflation, and regional dummies for Latin America and the Caribbean Conversely, variables such as financial openness, interactions between trade and financial openness, real GDP per capita, human capital, and the Socialist legal-origin dummy exhibit PIP values below 0.5, suggesting they are not linked to financial development.

Recent empirical studies have focused on the effects of openness on financial development while accounting for other crucial factors like institutions and macroeconomic characteristics This methodology aligns with significant research by Chinn and Ito (2002, 2006), Baltagi et al (2007), and David et al (2014) The results support existing literature on the influence of trade openness on financial development, as evidenced by the works of Rajan and Zingales (2003), Baltagi et al (2007, 2009), Law and Demetriades (2006), David et al (2014), Beck (2002), and Braun and Raddatz.

(2005), among others For instance, the findings are consistent with Baltagi et al.

A study conducted in 2009 highlights that trade openness, measured by the ratio of total trade to GDP, plays a crucial role in driving financial development This evidence strongly supports the H1A hypothesis, indicating that trade openness has a significantly positive impact on financial development in developing countries.

Table 4.3 The impacts of openness on financial development: posterior estimates under uniform model priors

Post SD PIP Post mean

Post SD PIP Post mean

Interaction between trade openness and institutional quality 1.000 0.389 0.058 1.000 0.389 0.058 1.000 0.396 0.062

Interaction between financial openness and institutional quality 0.797 -0.051 0.031 0.797 -0.051 0.031 0.855 -0.054 0.029

Latin America and The Caribbean dummy 0.743 -0.116 0.082 0.744 -0.116 0.082 0.883 -0.141 0.072

Interaction between financial openness and real GDP per capita 0.699 -0.008 0.011 0.698 -0.008 0.011 0.855 -0.054 0.029

Interaction between trade openness and financial openness 0.294 -0.021 0.038 0.294 -0.021 0.038 0.454 -0.032 0.041

Interaction between trade openness and real GDP per capita 0.161 -0.009 0.025 0.160 -0.009 0.025 0.244 -0.013 0.028

Notes: BRIC denotes benchmark prior; UIP denotes unit information prior; and LEB denotes local empirical Bayes approach

Figure 4.2 Marginal densities of trade openness, financial openness, and the interaction between trade openness and financial openness from BRIC

Unlike the findings of Baltagi et al (2009), this thesis concludes that there is no significant evidence supporting the interaction between trade openness and financial openness as a key factor in financial development While Baltagi et al and Law and Demetriades (2006) endorse the Rajan and Zingales (2003) hypothesis that simultaneous openness to capital flows and trade fosters financial development, this study does not support the H1C hypothesis, indicating that the interaction between trade and financial openness does not have a significantly positive impact on financial development in developing countries.

Numerous empirical studies have explored the relationship between financial openness and financial development, utilizing various econometric techniques, including the Bayesian Model Averaging (BMA) approach Research by Baltagi et al (2007) and Ito indicates that financial openness can have both positive and negative effects on financial development.

Numerous studies, including those by Chinn and Ito (2002, 2006), Law and Demetriades (2006), and Trabelsi and Cherif (2017), have explored the relationship between financial liberalization and financial development However, the findings offer minimal evidence to support the notion that financial liberalization effectively fosters financial development, as noted by Hauner et al.

(2013) point out Hence, this finding does not support the H 1B hypothesis that financial openness has significantly positive or negative effect on financial development in developing countries.

Besides openness, the results also find that institutional quality has a strong positive influence on financial development, as suggested by Acemoglu et al.

Research from 2001 and 2009 highlights that the interplay between trade openness and institutional quality significantly enhances financial development This indicates that robust institutions play a crucial role in maximizing the benefits of trade openness.

Financial development in developing countries with higher institutional quality experiences less benefit from financial liberalization compared to those with lower institutional quality Additionally, government consumption significantly positively impacts financial development, aligning with findings from Kim et al (2010a) and Kim et al (2010b) Furthermore, the level of financial development and its trends over time correlate with larger total populations, supporting the empirical research by David et al (2014).

The impact of financial development on economic growth: Evidence from

Table 4.4 provides a summary of descriptive statistics for the entire sample, while Tables 4.2a and 4.2b present descriptive statistics for different groups of developing countries and legal origins, respectively These tables detail the means, standard deviations, and range of values for various variables The correlation coefficients among the key variables are shown in Table 4.5 This thesis examines the relationship between financial development and economic growth, using the ratio of private credit to GDP (PrivCredit) as a financial development proxy and real GDP per capita growth (Y) as an economic growth indicator Additional variables analyzed include the investment-to-GDP ratio, inflation rate, government consumption-to-GDP ratio, human capital index, trade openness, financial openness index, FDI-to-GDP ratio, institutional quality, population growth, and legal origin dummies for British, French, and Socialist legal systems, along with regional dummies for Africa, Asia, and Latin America and the Caribbean.

From 2003 to 2017, the average economic growth rate (Y) was 0.028, while the average financial development measure, represented by the ratio of private credit to GDP (PrivCredit), stood at 0.373 Analysis reveals that developing countries in Asia and those with Socialist legal systems experienced higher average economic growth rates compared to their counterparts in Africa, Latin America, and the Caribbean, as well as those with British and French legal systems Furthermore, financial development mirrored this trend, with Asian countries achieving the highest average financial development level at 0.538, contrasted by Africa's lowest level at 0.245.

The analysis of correlation coefficients reveals a strong relationship between economic growth (Y) and the ratio of private credit to GDP (PrivCredit), which serves as an indicator of financial development, with a significance level of 0.001 for the period from 2003 onward.

The analysis of data from developing countries between 2003 and 2017 reveals an insignificant relationship between economic growth and financial development, as illustrated by the OLS regression lines plotted in Figure 4.4.

(Y) and financial development (PrivCredit), hence whether there exists a financial development level.

Table 4.4 and Table 4.2a, 4.2b also provides descriptive statistics and the correlations’coefficients of all other the variables involved to investigate impact of financial development on economic growth in developing countries.

Table 4.4 Summary statistics of the variables for Objective 2, whole sample, 64 economies, 2003-2017

Variable Mean Std.dev Min Max Variable Mean Std.dev Min Max

Table 4.5 Correlations between of the variables for Objective 2, whole sample, 2003-2017

Y PrivCredit TradeOpen KAOPEN InsQuality Inflation GovCons FDI Investment PopGrowth HCapital legor_uk legor_fr legor_so Africa Asia LatCar TimeTrend

HCapital -0.006 0.524 0.332 0.496 0.601 -0.115 0.080 0.131 0.080 -0.253 1 legor_uk -0.025 0.088 0.070 -0.068 0.250 0.091 -0.007 0.002 0.025 0.048 0.170 1 legor_fr -0.135 -0.197 -0.115 0.115 -0.167 -0.120 0.047 -0.076 -0.168 0.040 -0.202 -0.875 1 legor_so 0.322 0.227 0.096 -0.100 -0.152 0.066 -0.081 0.151 0.293 -0.175 0.075 -0.187 -0.312 1

Figure 4.4 Scatter plots of financial development and economic growth in developing countries, 2003 - 2017

The findings from the Bayesian Model Averaging (BMA) approach are detailed in Table 4.6, focusing on a cross-country economic growth regression model where the growth rate of real GDP per capita (Y) serves as the dependent variable for the period of 2003–2017 The model incorporates 19 variables from 64 developing economies, resulting in a total of 524,288 potential models Results are derived from a Markov Chain with 20 million recorded draws, following 10 million burn-ins, and visiting 3,962,772 models The average model size is approximately 13.465 regressors Table 4.6 compares the benchmark prior (BRIC), UIP, and LEB approaches, presenting posterior inclusion probabilities (PIPs), posterior means, and posterior standard deviations, assuming uninformative priors for model parameters Additionally, Figure 4.6 illustrates cumulative model probabilities from the BRIC approach.

Figure 4.6 Cumulative model probabilities from BRIC for Object 2

According to the literature, only variables with posterior inclusion probabilities (PIPs) exceeding 0.5 are deemed robust determinants of economic growth Table 4.6 reveals that both the ratio of private credit to GDP and its square consistently show PIPs above 0.5 across three alternative prior structures, indicating their significant impact on economic growth Notably, the findings suggest that while financial development negatively affects economic growth, it also presents a significant threshold effect, meaning that economic growth is only achieved when a certain level of financial development is reached This relationship is further illustrated in Figure 4.5, which displays the marginal densities of financial development within BRIC countries.

Table 4.6 The impacts of financial development on economic growth: posterior estimates under uniform model priors

Post SD PIP Post mean

Post SD PIP Post mean

Latin America and The Caribbean dummy 0.982 -0.014 0.004 0.981 -0.014 0.004 0.999 -0.015 0.004

The square of financial development 0.502 0.243 2.663 0.502 0.245 2.676 0.553 1.172 5.727

Interaction between financial openness and institutional quality 0.076 0.000 0.001 0.076 0.000 0.001 0.395 -0.001 0.001

Interaction between trade openness and institutional quality 0.055 0.000 0.001 0.055 0.000 0.001 0.272 0.000 0.002

Interaction between trade openness and financial openness 0.042 0.000 0.000 0.042 0.000 0.000 0.240 0.000 0.001

Notes: BRIC denotes benchmark prior; UIP denotes unit information prior; and LEB denotes local empirical Bayes approach

Figure 4.5 Marginal densities of financial development from BRIC

Table 4.6 highlights that several independent variables significantly impact economic growth, with posterior inclusion probabilities (PIPs) exceeding 0.5 across three alternative parameter structures Key variables include population growth, investment to GDP ratio, Socialist legal origin dummy, time trend, Latin America dummy, FDI, and Africa dummy Notably, the investment to GDP ratio, Socialist legal origin dummy, and FDI negatively affect economic growth, while population growth, time trend, and the Latin America and Africa dummies show positive correlations Additionally, the interaction between trade and financial openness has an insignificant effect on economic growth in developing countries In contrast, variables such as inflation, trade openness, institutional quality, government consumption, human capital, and financial openness demonstrate PIPs below 0.5, indicating no significant link to economic growth.

Previous research has explored the impact of financial development on economic growth, while controlling for other significant factors like macroeconomic characteristics and institutional quality, as highlighted by Acemoglu et al (2005) and Klein (2005) The findings indicate a U-shaped relationship, where financial development, measured by the ratio of private credit to GDP, initially has a negative effect on growth until a certain threshold is reached, after which it positively influences output growth This suggests that enhanced financial systems can drive growth in developing countries However, these results contrast with studies by Law and Singh (2014), Shen and Lee (2006), Cecchetti and Kharroubi (2012), and Arcand et al (2015), which propose an inverted U-shaped relationship between financial development and economic growth, indicating a lack of strong support for the latter view.

