Openness, financial development, economic growth, and environmental quality evidence from developing countries doctor of philosophy thesis in economics

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, 2023 Tai ngay!!! Ban co the xoa dong chu nay!!! 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, 2023 i COMMITMENTS I declare that the thesis has been composed by myself and has not been submitted for any other degree or professional qualification I confirm that the thesis submitted is my own, except where the 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 Finally, 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 the works demonstrated in Chapter 1, Chapter 2, Chapter 3, Chapter 4, and Chapter might be combined into two papers for further publication 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 23 December 2022 iii ACKNOWLEDGEMENTS First of all, this work would not have been possible without the exceptional support of my academic supervisor, Prof Nguyen Trong Hoai His expertise, enthusiasm, patience, motivation, sympathy, and encouragement have been supportive of my career goals and have provided me with the protected academic time to pursue those goals Second, I would like to thank my thesis committee members and reviewers for their encouraging words and constructive criticisms of this work Very special thanks to Prof Su Dinh Thanh, the chairman of my thesis committee, for his expertise and empathy Third, I am also deeply grateful for insightful comments and suggestions from anonymous peer reviewers, the editors at Cogent Economics & Finance and Journal of Applied Economics, Prof Andreas Stoffers and Prof Gabriel S Lee at the 4th Asia Conference on Business and Economic Studies (ACBES 2022) Besides, I wish to thank the reviewers for their valuable comments on my thesis summary Fourth, I would also like to extend my special thanks to my employer, the Ho Chi Minh University of Banking, and my colleagues for motivating me and creating favourable conditions for me to this work My grateful thanks are also extended to the UEH Graduate School and the UEH School of Economics for their assistance in administrative procedures throughout my study Last but not least, my warm and heartfelt thanks to all my dear friends and family for their tremendous support, sacrifices, and empathy they have given to me Especially to my two sweet children, I dedicate this work to them, Minh and Nam Any remaining errors and inadequacies are entirely my own responsibility iv TABLE OF CONTENTS COVER PAGE COMMITMENTS ACKNOWLEDGEMENTS TABLE OF CONTENTS ABBREVIATIONS LIST OF TABLES LIST OF FIGURES ABSTRACT CHAPTER - INTRODUCTION 1.1 Research problems Impacts of openness on financial development Impact of financial development on economic growth .6 Impact of trade openness on environmental quality 1.2 Research objectives 11 1.3 Research contributions 12 1.4 Structure of the thesis .13 CHAPTER - LITERATURE REVIEW 15 2.1 Openness and financial development .15 2.1.1 Impacts of openness on financial development: A theoretical review 15 2.1.2 Impacts of openness on financial development: An empirical review 20 2.1.3 Impacts of openness on financial development: Research hypotheses and a conceptual framework .26 v 2.2 Financial development and economic growth 28 2.2.1 Impact of financial development on economic growth: A theoretical review 28 2.2.2 Impact of financial development on economic growth: An empirical review 31 2.2.3 Impact of financial development on economic growth: Research hypothesis and a conceptual framework 36 2.3 Trade openness and environmental quality 39 2.3.1 Impact of trade openness on environmental quality: A theoretical review 39 2.3.2 Impact of trade openness on environmental quality: An empirical review 43 2.3.3 Impact of trade openness on environmental quality: Research hypothesis and a conceptual framework .48 2.4 An integrated conceptual framework for the links between openness, financial development, economic growth, and environmental quality in developing countries 50 CHAPTER - RESEARCH METHODOLOGY 52 3.1 Estimation strategy 52 3.1.1 Model uncertainty issue 52 3.1.2 Bayesian model averaging approach and model uncertainty 54 3.2 Construction of variables .59 3.2.1 Openness, financial development, economic growth, and environmental quality 59 3.2.2 Controlled