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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - Pham Thi Thuy Diem OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH, AND ENVIRONMENTAL QUALITY: EVIDENCE FROM DEVELOPING COUNTRIES DOCTOR OF PHILOSOPHY THESIS IN ECONOMICS Ho Chi Minh City, 2022 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - Pham Thi Thuy Diem OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH, AND ENVIRONMENTAL QUALITY: EVIDENCE FROM DEVELOPING COUNTRIES Major: Development Economics Code: 9310105 ACADEMIC ADVISOR: Prof Dr Nguyen Trong Hoai Ho Chi Minh City, 2022 i COMMITMENTS I declare that the thesis has been composed by myself and that the thesis has not been submitted for any other degree or professional qualification I confirm that the thesis submitted is my own, except where thesis which has formed part of jointly authored publications has been included My contribution and those of the other authors to this thesis have been explicitly indicated below I confirm that appropriate credit has been given within this thesis where reference has been made to the work of others Some works demonstrated in Chapter 1, Chapter 2, Chapter 3, Chapter 4, and Chapter were previously published in an international journal, Cogent Economics & Finance, 9(1) as “Impacts of openness on financial development in developing countries: Using a Bayesian model averaging approach” by Pham Thi Thuy Diem (the first and corresponding author) & Nguyen Trong Hoai (co-author) (2021) The rest of works demonstrated in Chapter 1, Chapter 2, Chapter 3, Chapter 4, and Chapter can be combined into two papers for further publications The work presented in Chapter was previously published in three national publications including: (i) Tạp chí Phát triển & Hội Nhập, 55(65), 109-116 as “Financial development and economic growth: A review of the literature” by Pham Thi Thuy Diem (the first and corresponding author) & Nguyen Trong Hoai (coauthor) (2020); (ii) Tạp chí Cơng Thương, Số 1-Tháng 1/2021, 72-80 as “Trade openness and environmental quality: A review of the literature” by Pham Thi Thuy Diem (the first and corresponding author) & Nguyen Trong Hoai (co-author) (2021); (iii) Review of Finance, 4(1), 9-12 as “Impacts of openness on financial development: A review of the literature” by Pham Thi Thuy Diem (the first and corresponding author) & Nguyen Trong Hoai (co-author) (2021) ii The thesis has been done under the supervision of Professor Nguyen Trong Hoai, the University of Economics Ho Chi Minh City Pham Thi Thuy Diem 10 July 2022 iii TABLE OF CONTENTS COVER PAGE COMMITMENTS TABLE OF CONTENTS ABBREVIATIONS LIST OF TABLES LIST OF FIGURES ABSTRACT CHAPTER - INTRODUCTION 1.1 Research problems The impacts of openness on financial development The impact of financial development on economic growth The impact of trade openness on environmental quality 1.2 Research objectives 11 1.3 Research contributions 13 1.4 Structure of the thesis .14 CHAPTER - LITERATURE REVIEW 16 2.1 Openness and financial development .16 2.1.1 Impacts of openness on financial development: A theoretical review 16 2.1.2 Impacts of openness on financial development: An empirical review 21 2.1.3 Impacts of openness on financial development: Research hypotheses and a conceptual framework .30 2.2 Financial development and economic growth 32 iv 2.2.1 Impact of financial development on economic growth: A theoretical review 32 2.2.2 Impact of financial development on economic growth: An empirical review 35 2.2.3 Impact of financial development on economic growth: Research hypothesis and a conceptual framework 42 2.3 Trade openness and environmental quality 45 2.3.1 Impact of trade openness on environmental quality: A theoretical review 45 2.3.2 Impact of trade openness on environmental