The relationship between financial development and economic growth is characterized by an inverted U-shaped curve, particularly in developing countries This phenomenon suggests that the influence of financial development on growth is more reliant on private sector investment behavior than on public sector involvement Initially, an increase in private lending can hinder growth, as the underdeveloped private sector struggles to effectively convert available resources into profitable investments However, up to a certain threshold, financial development can enhance economic growth, driven by active and innovative entrepreneurial activities.

Investment to GDP ratio, Socialist legal origin, and Foreign Direct Investment (FDI) are positively associated with economic growth The investment to GDP ratio demonstrates a strong correlation with economic growth, aligning with findings from Levine (2004), Caporale et al (2014), Kargbo and Adamu (2009), and Law and Singh (2014) Additionally, evidence supports that Socialist legal origins significantly enhance economic growth compared to French legal origins, as highlighted by Porta et al (1998) and Rajan and Zingales (2003) Furthermore, FDI exhibits a statistically and economically significant positive impact on economic growth, as discussed by Hermes and Lensink.

(2003), Lee and Chang (2009), and Omran and Bolbol (2003) However, this finding is inconsistent with Zhang et al (2012).

The findings indicate that population growth adversely affects economic growth, aligning with the Malthusian theory of population dynamics This conclusion contrasts with the perspectives of Kelley and Schmidt (1999) and Kuznets, suggesting a divergence in understanding the relationship between population and economic development.

This thesis identifies a notable negative time trend, suggesting that shared factors affecting developing countries evolve over time and hinder economic growth Additionally, it reveals that, in contrast to Asian developing nations, the presence of Latin America, the Caribbean, and Africa reduces the beneficial effects of financial development on economic growth.

The impact of trade openness on environmental quality: Evidence from

Table 4.7 presents descriptive statistics for the entire sample, while Tables 4.3a and 4.3b in Appendix 4.3 detail the statistics for various groups of developing countries and their legal origins These tables provide essential data, including means, standard deviations, and the minimum and maximum values for the examined variables The correlation coefficients among core variables are outlined in Table 4.8 To assess the impact of trade openness on environmental quality, the study utilizes CO2 emissions per capita as a measure of environmental pollution, alongside trade openness represented by the total trade-to-GDP ratio Additional variables considered include the financial openness index, economic intensity, GNP per capita, relative income, human capital index, adjusted capital abundance, relative capital abundance, inward FDI stock to capital stock ratio, share of renewable energy consumption, institutional quality, and various legal and regional origin dummies.

Between 2003 and 2017, the average trade openness (TradeOpen) across the entire sample was 0.763, while the average CO2 emissions stood at 2.714 metric tons per capita Notably, developing countries in Asia and those with British legal systems exhibited the highest trade openness compared to their counterparts in Africa and Latin America, as well as those with Socialist and French legal systems This trend is mirrored in CO2 emissions, with Asian countries averaging 5.195 metric tons per capita and British legal systems at 3.436 metric tons, whereas African nations and those with French legal systems recorded the lowest emissions, averaging 1.195 and 2.236 metric tons, respectively.

The analysis reveals a significant correlation coefficient of 0.339 between trade openness (TradeOpen) and CO2 emissions (CO2), indicating a notable relationship concerning environmental quality in developing countries from 2003 to 2017 Additionally, the OLS regression lines illustrated in Figure 4.6 highlight a positive yet statistically insignificant relationship between trade openness and CO2 emissions during this period.

Table 4.7a and Table 4.3a, 4.3b also provides descriptive statistics and the correlations ‘coefficients of all other the variables involved to investigate impact of trade openness on CO2 emissions in developing countries.

Table 4.7 Summary statistics of the variables for Objective 3, whole sample, 64 economies, 2003-2017

Variable Mean Std.dev Min Max Variable Mean Std.dev Min Max

Table 4.8 Correlations between of the variables for Objective 3, whole sample, 2003-2017

CO2 TradeOpen KAOPEN EcoIntensity K/L REL K/L Income REL.INC Inward.FDI/K REnergyUse legor_uk legor_fr legor_so Africa Asia LatCar TimeTrend

REnergyUse -0.571 -0.372 -0.291 -0.188 -0.562 -0.557 -0.483 -0.489 -0.281 1.000 legor_uk 0.118 0.181 -0.016 0.181 0.211 0.213 0.169 0.176 0.122 0.022 1.000 legor_fr -0.130 -0.194 0.069 -0.157 -0.171 -0.172 -0.120 -0.125 -0.122 0.015 -0.875 1.000 legor_so 0.033 0.038 -0.109 -0.035 -0.066 -0.069 -0.089 -0.092 0.008 -0.074 -0.187 -0.312 1.000

Figure 4.7 Scatter plots of trade openness and environmental quality in developing countries, 2003 – 2017

This section presents findings from the Bayesian Model Averaging (BMA) approach, which allows for the inclusion of any subset of up to 21 determinants of environmental quality, resulting in a model space of 2,097,152 possible models The analysis is based on Markov chain simulations involving 20 million recorded draws after a burn-in of 10 million, exploring 3,954,118 models The average posterior expected model size is 15.321, indicating the mean number of included regressors The study employs the benchmark prior (BRIC), unit information prior (UIP), and local empirical Bayes (LEB) methods, assuming uninformative priors for model parameters Data is drawn from 64 developing countries between 2003 and 2017, with CO2 emissions (metric tons per capita) serving as a proxy for environmental quality Cumulative model probabilities from the BRIC approach are illustrated in Figure 4.9.

Table 4.9 displays the posterior estimates, indicating that variables with posterior inclusion probabilities (PIP) exceeding 0.5 are considered robust determinants of environmental quality Notably, the prior probability for including any variable in the true model is set at 0.5 However, trade openness consistently shows a PIP below 0.5 across all three alternative prior structures, suggesting its limited role as a determinant of environmental quality.

The study reveals that a PIP of 0.033 has a negligible impact on environmental quality, while financial openness with a PIP of 1.000 significantly enhances environmental quality by effectively reducing CO2 emissions As illustrated in Figure 4.8, the marginal densities of trade openness from BRIC countries correlate with environmental quality, supported by the averaged point estimates represented by the green solid vertical line in Table 4.9 Additionally, the red solid vertical line and red dotted lines denote the conditional expected values and the double conditional standard deviation, respectively.

Table 4.9 The impacts of trade openness on environmental quality: posterior estimates under uniform model priors

Post SD PIP Post mean

Post SD PIP Post mean

Latin America and The Caribbean dummy 1.000 -0.314 0.046 1.000 -0.314 0.046 1.000 -0.314 0.046

Inward FDI stock/capital stock 1.000 0.102 0.016 1.000 0.102 0.016 1.000 0.102 0.016

Interaction between trade openness, relative capital-abundance and relative income 1.000 -0.048 0.008 1.000 -0.048 0.008 1.000 -0.048 0.008

Interaction between trade openness and the square of relative capital-abundance 0.535 -18.881 85.169 0.534 -19.010 85.448 0.533 -18.421 84.171

Interaction between trade openness and relative capital-abundance 0.527 37.575 170.339 0.528 37.833 170.896 0.527 36.656 168.343

The square of capital-abundance (adjusted) 0.521 5.923 44.628 0.517 5.898 44.543 0.514 5.729 43.875 Capital abundance (adjusted) 0.507 -10.606 89.256 0.511 -10.558 89.085 0.513 -10.218 87.750

Interaction between trade openness and the square of relative income 0.036 0.928 19.101 0.035 0.918 19.005 0.034 0.921 19.035

Interaction between trade openness and relative income 0.035 -1.855 38.201 0.035 -1.836 38.010 0.034 -1.841 38.070

The square of economic intensity 0.034 -0.533 15.791 0.034 -0.527 15.709 0.033 -0.522 15.642

Notes: BRIC denotes benchmark prior; UIP denotes unit information prior; and LEB denotes local empirical Bayes approach

Figure 4.8 Marginal densities of openness from BRIC

In addition to financial openness, several key factors significantly influence environmental quality in developing countries, with posterior inclusion probabilities (PIPs) exceeding 0.5 across various parameter structures These factors include the Socialist legal origin dummy, regional dummies for Africa and Latin America and the Caribbean, adjusted capital abundance interactions with income, inward FDI stock relative to capital stock, renewable energy consumption, time trends, and various trade openness interactions Conversely, variables such as British legal origin, income squared, and certain trade openness interactions show PIPs below 0.5, indicating they do not significantly impact environmental quality.

Figure 4.9 Cumulative model probabilities from BRIC for Object 3

This thesis examines trade variables and finds that increased trade openness does not correlate with higher CO2 emissions in developing countries, aligning with Jalil and Mahmud (2009) but contradicting Antweiler et al (2001), who argue that freer trade promotes cleaner production techniques Additionally, the findings do not support the pollution haven hypothesis, which posits that wealthy countries may offload dirty industries to poorer nations, as noted by several researchers Consequently, the thesis weakly supports the hypothesis that trade openness negatively impacts environmental quality in developing countries Furthermore, the interaction between trade openness and relative capital-abundance does not align with predictions from Antweiler et al (2001) and Managi et al (2009) regarding pollution reduction in capital-abundant countries Instead, it supports Cole and Elliott (2003) by indicating that developing nations with lax environmental regulations may experience increased pollution due to a comparative advantage in dirty production The thesis also reveals a negative correlation between the square of relative capital-abundance and CO2 emissions in the context of trade openness, consistent with Cole and Elliott's findings.

Increased relative capital abundance correlates with higher CO2 emissions, albeit with diminishing returns The findings suggest that greater trade openness can elevate pollution levels, particularly in capital-intensive high-income countries, partially supporting the pollution haven hypothesis However, the research indicates that rising relative income does not significantly contribute to increased CO2 emissions, with each additional rise in income having a reduced effect, aligning with the conclusions of Antweiler et al (2001) and Cole.

Elliott (2003) and Managi et al (2009) found a negative correlation between CO2 emissions and trade openness, influenced by factors such as relative capital abundance and income levels This conclusion contrasts with the findings of Antweiler et al.

(2001) and Cole and Elliott (2003), while it is consistent with Managi et al (2009).