variables 62 3.3 Data sources 71 vi CHAPTER - OPENNESS, FINANCIAL DEVELOPMENT, ECONOMIC GROWTH, AND ENVIRONMENTAL QUALITY - EVIDENCE FROM DEVELOPING COUNTRIES 74 4.1 Impacts of openness on financial development: Evidence from developing countries 74 4.1.1 Results of descriptive statistics 74 4.1.2 Estimation results and discussions 79 4.2 Impact of financial development on economic growth: Evidence from developing countries 87 4.2.1 Results of descriptive statistics 87 4.2.2 Estimation results and discussions 92 4.3 Impact of trade openness on environmental quality: Evidence from developing countries 98 4.3.1 Results of descriptive statistics 99 4.3.2 Estimation results and discussions 103 CHAPTER - CONCLUSIONS 112 5.1 Main findings .112 Impacts of openness on financial development: Evidence from developing countries 112 Impact of financial development on economic growth: Evidence from developing countries .113 Impact of trade openness on environmental quality: Evidence from developing countries .115 5.2 Policy implications .115 5.3 General conclusions, limitations, and further research of the thesis 119 vii 5.3.1 General conclusions .120 5.3.2 Limitations and further research 120 LIST OF RELEVANT PUBLICATIONS AND WORKING PAPERS 123 REFERENCES 124 APPENDICES 153 viii ABBREVIATIONS AREAER Annual Report on Exchange Arrangements and Exchange Restrictions BMA Bayesian model averaging BRIC Benchmark prior CO2 Carbon dioxide EG Economic growth EKC Environmental Kuznets curve FD Financial development FDI Foreign direct investment FO Financial openness GDP Gross domestic product GFDD Global Financial Development Database GNP Gross national product 236 Appendix 4.6 The impact 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" 237 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 Post Mean 1.000 -0.081 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 0.531 -18.930 0.531 37.674 0.515 5.905 0.513 -10.571 0.249 -0.016 0.076 -0.006 0.035 0.935 0.035 -1.870 0.034 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 LagIncome PIP 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 0.997 Post Mean -0.081 0.600 -0.349 -0.314 -0.112 0.102 -0.118 -0.052 -0.048 0.311 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 11.000 238 lnTradeOpen.lnREL.KLa2 lnTradeOpen.lnREL.KLa lnKLa2 lnKLa legor_uk lnIncome2 lnTradeOpen.lnREL.INC2 lnTradeOpen.lnREL.INC lnEcoIntensity2 lnEcoIntensity lnTradeOpen Mean no regressors Draws "12.5857" "2e+07" % Topmodels Corr PMP "100" "1.0000" 0.534 0.528 0.517 0.511 0.249 0.077 0.035 0.035 0.034 0.034 0.033 -19.010 37.833 5.898 -10.558 -0.016 -0.006 0.918 -1.836 -0.527 1.054 0.000 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 0.000 0.120 1.000 0.944 0.000 0.038 0.979 0.883 0.942 1.000 0.016 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 lnTradeOpen.lnREL.INC2 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 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 0.935 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 19.177 0.978 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 17.000 239 lnTradeOpen.lnREL.INC lnEcoIntensity lnEcoIntensity2 lnTradeOpen 0.035 0.034 0.034 0.033 -1.870 1.045 -0.522 0.000 38.354 31.278 15.639 0.008 0.883 1.000 0.942 0.016 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 1.000 240 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 1.000 241 Source: Author’s analysis Appendix 4.6a Posterior model size distribution from BRIC for Objective 242 Source: Author’s analysis Appendix 4.6b Posterior model probabilities from BRIC for Objective 243 Source: Author’s analysis Appendix 4.6c Posterior model size distribution from UIP for Objective 244 Source: Author’s analysis Appendix 4.6d Posterior model probabilities from UIP for Objective 245 Source: Author’s analysis Appendix 4.6e Posterior model size distribution from EBL for Objective 246 Source: Author’s analysis Appendix 4.6f Posterior model probabilities from EBL for Objective 247 Source: Author’s analysis Appendix 4.6g Cumulative model probabilities from UIP for Objective 248 Source: Author’s analysis Appendix 4.6h Cumulative model probabilities from EBL for Objective 249 Source: Author’s analysis Appendix 4.6i Marginal densities of trade openness from UIP 250 Source: Author’s analysis Appendix 4.6k Marginal densities of trade openness from EBL