quality: An empirical review 49 2.3.3 Impact of trade openness on environmental quality: Research hypothesis and a conceptual framework .55 2.2 An integrated conceptual framework for the links between openness, financial development, economic growth, and environmental quality in developing countries 58 CHAPTER - RESEARCH METHODOLOGY 60 3.1 Methodology 60 The issue of model uncertainty 60 Bayesian model averaging methodology and model uncertainty 60 3.2 Construction of variables .66 3.2.1 Openness, financial development, economic growth, and environmental quality 66 3.2.2 Controlled variables 69 3.3 Data sources 99 v CHAPTER - OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH AND ENVIRONMENTAL QUALITY - EVIDENCE FROM DEVELOPING COUNTRIES 102 4.1 The impacts of openness on financial development: Evidence from developing countries .102 4.1.1 Descriptive statistics results 102 4.1.2 Estimation results and discussions 107 4.2 The impact of financial development on economic growth: Evidence from developing countries 115 4.2.1 Descriptive statistics results 115 4.2.2 Estimation results and discussions 120 4.3 The impact of trade openness on environmental quality: Evidence from developing countries 126 4.3.1 Descriptive statistics results 126 4.3.2 Estimation results and discussions 131 CHAPTER - CONCLUSIONS 140 5.1 Main findings .140 The impacts of openness on financial development: Evidence from developing countries .140 The impact of financial development on economic growth: Evidence from developing countries .141 5.1.3 The impact of trade openness on environmental quality: Evidence from developing countries .143 5.2 Policy implications .144 5.3 Overall conclusions, limitations, and further research of the thesis 148 vi 5.3.1 Overall conclusions .148 5.3.2 Contributions 149 5.3.3 Limitations and further research 151 REFERENCE 154 APPENDICES 181 vii ABBREVIATIONS AREAER Annual report on Exchange Arrangements and Exchange Restrictions BMA Bayesian model averaging BRIC Benchmark prior CO2 Carbon dioxide EG Economic growth FD Financial development FDI Foreign direct investment FO Financial openness GDP Gross Domestic Product GFDD Global Financial Development Database IEA International Energy Agency KAOPEN Capital account openness index LEB Local empirical Bayes approach PWT Penn World Table SO2 Sulfur dioxide TradeOpen Trade openness UIP Unit Information Prior UNCTAD United Nations Conference on Trade and Development WDI World Development Indicators WGI Worldwide Governance Indicators viii LIST OF TABLES Table 3.1 Information on variables for Objective 72 Table 3.2 Information on variables for Objective 81 Table 3.3 Information on variables for Objective 92 Table 3.4 The list of developing countries 100 Table 4.1 Summary statistics of the variables for Objective 1, whole sample, 64 economies, 2003-2017 Table 4.2 Correlations between of the variables for Objective 1, whole sample, 2003-2017 Table 4.3 The impacts of openness on financial development: posterior estimates under uniform model priors Table 4.4 Summary statistics of the variables for Objective 2, whole sample, 64 economies, 2003-2017 Table 4.5 Correlations between of the variables for Objective 2, whole sample, 2003-2017 Table 4.6 The impacts of financial development on economic growth: posterior estimates under uniform model priors Table 4.7 Summary statistics of the variables for Objective 3, whole sample, 64 economies, 2003-2017 Table 4.8 Correlations between of the variables for Objective 3, whole sample, 2003-2017 104 105 109 117 118 122 126 130 252 Appendix 4.6 Impacts of trade openness on environmental quality > mfls2 = bms(datafls, burn=1e7, iter=2e7, g="BRIC", mprior="uniform", nmodel=5000, mcmc="bd") KAOPEN legor_so Africa LatCar lnKLa.lnIncome lnFDI.K LnREnergyUse TimeTrend