This thesis highlights the significant role of financial openness in enhancing environmental quality by reducing CO2 emissions in developing countries It suggests that financial liberalization fosters increases in foreign direct investment (FDI) and research and development (R&D) investments, ultimately promoting economic growth and environmental improvement, as supported by Tamazian et al (2009) and Tamazian and Rao (2010) The study indicates that the British legal origin does not significantly contribute to environmental quality, unlike the French legal origin, while the Socialist legal origin dampens the positive effects of trade liberalization Additionally, developing countries in Africa and Latin America exhibit lower environmental pollution levels compared to their Asian counterparts The research further demonstrates that increased capital abundance, when combined with rising income, enhances environmental quality, aligning with Managi et al (2009), though this contradicts findings from Antweiler et al (2001) and Cole and Elliott (2003) Lastly, a positive correlation between inward FDI stock and domestic capital stock is observed, with CO2 emissions showing upward trends, consistent with the conclusions of Managi et al.

The relationship between CO2 emissions and renewable energy consumption indicates that a decrease in emissions leads to a higher share of renewables, aligning with findings from Sebri and Ben-Salha (2014), Shafiei and Salim (2014), Jebli et al (2016), Bilgili et al (2016), and Zafar et al (2020) Unlike Antweiler et al (2001), this research reveals that economic intensity and its squared terms do not significantly impact environmental quality Additionally, the study highlights that while increased capital abundance initially reduces CO2 emissions, it can ultimately harm environmental quality beyond a certain threshold, contradicting Antweiler et al.'s conclusions.

Research by Cole and Elliott (2003) indicates that the findings do not validate scale and technique effects or the environmental Kuznets curve, which suggests an inverted-U relationship between per capita income and pollution Specifically, in developing countries, the study demonstrates that rising income levels lead to increased CO2 emissions.

CONCLUSIONS

Main findings

The impacts of openness on financial development: Evidence from developing countries

This thesis aims to explore the effects of trade and financial openness on financial development and economic growth in developing countries Analyzing data from 64 developing nations between 2003 and 2017, it presents new evidence highlighting the relationship between financial and trade openness and financial development, measured by the average ratio of private credit to GDP.

Our research reveals that trade openness, measured by the ratio of total trade to GDP, plays a vital role in fostering financial development This aligns with the findings of notable scholars such as Rajan and Zingales (2003) and Beck (2002), reinforcing the H1A hypothesis that trade openness positively influences financial development in developing nations Conversely, the study finds limited evidence supporting the notion that financial openness contributes to financial development, as indicated by previous research from Hauner et al (2013) and others.

Recent studies, including those by Trabelsi and Cherif (2017), indicate that financial openness does not have a significant positive or negative impact on financial development in developing countries, contradicting the H1B hypothesis Additionally, the research reveals an insignificant relationship between financial development and the simultaneous opening of trade and capital accounts, which does not align with the Rajan and Zingales hypothesis This finding contrasts with the conclusions of Baltagi et al (2009) and Law and Demetriades (2006) Consequently, there is no support for the H1C hypothesis, which posits that the interaction between trade openness and financial openness positively influences financial development in developing nations.

Empirical results indicate that a favorable institutional environment enables developing economies to leverage the benefits of financial openness, as suggested by Acemoglu et al (2001) and Law (2009) Stiglitz (2000) emphasizes that hasty financial and capital market liberalization without a solid regulatory framework contributed to economic issues, highlighting that countries like India and China, which maintained strong capital controls, thrived despite global economic challenges The findings also support the notion that British legal origins foster greater financial development than French legal origins, as noted by Porta et al (1998) Furthermore, developing nations in Africa and Latin America exhibit lower financial development levels compared to their Asian counterparts The thesis reveals a short-run negative relationship between foreign direct investment (FDI) and financial development, while higher inflation promotes financial development in the long run, aligning with Kim et al (2010b) Additionally, the interaction between financial openness and real GDP per capita shows a significant negative correlation with financial development, contradicting the views of Rajan and Zingales (2003).

The impact of financial development on economic growth: Evidence from developing countries

This thesis explores the relationship between financial development and economic growth, a key topic in development economics for decades The authors are driven by the scarcity of empirical studies utilizing the Bayesian Model Averaging (BMA) approach, as introduced by Fernandez et al (2001b) This research focuses on 64 developing countries and spans the period from 2003 onwards.

In 2017, the thesis examined the relationship between financial development and economic growth in developing countries by utilizing the ratio of private credit to GDP as an indicator for financial development and real per capita GDP growth as a measure of economic growth.

The study reveals a U-shaped relationship between financial development and economic growth, suggesting that financial development negatively impacts growth only up to a certain threshold, after which it positively influences output growth Evidence shows that in developing economies, an increase in the ratio of private credit to GDP correlates with enhanced economic growth, contradicting previous research that proposed an inverse U-shaped curve Consequently, the findings do not substantiate the H2 hypothesis, which posited that the impact of financial development on economic growth follows an inverted U-shaped trajectory.

Regarding control variables, the thesis suggests that investment to GDP ratio has positive effects on economic growth, which is remarkably similar to Levine

(2004), Caporale et al (2014), Kargbo and Adamu (2009), and Law and Singh

The findings from 2014 strongly support the notion that Socialist legal origins contribute more to economic growth than French legal origins, aligning with the arguments presented by Porta et al (1998) and Rajan and Zingales (2003) Additionally, the thesis highlights that foreign direct investment (FDI) has a significant positive effect on economic growth, corroborating the research of Hermes and Lensink (2003), Lee and Chang (2009), and Omran and Bolbol (2003), while contradicting the conclusions drawn by Zhang et al.

The thesis presents evidence supporting the Malthusian theory, indicating that population growth adversely affects economic growth, contradicting the findings of Kelley and Schmidt (1999) and Kuznets (1967) Additionally, it reveals that factors such as time trends and regional dummies for Latin America, the Caribbean, and Africa reduce the positive influence of financial development on economic growth in developing nations.

5.1.3 The impact of trade openness on environmental quality: Evidence from developing countries

The impact of trade openness on environmental quality has been a topic of significant debate for the past two decades This thesis explores the relationship between trade openness and CO2 emissions per capita as a measure of environmental pollution in developing countries A key innovation of this research is the use of a regression model based on the Bayesian Model Averaging (BMA) approach by Fernandez et al (2001b), which addresses model uncertainty in assessing the environmental effects of trade openness Additionally, this study incorporates financial openness, legal origins, and renewable energy consumption as crucial factors influencing environmental quality—elements overlooked in earlier studies by Antweiler et al (2001) and Cole and Elliott (2003).

Empirical findings indicate that trade openness does not lead to environmental degradation in developing countries This outcome challenges the pollution haven hypothesis, as discussed by researchers such as Ang (2009), Managi et al (2009), Nasir and Rehman (2011), Managi (2004), and Chebbi et al (2011).

The thesis presents mixed findings regarding the impact of trade openness on environmental quality in developing countries, indicating that it does not strongly support the hypothesis that trade openness negatively affects environmental quality Instead, it reveals a positive correlation between relative capital-abundance and CO2 emissions, suggesting that increased capital can enhance environmental quality in the context of trade, aligning with Cole and Elliott's (2003) arguments However, this contradicts the views of Antweiler et al (2001) and Managi et al (2009) Furthermore, the study finds that the effect of rising relative capital-abundance on CO2 emissions diminishes with trade openness, partially supporting the pollution haven hypothesis Ultimately, the thesis highlights that the interplay between trade openness, relative capital-abundance, and income negatively influences CO2 emissions, consistent with the observations made by Managi et al (2009).

The thesis highlights that non-trade variables significantly influence environmental quality, with financial openness and renewable energy consumption notably reducing CO2 emissions In contrast, inward FDI stock relative to domestic capital stock and income negatively impact environmental quality Additionally, the relationship between capital abundance and environmental quality is characterized by an inverted U-shaped curve.

Policy implications

The main findings draw out some key policy implications for improving financial development, economic growth, environmental quality in the context of developing countries as follows.

Trade policies in developing countries should focus on a coordinated approach that includes foreign direct investment (FDI) to maximize benefits and minimize drawbacks from increased trade Specialization in alignment with global price relations is essential for small economies, alongside the negotiation of multilateral, bilateral, and regional trade agreements through platforms like the WTO These policies can boost exports, support trade reforms, and facilitate structural adjustments Additionally, a suitable decision rule for importing traditional primary commodities should be based on the equality of marginal costs and marginal revenue from exports It is also important to reduce protections for manufacturing, increase tariffs while lowering production subsidies, and ensure equal incentives for selling manufactured goods domestically and internationally The sequencing, timing, and customization of trade policies must be tailored to each developing country's unique circumstances.

Financial liberalisation can significantly enhance financial development in small developing countries compared to their larger counterparts To maximize the benefits of such policies, it is essential to implement active institutional reforms that create a conducive environment for success This thesis emphasizes that these reforms are vital for leveraging the advantages of financial openness Key measures should include the removal of financial repression mechanisms, such as interest rate ceilings, administrative credit allocation, and high reserve requirements However, it is crucial to tailor the sequencing, timing, and content of financial liberalisation policies to align with the specific circumstances of each developing country.

Enhancing institutional quality is crucial for fostering financial development, aligning with the insights of Acemoglu et al (2001), Law (2009), and Mishkin (2009) This thesis advocates for proactive institutional reforms to maximize the advantages of trade and financial openness in developing nations Key policy implications include improving government effectiveness by implementing strategies that boost public sector efficiency, optimize budget management, and manage public expenditures and debt effectively.

Enhancing regulatory quality can be achieved by refining trade, foreign exchange, labor market, and competitive policies Additionally, it is essential to reform property rights and strengthen patent and copyright protections Combating corruption requires promoting transparency and accountability among public officials Furthermore, decentralizing government functions is crucial for effective governance.

Enhancing independent and responsibilities in local and regional governments; (vii) Improving legislative and executive transparency.

To enhance foreign direct investment (FDI) in developing countries, a comprehensive strategy should be developed that captures, facilitates, and retains FDI flows This involves maximizing the benefits of FDI spillovers through coordinated policies and regulatory approaches, while also improving the effectiveness of policies aimed at attracting FDI Reducing sectoral restrictions can help achieve financial development goals, and providing investment incentives such as grants, loans, subsidized infrastructure, and regulatory concessions is essential Strengthening investor confidence through an upgraded regulatory environment and effective aftercare programs is crucial for expanding and retaining FDI Additionally, implementing an investment grievance mechanism can help prevent disputes between investors and states.

