Financial Development, Economic Growth and Environmental Degradation in Selected Sub-Saharan African Countries

ABSTRACT

This study examines the relative effects of financial development and economic growth on environmental degradation in selected Sub-Saharan African (SSA) countries that includes Cote d’ivoire, Ghana, Kenya, Mauritius, Namibia, Nigeria and South Africa. Specifically, the study considered the roles of different financial system development factors on the environment, while also examining the impacts of economic growth on the environment using the environmental Kuznets curve (EKC) formulation. The study also examined the possible direction of causality between environment degradation and both economic growth and financial development among the countries, as well as the influence of financial development on the relationship between economic growth and environmental degradation. Environmental degradation is measured by the tonnes of carbon emission per country and the rate of ecological footprint which was further divided into per capita footprint on cropland and per capita footprint on built land. Financial system development is measured using both the money and capital markets variables which include credit to the private sector, liquidity in the economy, market capitalization, and stock market turnover. A panel data of seven (7) selected SSA nations for the period of 1990 to 2021 is employed in the analysis, while the Mean Group (MG) and the Pooled Mean Group (PMG) techniques are employed to estimate the long-run and short-run relationship amongst the variables for the panel analysis. The main finding in the study is that while financial system development and economic growth affect environmental degradation among SSA countries, the effect is more of a long run affair. The short run effects are limited and insignificant in most of the cases. Specifically, financial development is shown to generally increase carbon emission, but reduce ecological footprint (per xvi capita footprint on crop land and per capita footprint on built land). In particular, the study finds that credit to the private sector and market capitalization is the most important financial market segments that reduce environmental degradation. A strong EKC format was also found to exist among the SSA countries, while the study also found evidence that deeper financial system development will help to manage the impacts of economic growth on environmental degradation among the SSA countries. Adopting responsible financial sector investment as well as deepening the financial markets among SSA countries is therefore the main recommendation in the study. This is intended to ensure that the negative spillover effects of financial and economic development on the environment is limited. The focus of the financial system should be on sustainability and ensuring that instruments in the system are environmentally responsible.