lnTradeOpen.lnREL.KL.lnREL.INC LagIncome lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen Mean no regressors "12.5853" % Topmodels "100" Draws "2e+07" Corr PMP "0,9999" PIP 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.997 0.535 0.527 0.521 0.507 0.249 0.077 0.036 0.035 0.034 0.034 0.033 Post SD Cond.Pos.Sign 0.011 0.000 0.066 1.000 0.037 0.000 0.046 0.000 0.009 0.000 0.016 1.000 0.008 0.000 0.003 0.000 0.008 0.000 0.065 1.000 85.169 0.000 170.339 0.119 44.628 1.000 89.256 0.944 0.032 0.000 0.030 0.037 19.101 0.978 38.201 0.884 31.582 1.000 15.791 0.940 0.008 0.016 No Burnins Time models visited "1e+07" "40.49832 mins" "1944719" No Model Prior g-Prior Obs "960" "uniform / 10,5" "BRIC" Time difference of 40.49832 mins > coef(mfls2 exact=TRUE) Post Mean -0.081 0.600 -0.349 -0.314 -0.112 0.102 -0.118 -0.052 -0.048 0.311 -18.881 37.575 5.923 -10.606 -0.016 -0.006 0.928 -1.855 1.066 -0.533 0.000 Idx 2.000 4.000 5.000 6.000 13.000 19.000 20.000 21.000 18.000 11.000 15.000 14.000 10.000 9.000 3.000 12.000 17.000 16.000 7.000 8.000 1.000 Modelspace 2^K % visited "2097152" ShrinkageStats "Av=0,999" "93" 253 KAOPEN legor_so Africa LatCar lnKLa.lnIncome lnFDI.K LnREnergyUse TimeTrend lnTradeOpen.lnREL.KL.lnREL.INC LagIncome lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity PIP 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.997 0.531 0.531 0.515 0.513 0.249 0.076 0.035 0.035 0.034 Post Mean -0.081 0.600 -0.349 -0.314 -0.112 0.102 -0.118 -0.052 -0.048 0.311 -18.930 37.674 5.905 -10.571 -0.016 -0.006 0.935 -1.870 1.045 Post SD Cond.Pos.Sign Idx 0.011 0.000 2.000 0.066 1.000 4.000 0.037 0.000 5.000 0.046 0.000 6.000 0.009 0.000 13.000 0.016 1.000 19.000 0.008 0.000 20.000 0.003 0.000 21.000 0.008 0.000 18.000 0.065 1.000 11.000 85.276 0.000 15.000 170.553 0.119 14.000 44.574 1.000 10.000 89.148 0.944 9.000 0.032 0.000 3.000 0.030 0.037 12.000 19.180 0.978 17.000 38.359 0.883 16.000 31.280 1.000 7.000 > cor(pmp.bma(mfls2)) PMP PMP (Exact) PMP (MCMC) (Exact) PMP 0.9998818 (MCMC) 0.9998818 > mfls2 = bms(datafls burn=1e7 iter=2e7 g="UIP" mprior="uniform" nmodel=5000 mcmc="bd") KAOPEN legor_so Africa LatCar lnKLa.lnIncome lnFDI.K LnREnergyUse TimeTrend lnTradeOpen.lnREL.KL.lnREL.INC PIP 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Post Mean -0.081 0.600 -0.349 -0.314 -0.112 0.102 -0.118 -0.052 -0.048 Post SD Cond.Pos.Sign 0.011 0.000 0.066 1.000 0.037 0.000 0.046 0.000 0.009 0.000 0.016 1.000 0.008 0.000 0.003 0.000 0.008 0.000 Idx 2.000 4.000 5.000 6.000 13.000 19.000 20.000 21.000 18.000 254 LagIncome lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity2 lnEcoIntensity lnTradeOpen Mean no regressors "12.5857" % Topmodels "100" Draws "2e+07" Corr PMP "1.0000" 0.997 0.534 0.528 0.517 0.511 0.249 0.077 0.035 0.035 0.034 0.034 0.033 0.311 -19.010 37.833 5.898 -10.558 -0.016 -0.006 0.918 -1.836 -0.527 1.054 0.000 0.065 85.448 170.896 44.543 89.085 0.032 0.030 19.005 38.010 15.709 31.418 0.008 No models visited "1e+07" "48.59866 mins" "1947223" No Model Prior g-Prior Obs "960" "uniform / 10,5" "UIP" Burnins Time 1.000 0.000 0.120 1.000 0.944 0.000 0.038 0.979 0.883 0.942 1.000 0.016 11.000 15.000 14.000 10.000 9.000 3.000 12.000 17.000 16.000 8.000 7.000 1.000 Modelspace 2^K % visited "2097152" ShrinkageStats "Av=0.999" "93" Time difference of 48.59866 mins > coef(mfls2 exact=TRUE) KAOPEN legor_so Africa LatCar lnKLa.lnIncome lnFDI.K LnREnergyUse TimeTrend lnTradeOpen.lnREL.KL.lnREL.INC LagIncome lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 PIP 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.997 0.531 0.531 0.515 0.513 0.249 0.076 Post Mean -0.081 0.600 -0.349 -0.314 -0.112 0.102 -0.118 -0.052 -0.048 0.311 -18.929 37.672 5.904 -10.569 -0.016 -0.006 Post SD Cond.Pos.Sign 0.011 0.000 0.066 1.000 0.037 0.000 0.046 