To foster financial development in emerging economies, several key policies should be implemented: Firstly, it is essential to establish a robust wholesale foreign exchange market alongside effective central bank intervention methods Secondly, strengthening the regulatory and institutional frameworks is crucial for sustainable financial growth Additionally, forming an integrated financial regulatory committee will enhance oversight It is important to assess finance sector risks, particularly in economies with high dollarization Furthermore, an international cooperation framework should be organized to facilitate early warning systems and crisis responses A strategic plan aimed at achieving compliance with the Basel Core Principles for financial regulation and supervision is also necessary Lastly, developing a comprehensive framework for prudential regulation and supervision of financial institutions is vital for maintaining stability and integrity in the financial sector.

The investment policy focuses on enhancing the effectiveness and reach of public investment law, while also monitoring investments and ensuring robust corporate governance post-financing It emphasizes improving pre-evaluation processes for identifying positive investment opportunities in resource allocation, promoting public investment in innovation that drives growth, and minimizing unproductive investments and wasteful activities Additionally, the policy aims to restructure and improve the performance of state-owned enterprises.

Population Policy: This thesis proves that population control policy is one of the most important policies in stimulating economic growth in developing countries:

Accurately predicting future population growth in developing countries is essential for evaluating government policy options By measuring and shaping population growth, policymakers can effectively integrate these insights into their strategies Furthermore, creating a comprehensive policy framework is crucial for achieving a sustainable population level that aligns with national goals.

(v) Reducing birth rate through education (especially for women), family planning service provision, positive financial incentives, etc.; (vi) Creating policies to impact the balance between family obligations and work.

The regal revolution, rooted in French legal origins, aims to enhance foreign direct investment policies to stimulate economic growth in developing countries Key legal strategies include improving the effectiveness and coverage of commercial law, strengthening financial regulations, and combating black markets and insider trading Additionally, it focuses on legislation for fair competition among financial institutions, ensuring adequate legal frameworks for financial stability, and reforming regulatory systems for both foreign trade and foreign currency.

Renewable energy policy focuses on promoting environmental responsibility in manufacturing and consumption through cleaner technologies, fostering public-private partnerships to research renewable energy potential, and raising fossil fuel prices to encourage the use of renewable sources It aims to enhance regulatory effectiveness to boost public awareness of environmental protection, implement carbon pricing via stringent regulations, and advance technologies that convert non-renewable energy into green alternatives.

To enhance inward foreign direct investment (FDI) in cleaner technologies and production, it is essential to establish investment promotion agencies that focus on attracting such investments Additionally, implementing fiscal and financial incentives, including grants, loans, tax benefits, subsidized infrastructure, and regulatory concessions, can significantly facilitate clean FDI inflows Furthermore, investing in infrastructure is crucial to stimulate and support the growth of clean FDI.

Human capital policy focuses on enhancing educational quality through school choice, increasing investments in early childhood education, and implementing mentoring programs during adolescence It also emphasizes the importance of public and private job training initiatives, including trainer exchanges, and advocates for a national human resource development fund strategy Additionally, it promotes vocational training offered by private sector organizations to equip individuals with essential skills for the workforce.

Overall conclusions, limitations, and further research of the thesis

This thesis explores the interrelationships among five key macroeconomic factors—openness (trade and financial), financial development, economic growth, and environmental quality—as socio-economic indicators for sustainable development in developing countries Despite extensive research on these factors, previous findings remain inconclusive The study aims to analyze how openness influences financial development, the effect of financial development on economic growth, and the relationship between trade openness and environmental quality within the context of developing nations Utilizing a Bayesian Model Averaging (BMA) approach to address model uncertainty, this research contrasts with many prior studies that rely on traditional frequentist statistics The analysis is based on panel data from 64 developing countries covering the period from 2003 to 2017.

The thesis concludes that trade openness positively influences financial development, which may initially hinder economic growth in developing countries but eventually fosters it beyond a certain threshold However, trade openness is not a significant determinant of economic growth and does not correlate with environmental quality In contrast, while financial openness has a minor positive impact on financial development and economic growth, it significantly enhances environmental quality by lowering CO2 emissions in developing countries.

This thesis makes significant contributions by utilizing a regression model based on Bayesian Model Averaging (BMA) to address model uncertainty, as highlighted by Raftery et al (1997), Hoeting et al (1999), Chipman et al (2001), and Fragoso et al (2018) It effectively examines the effects of openness on financial development, the influence of financial development on economic growth, and the relationship between trade openness and environmental quality in developing countries Additionally, the thesis presents a diverse array of competing theories related to financial development, economic growth, and environmental quality research.

This thesis presents three key contributions regarding the impact of openness on financial development First, it reveals that a robust institutional environment enables developing economies to harness the advantages of openness for financial growth Second, it challenges the Rajan and Zingales hypothesis by indicating a lack of evidence that simultaneous openness to trade and capital flows enhances financial development, as measured by the private credit-to-GDP ratio in developing nations Finally, it underscores the significance of legal origins, demonstrating that British legal origins diminish the positive effects of openness on financial development compared to French legal origins, a perspective that has been largely overlooked in existing research on financial development in developing countries.

This thesis offers three significant insights into the relationship between financial development and economic growth in developing countries Firstly, it presents new evidence indicating that financial development, measured by the ratio of private credit to GDP, follows a U-shaped curve in its effect on economic growth Secondly, it highlights the positive impact of Socialist legal origins on economic growth, contrasting it with the French legal origin, a topic previously unexplored in this context Lastly, the research affirms that implementing population control policies could be crucial for enhancing economic growth in developing nations.

The article explores the relationship between trade openness and environmental quality, highlighting several key findings: Firstly, it offers partial support for the pollution haven hypothesis in developing countries with relative capital abundance Secondly, unlike previous studies, it emphasizes the significance of financial openness and renewable energy consumption as critical factors influencing environmental quality, with strong evidence suggesting that financial openness helps reduce CO2 emissions Thirdly, it reveals that developing countries with Socialist legal origins experience less positive impacts from trade liberalization on environmental quality compared to those with French legal origins, potentially due to increased pollution from rapid economic growth Lastly, the research advocates for financial liberalization policies as essential for enhancing environmental quality in developing nations.

Although this thesis contributes to narrowing some of the existing gaps in the literature, it has three limitations.

The Bayesian Model Averaging (BMA) approach, while useful for addressing model uncertainty, fails to clarify causality in regression models concerning the relationships between openness and financial development, financial development and economic growth, and trade openness and environmental quality This limitation arises because BMA does not adequately address issues like endogeneity and multicollinearity, which traditional frequentist methods can handle more effectively Furthermore, BMA's reliance on Bayesian inference implies that a single model is deemed correct with infinite data; however, if such conditions are not met, identifying the accurate model becomes problematic (Hinne et al 2020) The choice of priors also influences posterior model probabilities, and differences in implicit priors across models complicate the analysis As enumerating potential models can become overwhelmingly complex, BMA is often computationally intensive Although modern techniques like Markov Chain Monte Carlo Model Composition offer solutions, all methods have inherent challenges, highlighting the need for further research to overcome these limitations.

The thesis acknowledges limitations due to the lack of data on developing countries, leading to the exclusion of various important variables such as financial depth, access, stability indicators, tariffs, financial reforms, black-market premiums, and the role of state-owned entities in fixed asset investments Additionally, the study focuses on the period from 2003 to 2017, which may be considered outdated Future research should aim to incorporate a broader range of variables and utilize more recent data to enhance the findings.

This thesis overlooks the critical relationships between openness and financial development, finance and growth, as well as trade openness and carbon emissions in developing countries These significant topics are suggested for exploration in future research.

LIST OF RELEVANT PUBLICATIONS AND FORTHCOMING

Diem, P.T.T, & Hoai, N.T (2021) Impacts of openness on financial development in developing countries: Using a Bayesian model averaging approach.

Diem, P.T.T, & Hoai, N.T (2021) Impacts of openness on financial development: A review of the literature Review of Finance, 4(1), 9-12.

Diem, P.T.T, & Hoai, N.T (2021) Trade openness and environmental quality: A review of the literature Tạp chí Công Thương, 1(1), 72-80.

Diem, P.T.T, & Hoai, N.T (2020) Financial development and economic growth:

This literature review, published in the journal "Phát triển & Hội Nhập," explores the relationship between financial development and economic growth in developing countries The authors, Diem P.T.T and Hoai N.T., utilize a Bayesian model averaging approach to investigate this impact, with their findings set to be published in an upcoming paper.

Diem, P.T.T, & Hoai, N.T Effects of trade openness on environmental quality:

Evidence from developing countries Forthcoming paper.

Abiad, A., & Mody, A (2005) Financial reform: What shakes it? What shapes it? American Economic Review, 95(1), 66-88.

Acemoglu, D., & Zilibotti, F (1997) Was Prometheus unbound by chance? Risk, diversification, and growth Journal of Political Economy, 105(4), 709-751. DOI:10.1086/262091.

Acemoglu, D., Aghion, P., & Zilibotti, F (2006) Distance to frontier, selection, and economic growth Journal of the European Economic Association, 4(1), 37-

Acemoglu, D., Johnson, S., & Robinson, J A (2001) The colonial origins of comparative development: An empirical investigation American Economic

Acemoglu, D., Johnson, S., & Robinson, J A (2005) Institutions as a fundamental cause of long-run growth Handbook of Economic Growth, 1, 385-472. DOI:10.3386/w10481.

Acheampong, A O., Amponsah, M., & Boateng, E (2020) Does financial development mitigate carbon emissions? Evidence from heterogeneous financial economies Energy Economics, 88, 104768.

Research by Adeniyi et al (2015) highlights the relationship between financial development and economic growth in Nigeria, utilizing threshold modeling to provide insights Similarly, Adu et al (2013) examine this dynamic in Ghana, questioning whether the measurement of financial development significantly impacts economic growth outcomes Both studies underscore the critical role of financial development in fostering economic progress within their respective countries.

Agras, J., & Chapman, D (1999) A dynamic approach to the Environmental

Kuznets Curve hypothesis Ecological Economics, 28(2), 267-277.

Aizenman, J (2004) Financial opening and development: evidence and policy controversies American Economic Review, 94(2), 65-70. DOI:10.1257/0002828041301434.

Aizenman, J., & Noy, I (2003) Endogenous financial openness: efficiency and political economy considerations (No w10144) National Bureau of

Aizenman, J., & Noy, I (2009) Endogenous financial and trade openness Review of Development Economics, 13(2), 175-189 DOI:10.1111/j.1467-

Allen, F (1990) The market for information and the origin of financial intermediation Journal of Financial Intermediation, 1(1), 3-30. DOI:10.1016/1042-9573(90)90006-2.

Al-Yousif, Y K (2002) Financial development and economic growth: another look at the evidence from developing countries Review of Financial Economics,

Andersen, T B., & Tarp, F (2003) Financial liberalization, financial development and economic growth in LDCs Journal of International Development, 15(2), 189-209 DOI:10.1002/jid.971.

Ang, J B (2009) CO2 emissions, research and technology transfer in China.

Ang, J B (2011) Financial development, liberalization and technological deepening.

Antweiler, W., Copeland, B R., & Taylor, M S (2001) Is free trade good for the environment? American Economic Review, 91(4), 877-908. DOI:10.1257/aer.91.4.877.

Arcand, J L., Berkes, E., & Panizza, U (2015) Too much finance? Journal of

Arrow, K., Bolin, B., Costanza, R., Dasgupta, P., Folke, C., Holling, C S.,

Perrings, C (1995) Economic growth, carrying capacity, and the environment Ecological Economics, 15(2), 91-95 DOI:10.1016/0921-

Atici, C (2009) Carbon emissions in Central and Eastern Europe: environmental

Kuznets curve and implications for sustainable development Sustainable

Atici, C (2012) Carbon emissions, trade liberalization, and the Japan–ASEAN interaction: A group-wise examination Journal of the Japanese

Baek, J., Cho, Y., & Koo, W W (2009) The environmental consequences of globalization: A country-specific time-series analysis Ecological

Bagehot, W (1873) Lombard street: A Description of the Money Market: King. Baltagi, B H., Demetriades, P O., & Law, S H (2007) Financial Development,

Openness and Institutions: Evidence from Panel Data World Economy

Finance Research Programme, Working paper series, WEF.

Baltagi, B H., Demetriades, P O., & Law, S H (2009) Financial development and openness: Evidence from panel data Journal of Development Economics,

Bangake, C., & Eggoh, J C (2011) Further evidence on finance-growth causality:

A panel data analysis Economic Systems, 35(2), 176-188. DOI:10.1016/j.ecosys.2010.07.001.

Barbieri, M M., & Berger, J O (2004) Optimal predictive model selection The annals of statistics, 32(3), 870-897 DOI: 10.1214/009053604000000238.

Barro, R J (1991) Economic Growth in a Cross Section of Countries The

Quarterly Journal of Economics, 106(2), 407-443 DOI:10.2307/2937943.

Barro, R J., & Lee, J W (1996) International measures of schooling years and schooling quality The American Economic Review, 86(2), 218-223. https://www.jstor.org/stable/2118126.

Beck, T (2002) Financial development and international trade: Is there a link?

Journal of International Economics, 57(1), 107-131 DOI:10.1016/S0022-

Beck, T., & Levine, R (2004) Stock markets, banks, and growth: Panel evidence.

Journal of Banking Finance, 28(3), 423-442 DOI:10.1007/s10887-007-

Beck, T., & Levine, R (2005) Legal institutions and financial development In

Handbook of New Institutional Economics (pp 251-278): Springer.

Beck, T., Demirgỹỗ-Kunt, A., & Levine, R (2007) Finance, inequality and the poor.

Journal of Economic Growth, 12(1), 27-49 DOI:10.3386/w10126.

Beck, T., Demirgỹỗ‐Kunt, A., & Maksimovic, V (2005) Financial and legal constraints to growth: does firm size matter? The Journal of Finance, 60(1), 137-177 DOI:10.1111/j.1540-6261.2005.00727.x.

Beck, T., Levine, R., & Demirgỹỗ-Kunt, A (2002) Law and finance: why does legal origin matter?: The World Bank.

Beck, T., Levine, R., & Loayza, N (2000) Finance and the Sources of Growth.

Journal of Financial Economics, 58(1-2), 261-300 DOI:10.1016/S0304-

Bekhet, H A., Matar, A., & Yasmin, T (2017) CO2 emissions, energy consumption, economic growth, and financial development in GCC countries: Dynamic simultaneous equation models Renewable and

Bencivenga, V R., & Smith, B D (1991) Financial Intermediation and

Endogenous Growth The Review of Economic Studies, 58(2), 195-209.DOI:10.2307/2297964.

Bergh, D V D., Clyde, M A., Gupta, A R., de Jong, T., Gronau, Q F., Marsman,

M., & Wagenmakers, E J (2021) A tutorial on Bayesian multi-model linear regression with BAS and JASP Behavior research methods, 1-21. DOI:10.3758/s13428-021-01552-2.

Bhattacharya, S., & Pfleiderer, P (1985) Delegated portfolio management Journal of Economic Theory, 36(1), 1-25 DOI:10.1016/0022-0531(85)90076-6.

Bilgili, F., Koỗak, E., & Bulut, ĩ (2016) The dynamic impact of renewable energy consumption on CO2 emissions: a revisited Environmental Kuznets Curve approach Renewable and Sustainable Energy Reviews, 54, 838-845. DOI:10.1016/j.rser.2015.10.080.

Birdsall, N., & Wheeler, D (1993) Trade policy and industrial pollution in Latin

America: where are the pollution havens? The Journal of Environment

Bittencourt, M (2012) Financial development and economic growth in Latin

America: Is Schumpeter right? Journal of Policy Modeling, 34(3), 341-355. DOI:10.1016/j.jpolmod.2012.01.012.

Boutabba, M A (2014) The impact of financial development, income, energy and trade on carbon emissions: evidence from the Indian economy Economic

Boyd, J H., & Prescott, E C (1986) Financial intermediary-coalitions Journal of

Boyd, J H., Levine, R., & Smith, B D (2001) The impact of inflation on financial sector performance Journal of Monetary Economics, 47(2), 221-248. DOI:10.1016/S0304-3932(01)00049-6.

Braun, M., & Raddatz, C (2005) Trade liberalization and the politics of financial development: The World Bank.

Calderón, C., & Liu, L (2003) The direction of causality between financial development and economic growth Journal of Development Economics,

Caporale, G M., Rault, C., Sova, A D., & Sova, R (2014) Financial development and economic growth: Evidence from 10 new European Union members.

International Journal of Finance Economics, 20(1), 48-60.

Cecchetti, S., & Kharroubi, E (2012) Reassessing the impact of finance on growth.

Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id!17753.

Chamarbagwala, R., Ramaswamy, S., & Wunnava, P V (2000) The role of foreign capital in domestic manufacturing productivity: empirical evidence from Asian economies Applied Economics, 32(4), 393-398.

Chandavarkar, A (1992) Of finance and development: Neglected and unsettled questions World development, 20(1), 133-142 DOI:10.1016/0305- 750X(92)90142-I.

Chatfield, C (1995) Model uncertainty, data mining and statistical inference Journal of the Royal Statistical Society: Series A (Statistics in

Chebbi, H E., Olarreaga, M., & Zitouna, H (2011) Trade openness and CO 2 emissions in Tunisia Middle East Development Journal, 3(01), 29-53. DOI:10.1142/S1793812011000314.

Chinn, M D., & Ito, H (2002) Capital account liberalization, institutions and financial development: cross country evidence (No w8967) National

Bureau of Economic Research https://www.nber.org/papers/w8967.

Chinn, M D., & Ito, H (2006) What matters for financial development? Capital controls, institutions, and interactions Journal of Development Economics,

Chinn, M D., & Ito, H (2019) The Chinn-Ito Index – A de jure measure of financial openness Retrieved from http://web.pdx.edu/~ito/Chinn-

Chipman, H., George, E I., McCulloch, R E., Clyde, M., Foster, D P., & Stine, R.

A (2001) The practical implementation of Bayesian model selection.

Lecture Notes-Monograph Series, 65-134 DOI:10.1214/lnms/1215540964.

Choi, E., Heshmati, A., & Cho, Y (2010) An empirical study of the relationships between CO2 emissions, economic growth and openness Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id08750.

Clyde, M., & George, E I (2004) Model uncertainty Statistical Science, 19(1), 81-

Coase, R H (1937) The nature of the firm Economica, 4(16), 386-405.

Cole, M A., & Elliott, R (2003) Determining the trade–environment composition effect: the role of capital, labor and environmental regulations Journal of

Cole, M A., Elliot, R J., & Azhar, A K (2001) The determinants of trade in pollution intensive industries: North-South evidence: University of

Cole, M A., Elliott, R J., & Fredriksson, P G (2006) Endogenous pollution havens: Does FDI influence environmental regulations? Scandinavian

Copeland, B R., & Taylor, M S (1995) Trade and the environment: a partial synthesis American Journal of Agricultural Economics, 77(3), 765-771. DOI:10.2307/1243249.

Cropper, M., & Griffiths, C (1994) The interaction of population growth and environmental quality The American Economic Review, 84(2), 250-254. https://www.jstor.org/stable/2117838.

Dasgupta, S., Laplante, B., Wang, H., & Wheeler, D (2002) Confronting the environmental Kuznets curve Journal of Economic Perspectives, 16(1), 147-

David, M A., Mlachila, M M., & Moheeput, A (2014) Does openness matter for financial development in Africa? : International Monetary Fund.

De Gregorio, J., & Guidotti, P E (1995) Financial development and economic growth World Development, 23(3), 433-448 DOI:10.1016/0305- 750X(94)00132-I.

Deidda, L., & Fattouh, B (2002) Non-linearity between finance and growth Economics Letters, 74(3), 339-345 DOI:10.1016/S0165-

Demetriades, P., & Andrianova, S (2004) Finance and growth: what we know and what we need to know In Financial development and economic growth (pp. 38-65): Springer DOI:10.1057/9780230374270_2.

Demetriades, P., & Hook Law, S (2006) Finance, institutions and economic development International Journal of Finance & Economics, 11(3), 245-

Dessus, S., & Bussolo, M (1998) Is there a trade-off between trade liberalization and pollution abatement?: a computable general equilibrium assessment applied to Costa Rica Journal of Policy Modeling, 20(1), 11-31. DOI:10.1016/S0161-8938(96)00092-0.

Di Vita, G (2009) Legal families and environmental protection: Is there a causal relationship? Journal of Policy Modeling, 31(5), 694-707. DOI:10.1016/j.jpolmod.2009.01.003.

Diamond, D W., & Dybvig, P H (1983) Bank runs, deposit insurance, and liquidity.

Journal of Political Economy, 91(3), 401-419 DOI:10.1086/261155.