0.000 0.009 0.000 0.016 1.000 0.008 0.000 0.003 0.000 0.008 0.000 0.065 1.000 85.275 0.000 170.550 0.119 44.570 1.000 89.139 0.944 0.032 0.000 0.030 0.037 Idx 2.000 4.000 5.000 6.000 13.000 19.000 20.000 21.000 18.000 11.000 15.000 14.000 10.000 9.000 3.000 12.000 255 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen 0.035 0.035 0.034 0.034 0.033 0.935 -1.870 1.045 -0.522 0.000 19.177 38.354 31.278 15.639 0.008 0.978 0.883 1.000 0.942 0.016 17.000 16.000 7.000 8.000 1.000 > cor(pmp.bma(mfls2)) PMP PMP (Exact) PMP (MCMC) (Exact) PMP 0.9999529 (MCMC) 0.9999529 > mfls2 = bms(datafls burn=1e7 iter=2e7 g="EBL" mprior="uniform" nmodel=5000 mcmc="bd") KAOPEN legor_so Africa LatCar lnKLa.lnIncome lnFDI.K LnREnergyUse TimeTrend lnTradeOpen.lnREL.KL.lnREL.INC LagIncome lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen PIP 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.997 0.533 0.527 0.514 0.513 0.242 0.074 0.034 0.034 0.033 0.033 0.032 Post Mean -0.082 0.600 -0.349 -0.314 -0.112 0.102 -0.118 -0.052 -0.048 0.311 -18.421 36.656 5.729 -10.218 -0.016 -0.006 0.921 -1.841 1.045 -0.522 0.000 Post SD Cond.Pos.Sign 0.011 0.000 0.066 1.000 0.037 0.000 0.046 0.000 0.009 0.000 0.016 1.000 0.008 0.000 0.003 0.000 0.008 0.000 0.065 1.000 84.171 0.000 168.343 0.116 43.875 1.000 87.750 0.946 0.032 0.000 0.029 0.037 19.035 0.977 38.070 0.881 31.284 1.000 15.642 0.940 0.008 0.017 Idx 2.000 4.000 5.000 6.000 13.000 19.000 20.000 21.000 18.000 11.000 15.000 14.000 10.000 9.000 3.000 12.000 17.000 16.000 7.000 8.000 1.000 256 Mean no regressors "12.5674" % Topmodels "100" Draws Burnins Time "2e+07" Corr PMP "1.0000" "1e+07" No Obs "960" "1.40857 hours" No models visited "1890488" Model Prior g-Prior "uniform / 10,5" "EBL" Modelspace 2^K % visited "2097152" ShrinkageStats "Av=0.9991" "90" Time difference of 1.40857 hours > coef(mfls2 exact=TRUE) KAOPEN legor_so Africa LatCar lnKLa.lnIncome lnFDI.K LnREnergyUse TimeTrend lnTradeOpen.lnREL.KL.lnREL.INC LagIncome lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity2 lnEcoIntensity lnTradeOpen PIP Post Mean 1.000 -0.082 1.000 0.600 1.000 -0.349 1.000 -0.314 1.000 -0.112 1.000 0.102 1.000 -0.118 1.000 -0.052 1.000 -0.048 0.997 0.311 0.530 -18.396 0.530 36.605 0.515 5.745 0.513 -10.251 0.242 -0.016 0.074 -0.006 0.034 0.914 0.034 -1.827 0.033 -0.510 0.033 1.020 0.032 0.000 > cor(pmp.bma(mfls2)) PMP PMP (Exact) PMP (MCMC) (Exact) PMP 0.9999782 (MCMC) 0.9999782 Post SD Cond.Pos.Sign 0.011 0.000 0.066 1.000 0.037 0.000 0.046 0.000 0.009 0.000 0.016 1.000 0.008 0.000 0.003 0.000 0.008 0.000 0.065 1.000 84.116 0.000 168.233 0.116 43.938 1.000 87.876 0.946 0.032 0.000 0.029 0.038 18.961 0.977 37.922 0.882 15.454 0.941 30.908 1.000 0.008 0.016 Idx 2.000 4.000 5.000 6.000 13.000 19.000 20.000 21.000 18.000 11.000 15.000 14.000 10.000 9.000 3.000 12.000 17.000 16.000 8.000 7.000 1.000 257 Figure 4.6a Posterior model size distribution from BRIC for Objective Source: Author’s analysis 258 Figure 4.6b Posterior model probabilities from BRIC for Objective Source: Author’s analysis 259 Figure 4.6c Posterior model size distribution from UIP for Objective Source: Author’s analysis 260 Figure 4.6d Posterior model probabilities from UIP for Objective Source: Author’s analysis 261 Figure 4.6e Posterior model size distribution from EBL for Objective Source: Author’s analysis 262 Figure 4.6f Posterior model probabilities from EBL for Objective Source: Author’s analysis 263 Figure 4.6g Cumulative model probabilities from UIP for Objective Source: Author’s analysis 264 Figure 4.6h Cumulative model probabilities from EBL for Objective Source: Author’s analysis 265 Figure 4.6k Marginal densities of trade openness from UIP Source: Author’s analysis 266 Figure 4.6i Marginal densities of trade openness from EBL Source: Author’s analysis