Do, Q T., & Levchenko, A A (2004) Trade and financial development: The

Do, Q T., & Levchenko, A A (2007) Comparative advantage, demand for external finance, and financial development Journal of Financial

Dogan, E., & Seker, F (2016) The influence of real output, renewable and non- renewable energy, trade and financial development on carbon emissions in the top renewable energy countries Renewable and Sustainable Energy

Dogan, E., & Turkekul, B (2016) CO 2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA Environmental Science and Pollution Research,

Draper, D (1995) Assessment and propagation of model uncertainty Journal of the Royal Statistical Society: Series B, 57(1), 45-70 DOI:10.1111/j.2517-

Durlauf, S N., Kourtellos, A., & Tan, C M (2012) Is God in the details? A reexamination of the role of religion in economic growth Journal of Applied

Easterly, W., & Rebelo, S (1993) Fiscal policy and economic growth Journal of

Edward E Leamer (1978) Specification Searches: Ad Hoc Inference with

Nonexperimental Data New York: Wiley.

Edwards, S (2001) Capital mobility and economic performance: are emerging economies different? (No w8076) National bureau of economic research.

Eicher, T S., Papageorgiou, C., & Raftery, A E (2011) Default priors and predictive performance in Bayesian model averaging, with application to growth determinants Journal of Applied Econometrics, 26(1), 30-55. DOI:10.1002/jae.1112.

Ekins, P (1997) The Kuznets curve for the environment and economic growth: examining the evidence Environment and Planning A, 29(5), 805-830.DOI:10.1068/a290805

Ergungor, O E (2008) Financial system structure and economic growth: Structure matters International Review of Economics & Finance, 17(2), 292-305. DOI:10.1016/j.iref.2006.09.001.

Estrada, G B., Park, D., & Ramayandi, A (2010) Financial development and economic growth in developing Asia Asian Development Bank Economics

Working Paper(233) https://www.adb.org/publications/financial- development-and-economic-growth-developing-asia.

Estrada, G B., Park, D., & Ramayandi, A (2015) Financial development, financial openness, and economic growth Asian Development Bank Economics

Working Paper Series(442) https://www.adb.org/publications/financial- development-financial-openness-and-economic-growth.

Feldkircher, M., & Zeugner, S (2009) Benchmark priors revisited: on adaptive shrinkage and the supermodel effect in Bayesian model averaging:

Feng, Y., & Yu, X (2020) The impact of institutions on financial development:

Evidence from East Asian countries Australian Economic Papers, 60(1),

Fernandez, C., Ley, E., & Steel, M F (2001a) Model uncertainty in cross‐country growth regressions Journal of Applied Econometrics, 16(5), 563-576. DOI:10.1002/jae.623.

Fernandez, C., Ley, E., & Steel, M F (2001b) Benchmark priors for Bayesian model averaging Journal of Applied Econometrics, 100(2), 381-427. DOI:10.1016/S0304-4076(00)00076-2.

Fischer, S (1993) The role of macroeconomic factors in growth Journal of

Fragoso, T M., Bertoli, W., & Louzada, F (2018) Bayesian model averaging: A systematic review and conceptual classification International Statistical

Frankel, J A (2009) Environmental effects of international trade Faculty

Research Working Paper Series. https://www.hks.harvard.edu/publications/environmental-effects- international-trade

Frankel, J A., & Romer, D H (1999) Does trade cause growth? American

Frankel, J A., & Rose, A K (2005) Is trade good or bad for the environment?

Sorting out the causality Review of Economics Statistics, 87(1), 85-91. DOI:10.1162/0034653053327577.

George, E., & Foster, D P (2000) Calibration and empirical Bayes variable selection Biometrika, 87(4), 731-747 DOI:10.1093/biomet/87.4.731.

Gibson, H D., & Tsakalotos, E (1994) The scope and limits of financial liberalisation in developing countries: A critical survey The Journal of

Glaeser, E L., & Shleifer, A (2002) Legal origins The Quarterly Journal of

Goldberg, P K., & Pavcnik, N (2007) Distributional effects of globalization in developing countries Journal of Economic Literature, 45(1), 39-82. DOI:10.1257/jel.45.1.39

Goldsmith, R W (1969) Financial structure and development New Haven: Yale

Greenwood, J., & Jovanovic, B (1990) Financial development, growth, and the distribution of income Journal of Political Economy, 98(5, Part 1), 1076-

Greenwood, J., & Smith, B D (1997) Financial markets in development, and the development of financial markets Journal of Economic Dynamics and

Grether, J M., & De Melo, J (2003) Globalization and dirty industries: Do pollution havens matter? (No w9776) National Bureau of Economic

Research https://econpapers.repec.org/paper/nbrnberwo/9776.htm.

Gries, T., Kraft, M., & Meierrieks, D (2009) Linkages between financial deepening, trade openness, and economic development: causality evidence from Sub- Saharan Africa World development, 37(12), 1849-1860. DOI:10.1016/j.worlddev.2009.05.008.

Grossman, G M., & Krueger, A B (1991) Environmental impacts of a North

American free trade agreement (No w3914) National Bureau of economic research DOI:10.3386/w3914.

Grossman, S J., & Stiglitz, J E (1980) On the impossibility of informationally efficient markets The American Economic Review, 70(3), 393-408. DOI:10.7916/D8765R99.

Gurley, J G., & Shaw, E S (1955) Financial Aspects of Economic Development.

Harrison, A (1995) Openness and growth: A time-series, cross-country analysis for developing countries Journal of Development Economics, 48(2), 419-447. DOI:10.1016/0304-3878(95)00042-9.

Harrison, A E., & Eskeland, G (1997) Moving to greener pastures?

Multinationals and the pollution-haven hypothesis: The World Bank.

Hauner, D., Prati, A., & Bircan, C (2013) The interest group theory of financial development: Evidence from regulation Journal of Banking &

He, J (2006) Pollution haven hypothesis and environmental impacts of foreign direct investment: The case of industrial emission of sulfur dioxide (SO2) in

Hermes, N (1992) Financial Development of Economic Growth: A Survey of the

Literature Retrieved from https://ideas.repec.org/p/fth/gronig/504.html.

Hermes, N., & Lensink, R (2003) Foreign direct investment, financial development and economic growth The Journal of Development Studies,

Hinne, M., Gronau, Q F., van den Bergh, D., & Wagenmakers, E J (2020) A conceptual introduction to Bayesian model averaging Advances in Methods and Practices in Psychological Science, 3(2), 200-215.

Hoeting, J A., Madigan, D., Raftery, A E., & Volinsky, C T (1999) Bayesian model averaging: a tutorial Statistical Science, 382-401. DOI:10.1214/ss/1009212519.

Hoeting, J A., Madigan, D., Raftery, A E., & Volinsky, C T (1999) Bayesian model averaging: a tutorial (with comments by M Clyde, David Draper and

EI George, and a rejoinder by the authors Statistical Science, 14(4), 382-

Holmstrửm, B., & Tirole, J (1993) Market liquidity and performance monitoring.

Journal of Political Economy, 101(4), 678-709 DOI:10.1086/261893.

Huang, H C., & Lin, S C (2009) Non‐linear finance–growth nexus: A threshold with instrumental variable approach Economics of Transition, 17(3), 439-

Ito, H (2006) Financial development and financial liberalization in Asia:

Thresholds, institutions and the sequence of liberalization The North

American Journal of Economics and Finance, 17(3), 303-327.

Jaffe, A B., Peterson, S R., Portney, P R., & Stavins, R N (1995) Environmental regulation and the competitiveness of US manufacturing: what does the evidence tell us? Journal of Economic Literature, 33(1), 132-163.

Jalil, A., & Mahmud, S F (2009) Environment Kuznets curve for CO2 emissions: a cointegration analysis for China Energy Policy, 37(12), 5167-5172.

Jọnicke, M., Binder, M., & Mửnch, H (1997) ‘Dirty industries’: patterns of change in industrial countries Environmental Resource Economics, 9(4), 467-491. DOI:10.1007/BF02441762.

Jebli, M B., Youssef, S B., & Ozturk, I (2016) Testing environmental Kuznets curve hypothesis: The role of renewable and non-renewable energy consumption and trade in OECD countries Ecological Indicators, 60, 824-

Jones, L E., & Manuelli, R E (1995) A positive model of growth and pollution controls (No w5205) National Bureau of Economic Research.

Jones, L E., & Manuelli, R E (2001) Endogenous policy choice: the case of pollution and growth Review of Economic Dynamics, 4(2), 369-405. DOI:10.1006/redy.2000.0118.

Kar, M., Nazlıoğlu, Ş., & Ağır, H (2011) Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis Economic Modelling, 28(1-2), 685-693.

Kargbo, S M., & Adamu, P A (2009) Financial development and economic growth in Sierra Leone Journal of Monetary and Economic Integration, 9(2), 30-61.

Karimu, A., & Marbuah, G (2017) Re-examining the financial development- openness nexus: Nonparametric evidence for developing countries Journal of

Kass, R E., & Wasserman, L (1995) A reference Bayesian test for nested hypotheses and its relationship to the Schwarz criterion Journal of the

Kaufmann, D., Kraay, A., & Mastruzzi, M (2005) Governance matters IV: governance indicators for 1996-2004: The World Bank.

Kearsley, A., & Riddel, M (2010) A further inquiry into the Pollution Haven

Hypothesis and the Environmental Kuznets Curve Ecological Economics,

Kelley, A C., & Schmidt, R M (1999) Economic and demographic change: A synthesis of models, findings, and perspectives Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id2888.

Khan, M S., & Senhadji, A S (2003) Financial Development and Economic

Growth: A Review and New Evidence Journal of African Economies,

12(suppl_2), ii89-ii110 DOI:10.1093/jae/12.suppl_2.ii89.

Khan, S A R., Yu, Z., Belhadi, A., & Mardani, A (2020) Investigating the effects of renewable energy on international trade and environmental quality.

Journal of Environmental Management, 272, 111089. DOI:10.1016/j.jenvman.2020.111089.

Kim, D H., Lin, S C., & Suen, Y B (2010a) Dynamic effects of trade openness on financial development Economic Modelling, 27(1), 254-261. DOI:10.1016/j.econmod.2009.09.005.

Kim, D H., Lin, S C., & Suen, Y B (2010b) Are financial development and trade openness complements or substitutes? Southern Economic Journal, 76(3), 827-845 DOI:10.4284/sej.2010.76.3.827.

Kim, D H., Lin, S C., & Suen, Y B (2012) The simultaneous evolution of economic growth, financial development, and trade openness The Journal of

King, R G., & Levine, R (1993a) Finance and Growth: Schumpeter Might Be Right.

The Quarterly Journal of Economics, 108(3), 717-737. DOI:10.2307/2118406.

King, R G., & Levine, R (1993b) Finance, entrepreneurship and growth: Theory and evidence Journal of Monetary Economics, 32(3), 513-542.

Klein, M W (2005) Capital account liberalization, institutional quality and economic growth: theory and evidence (No w11112) National Bureau of

Koch, K R (2007) Introduction to Bayesian statistics Springer Science &

Kock, C J., & Min, B S (2016) Legal origins, corporate governance, and environmental outcomes Journal of Business Ethics, 138(3), 507-524. DOI:10.1007/s10551-015-2617-1.

Kónya, L (2006) Exports and growth: Granger causality analysis on OECD countries with a panel data approach Economic Modelling, 23(6), 978-992. DOI:10.1016/j.econmod.2006.04.008.

Koop, G., Leon-Gonzalez, R., & Strachan, R (2012) Bayesian model averaging in the instrumental variable regression model Journal of Econometrics, 171(2), 237-250.

Kose, M A., Prasad, E., Rogoff, K., & Wei, S J (2009) Financial globalization: a reappraisal IMF Staff papers, 56(1), 8-62 DOI:10.3386/w12484.

Kutan, A M., Samargandi, N., & Sohag, K (2017) Does institutional quality matter for financial development and growth? Further evidence from MENA countries Australian Economic Papers, 56(3), 228-248 DOI:10.1111/1467- 8454.12097.

Kuznets, S (1967) Population and economic growth Proceedings of the American

Philosophical Society, 111(3), 170-193 https://www.jstor.org/stable/985714.

Kyle, A S (1984) Market Structure, Information, Futures Markets, and Price

Formation In International Agricultural Trade (pp 45-64) Colorado: Westview Press.

Lane, P R., & Milesi-Ferretti, G M (2007) The external wealth of nations mark II:

Revised and extended estimates of foreign assets and liabilities, 1970–

Law, S H (2009) Trade openness, capital flows and financial development in developing economies International Economic Journal, 23(3), 409-426. DOI:10.1080/10168730903268398.

Law, S H., & Demetriades, P (2006) Openness, Institutions and Financial

Development Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id1387.

Law, S H., & Singh, N (2014) Does too much finance harm economic growth?

Journal of Banking Finance, 41, 36-44 DOI:10.1016/j.jbankfin.2013.12.020.

Le, T H., Chang, Y., & Park, D (2016) Trade openness and environmental quality:

Lee, C C., & Chang, C P (2009) FDI, financial development, and economic growth: international evidence Journal of

Lee, H., & Roland-Holst, D (1997) The environment and welfare implications of trade and tax policy Journal of Development Economics, 52(1), 65-82. DOI:10.1016/S0304-3878(96)00439-7.

Levine, R (1991) Stock markets, growth, and tax policy The Journal of Finance,

Levine, R (1996) Financial Development and Economic Growth: Views and

Levine, R (1998) The Legal Environment, Banks, and Long-Run Economic Growth.

Journal of Money, Credit and Banking, 30(3), 596-613.

Levine, R (2001) International financial liberalization and economic growth.

Review of International Economics, 9(4), 688-702 DOI:10.1111/1467-

Levine, R (2004) Finance and growth: theory and evidence Handbook of

Levine, R., & Renelt, D (1992) A sensitivity analysis of cross-country growth regressions The American Economic Review, 942-963. https://www.jstor.org/stable/2117352.

Levine, R., & Zervos, S (1998) Stock Markets, Banks, and Economic Growth The

American Economic Review, 88(3), 537-558. https://www.jstor.org/stable/116848.

Levine, R., Loayza, N., & Beck, T (2000) Financial intermediation and growth:

Causality and causes Journal of Monetary Economics, 46(1), 31-77. DOI:10.1016/S0304-3932(00)00017-9.

Ley, E., & Steel, M F (2009) On the effect of prior assumptions in Bayesian model averaging with applications to growth regression Journal of Applied

Liang, F., Paulo, R., Molina, G., Clyde, M A., & Berger, J O (2008) Mixtures of g priors for Bayesian variable selection Journal of the American Statistical

Liddle, B (2001) Free trade and the environment-development system Ecological

Lucas, R E (1988) On the mechanics of economic development Journal of

Madigan, D., & Raftery, A E (1994) Model selection and accounting for model uncertainty in graphical models using Occam's window Journal of the

Madigan, D., Raftery, A E., Volinsky, C., & Hoeting, J (1996, August) Bayesian model averaging In Proceedings of the AAAI Workshop on Integrating

Multiple Learned Models, Portland, OR (pp 77-83).

Madigan, D., York, J., & Allard, D (1995) Bayesian graphical models for discrete data International Statistical Review/Revue Internationale de Statistique,215-232 DOI:10.2307/1403615.

Magnani, E (2000) The Environmental Kuznets Curve, environmental protection policy and income distribution Ecological Economics, 32(3), 431-443. DOI:10.1016/S0921-8009(99)00115-9.

Malthus, T R (1798) An Essay on the Principle of Population, as it Affects the

The future improvement of society hinges on the insights of thinkers like Mr Godwin and M Condorcet, who explore the interplay between trade liberalization and environmental sustainability Their speculations emphasize the need for a balanced approach that considers the impact of carbon dioxide emissions in the context of economic growth Addressing these challenges is crucial for fostering a harmonious relationship between development and ecological preservation.

1960-1999 Economics Bulletin, 17(1), 1-5. http://www.accessecon.com/pubs/EB/2004/Volume17/EB-03Q20005A.pdf. Managi, S., Hibiki, A., & Tsurumi, T (2008) Does Trade Liberalization Reduce

Pollution Emissions? Retrieved from https://ideas.repec.org/p/eti/dpaper/08013.html

Managi, S., Hibiki, A., & Tsurumi, T (2009) Does trade openness improve environmental quality? Journal of Environmental Economics Management,

Mani, M., & Wheeler, D (1998) In search of pollution havens? Dirty industry in the world economy, 1960 to 1995 The Journal of Environment

McKinnon, R I (1973) Money and capital in economic development: Brookings

McKinnon, R I (1991) Financial Control in the Transition from Classical

Socialism to a Market Economy Journal of Economic Perspectives, 5(4), 107-122 DOI:10.1257/jep.5.4.107.

Meckling, W H., & Jensen, M C (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure Journal of Financial Economics, 3(4), 305-360 DOI:10.1016/0304-405X(76)90026-X.

Menyah, K., Nazlioglu, S., & Wolde-Rufael, Y (2014) Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach Economic Modelling, 37, 386-394. DOI:10.1016/j.econmod.2013.11.044.

Mishkin, F S (2009) Why we shouldn't turn our backs on financial globalization.

IMF Staff papers, 56(1), 139-170 DOI:10.1057/imfsp.2008.30.

Mutascu, M (2018) A time-frequency analysis of trade openness and CO2 emissions in France Energy policy, 115, 443-455. DOI:10.1016/j.enpol.2018.01.034.

Myers, S C., & Majluf, N S (1984) Corporate financing and investment decisions when firms have informationthat investors do not have (No w1396). National Bureau of Economic Research DOI:10.3386/w1396.

Nasir, M., & Rehman, F U (2011) Environmental Kuznets curve for carbon emissions in Pakistan: an empirical investigation Energy Policy, 39(3),

Nordhaus, W D (1991) To slow or not to slow: the economics of the greenhouse effect The Economic Journal, 101(407), 920-937 DOI:10.2307/2233864. North, D C (1991) Institutions Journal of Economic Perspectives, 5(1), 97-112. https://www.jstor.org/stable/1942704.

North, D C., & Weingast, B R (1989) Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England The Journal of Economic History, 49(4),

Obstfeld, M (2009) International finance and growth in developing countries: what have we learned? IMF Staff papers, 56(1), 63-111.

Omoke, P (2009) The Causal Relationship Among Financial Development, Trade

Openness and Economic Growth in Nigeria SSRN Electronic Journal. DOI:10.2139/ssrn.1529644.

Omran, M., & Bolbol, A (2003) Foreign direct investment, financial development, and economic growth: evidence from the Arab countries Review of Middle

East Economics and Finance, 1(3), 37-55. DOI:10.1080/1475368032000158232.

Onatski, A., & Williams, N (2003) Modeling model uncertainty Journal of the

Panayotou, T (1997) Demystifying the environmental Kuznets curve: turning a black box into a policy tool Environment and Development Economics, 2(4), 465-484 DOI:10.1017/S1355770X97000259.

Park, I., Amarchinta, H K., & Grandhi, R V (2010) A Bayesian approach for quantification of model uncertainty Reliability Engineering & System

Patrick, H T (1966) Financial development and economic growth in underdeveloped countries Economic Development and Cultural Change,

Pedroni, P (1999) Critical values for cointegration tests in heterogeneous panels with multiple regressors Oxford Bulletin of Economics Statistics, 61(S1),

Piironen, J., & Vehtari, A (2017) Comparison of Bayesian predictive methods for model selection Statistics and Computing, 27(3), 711-735 DOI: 10.1007/s11222-016-9649-y.

Porta, R L., Lopez-de-Silanes, F., & Shleifer, A (2008) The economic consequences of legal origins Journal of Economic Literature, 46(2), 285- 332.

Porta, R L., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R W (1998) Law and finance Journal of Political Economy, 106(6), 1113-1155 DOI:10.1086/250042. Raftery, A E (1988) Approximate Bayes factors for generalized linear models.

University of Washington, Department of Statistics https://stat.uw.edu/sites/ default/files/files/reports/1988/tr121.pdf.

Raftery, A E (1993) Bayesian model selection in structural equation models Sage

Focus Editions, 154, 163-180. https://sites.stat.washington.edu/raftery/Research/PDF/bollen1993.pdf.

Raftery, A E., Gneiting, T., Balabdaoui, F., & Polakowski, M (2005) Using

Bayesian model averaging to calibrate forecast ensembles Monthly Weather

Raftery, A E., Madigan, D., & Hoeting, J A (1997) Bayesian model averaging for linear regression models Journal of the American Statistical Association,

Rajan, R G., & Zingales, L (1996) Financial dependence and growth (No w5758).

National Bureau of Economic Research DOI:10.3386/w5758.

Rajan, R G., & Zingales, L (2003) The great reversals: the politics of financial development in the twentieth century Journal of Financial Economics, 69(1), 5-50 DOI:10.1016/S0304-405X(03)00125-9.

Ramakrishnan, R T., & Thakor, A V (1984) Information reliability and a theory of financial intermediation The Review of Economic Studies, 51(3), 415-432. DOI:10.2307/2297431.

Reppelin-Hill, V (1999) Trade and environment: An empirical analysis of the technology effect in the steel industry Journal of Environmental Economics

Rioja, F., & Valev, N (2004a) Does one size fit all?: a reexamination of the finance and growth relationship Journal of Development Economics, 74(2), 429-

Rioja, F., & Valev, N (2004b) Finance and the sources of growth at various stages of economic development Economic Inquiry, 42(1), 127-140.

Robinson, J (1979) The generalisation of the general theory In The Generalisation of the General Theory and Other Essays (pp 1-76): Springer.

Robison, H D (1988) Industrial pollution abatement: the impact on balance of trade.

Canadian Journal of Economics, 187-199 DOI:10.2307/135219.

Rock, M T (1996) Pollution intensity of GDP and trade policy: can the World

Bank be wrong? World development, 24(3), 471-479 DOI:10.1016/0305- 750X(95)00152-3.

Romer, P M (1986) Increasing Returns and Long-Run Growth 94(5), 1002-1037.

Romer, P M (1990) Endogenous Technological Change 98(5, Part 2), S71-S102.

DOI:10.1086/261725 https://www.jstor.org/stable/2937632.

Rothman, D S (1998) Environmental Kuznets curves—real progress or passing the buck?: A case for consumption-based approaches Ecological

Saint-Paul, G (1994) The Economics of Sustainable Development In: Cambridge

Salahuddin, M., Alam, K., Ozturk, I., & Sohag, K (2018) The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait Renewable and Sustainable Energy

Samargandi, N., Fidrmuc, J., & Ghosh, S (2015) Is the relationship between financial development and economic growth monotonic? Evidence from a sample of middle-income countries World Development, 68, 66-81. DOI:10.1016/j.worlddev.2014.11.010.

Schumpeter, J A (1912) Theorie der Wirtschaftlichen Entwicklung Leipzig:

Dunker & Humblot The Theory of Economic Development.

Sebri, M., & Ben-Salha, O (2014) On the causal dynamics between economic growth, renewable energy consumption, CO2 emissions and trade openness: Fresh evidence from BRICS countries Renewable and Sustainable Energy

A comparative analysis by Shafiei and Salim (2014) highlights the relationship between non-renewable and renewable energy consumption and CO2 emissions in OECD countries, emphasizing the need for sustainable energy policies Additionally, Shahbaz et al (2016) explore the nexus between trade openness and carbon emissions, identifying critical turning points in trade openness that impact various country panels These studies underscore the importance of integrating energy consumption strategies with trade policies to mitigate carbon emissions effectively.

Shahbaz, M., Shahzad, S J H., Ahmad, N., & Alam, S (2016) Financial development and environmental quality: The way forward Energy policy,

Shahbaz, M., Solarin, S A., Mahmood, H., & Arouri, M (2013) Does financial development reduce CO2 emissions in Malaysian economy? A time series analysis Economic Modelling, 35, 145-152.

Shaw, E S (1973) Financial deepening in economic development Oxford

University Press: Oxford https://www.jstor.org/stable/2978421.

Shen, C H., & Lee, C C (2006) Same financial development yet different economic growth: why? Journal of Money, Credit and

Singh, A., & Weisse, B A (1998) Emerging stock markets, portfolio capital flows and long-term economie growth: Micro and macroeconomic perspectives World Development, 26(4), 607-622. https://ideas.repec.org/a/eee/wdevel/v26y1998i4p607-622.html.

Stern, D I., Common, M S., & Barbier, E B (1996) Economic growth and environmental degradation: The environmental Kuznets curve and sustainable development World Development, 24(7), 1151-1160. DOI:10.1016/0305- 750X(96)00032-0.

Stern, N (1989) The Economics of Development: A Survey The Economic

Stiglitz, J E (1993) The Role of the State in Financial Markets The World Bank

Economic Review, 7(suppl_1), 19-52 DOI:10.1093/wber/7.suppl_1.19.

Stiglitz, J E (2000) Capital market liberalization, economic growth, and instability.

Suri, V., & Chapman, D (1998) Economic growth, trade and energy: implications for the environmental Kuznets curve Ecological Economics, 25(2), 195-208. DOI:10.1016/S0921-8009(97)00180-8.

Svaleryd, H., & Vlachos, J (2002) Markets for risk and openness to trade: how are they related? Journal of International Economics, 57(2), 369-395. DOI:10.1016/S0022-1996(01)00153-2.

Svaleryd, H., & Vlachos, J (2005) Financial markets, the pattern of industrial specialization and comparative advantage: Evidence from OECD countries.

Tamazian, A., & Rao, B B (2010) Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies Energy Economics, 32(1), 137-145. DOI:10.1016/j.eneco.2009.04.004.

Tamazian, A., Chousa, J P., & Vadlamannati, K C (2009) Does higher economic and financial development lead to environmental degradation: evidence from

Taylor, A M (1998) Argentina and the world capital market: saving, investment, and international capital mobility in the twentieth century Journal of

Tisdell, C (2001) Globalisation and sustainability: environmental Kuznets curve and the WTO Ecological Economics, 39(2), 185-196 DOI:10.1016/S0921- 8009(01)00234-8.

Tobey, J A (1990) The effects of domestic environmental policies on patterns of world trade: an empirical test Kyklos, 43(2), 191-209 DOI:10.1111/j.1467- 6435.1990.tb00207.x.

Torras, M., & Boyce, J K (1998) Income, inequality, and pollution: a reassessment of the environmental Kuznets curve Ecological Economics,

Trabelsi, M., & Cherif, M (2017) Capital account liberalization and financial deepening: Does the private sector matter? The Quarterly Review of

Economics and Finance, 64, 141-151 DOI:10.1016/J.QREF.2016.08.001.

Trew, A (2006) Finance and growth: a critical survey Economic Record, 82(259),

Uddin, G S., Sjử, B., & Shahbaz, M (2013) The causal nexus between financial development and economic growth in Kenya Economic Modelling, 35, 701-

Valickova, P., Havranek, T., & Horvath, R (2015) Financial development and economic growth: A meta‐analysis Journal of Economic Surveys, 29(3),

Vamvakidis, A (1999) Regional trade agreements or broad liberalization: which path leads to faster growth? IMF Staff papers, 46(1), 42-68. DOI:10.2307/3867634.

Wacziarg, R (2001) Measuring the dynamic gains from trade: The World Bank.

Westerlund, J (2005) A panel CUSUM test of the null of cointegration Oxford

Bulletin of Economics and Statistics, 67(2), 231-262 DOI:10.1111/j.1468-

Wheeler, D (2001) Racing to the bottom? Foreign investment and air pollution in developing countries The Journal of Environment Development, 10(3), 225-

Wheeler, D., & Martin, P (1992) Prices, policies, and the international diffusion of clean technology: The case of wood pulp production World Bank

Wit, E., Heuvel, E V D., & Romeijn, J W (2012) ‘All models are wrong ’: an introduction to model uncertainty Statistica Neerlandica, 66(3), 217-236. DOI:10.1111/j.1467-9574.2012.00530.x.

Wolde-Rufael, Y (2009) Re-examining the financial development and economic growth nexus in Kenya Economic Modelling, 26(6), 1140-1146. DOI:10.1016/j.econmod.2009.05.002.

Xu, Z (2000) Financial development, investment, and economic growth Economic

Zafar, M W., Shahbaz, M., Sinha, A., Sengupta, T., & Qin, Q (2020) How renewable energy consumption contribute to environmental quality? The role of education in OECD countries Journal of Cleaner Production, 268,

Zhang, J., Wang, L., & Wang, S (2012) Financial development and economic growth: Recent evidence from China Journal of Comparative Economics,

Zhuang, J., Gunatilake, H., Niimi, Y., Ehsan Khan, M., Jiang, Y., Hasan, R.,

Huang, B (2009) Financial sector development, economic growth, and poverty reduction: A literature review Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id17022.

APPENDICES Appendix 2 Summaries of empirical studies Table 2.1 A summary of the characteristics of the previous studies for the impacts of openness on financial development

No Author(s) Countries Time periods Methodologies Dependent variables Independent variables Controlled variables Findings

24 countries 1913–1999 2SLS Number of companies listed/

GDP (or population), stock market capitalization/GDP, deposits/

GDP, equity issues/gross fixed capital formation

Cross-border capital flows (Taylor, 1998); total trade/GDP

42 countries 1980–2003 DGMM (i) Banking development indicators: liquid liabilities/GDP, private credit/GDP, domestic credit/GDP

(ii) Capital market development indicator: number of companies listed/

Financial openness is defined by the ratio of a country's foreign assets and liabilities to its GDP, as outlined by Lane and Milesi-Feretti (2007) It encompasses six key aspects of liberalization: credit controls, interest rate controls, entry barriers, regulations, privatization, and international transactions, as identified by Abiad and Mody (2005).

Economic institutions, per capita income

FO  FD (+)FO*TradeOpen  FD (+)

(ii) Trade openness: Total trade/GDP

(ii) Capital market development: stock market capitalization/GDP

Financial openness is measured by the ratio of a country's foreign assets and liabilities to its GDP, as outlined by Lane and Milesi-Feretti (2007) This concept encompasses six key dimensions of liberalization: credit controls, interest rate controls, entry barriers, regulatory frameworks, privatization efforts, and the facilitation of international transactions, as identified by Chinn and Ito (2006).

Institutional quality, real GDP per capita, neighbour's average trade openness

Private credit/GDP (i) Financial openness: The volume of external assets and liabilities and KAOPEN

(ii) Trade openness: Total trade (exports and imports)/

Real GDP per capita, institutional quality

Private credit, stock market capitalization, total value of stocks traded, stock market turnover ratio

Per capita income, inflation rate, and trade openness (total trade/GDP)

Liquid liabilities/GDP, private credit/GDP, stock market capitalization/GDP, total value of stocks traded/GDP, the stock market turnover ratio, and equity issues/GDP

Per capita income, inflation rate, and trade openness (total trade/GDP), regional and time dummies

Private credit/GDP, stock market capitalization, total value of stocks traded, stock market turnover ratio

Per capita income, inflation rate, and trade openness (total trade/GDP), regional and time dummies

1980 – 2001 DGMM, PMG (i) Banking sector development: liquid liabilities/GDP, private credit/GDP, and domestic credit/GDP

(ii) Capital market development: stock market capitalization/GDP, total share traded/GDP and number

(ii) Trade openness: Total trade/GDP

Real GDP per capita, institutional environment

FO  FD (+)FO*TradeOpen  FD (+). of companies listed/total population

Liquid liabilities/GDP, private credit/GDP (by deposit-taking banks), private credit/GDP (financial institutions), private credit/GDP, bank deposits/GDP, financial system deposits/GDP

(ii) Trade openness: Total trade/GDP

GDP per capita, inflation, institutional quality, financial reforms index, population density, terms of trade, quality of bureaucracy indicator