Environmental Science and Pollution Research

, Volume 26, Issue 8, pp 7926–7937 | Cite as

Financial development and environment in South Asia: the role of institutional quality

  • Muhammad ZakariaEmail author
  • Samina Bibi
Research Article


The paper investigates the effect of financial development and institutional quality on the environment in South Asia. Other determinants of environmental quality included are economic growth, energy consumption, FDI, trade openness and institutional quality. For empirical analysis, panel data is used for the period 1984 to 2015. The estimated results indicate that Environmental Kuznet Curve (EKC) hypothesis holds in South Asia, i.e., environment first deteriorates with economic development and then it starts improving. Empirical results reveal that 1% increase in economic growth worsens environment by 1.709%. However, further increase in economic growth improves environment by 0.104%. Energy consumption has deteriorating effect on environment. Financial development has degraded the environment in the region, which indicates that South Asian countries have used financial development for capitalization and not to improve technology. The estimated results show that 1% increase in financial development deteriorates environment by 0.147%. FDI, which is a measure of financial openness, has mitigating effect on pollution. In turn, trade openness has worsened the environmental quality in the region. Institutional quality has significant negative effect on carbon emissions. It also has significant negative moderating effects on carbon emissions. The findings show that 1% improvement in institutional quality will decrease pollution by 0.114%. The study suggests that South Asian countries should focus more on technology effect and not on scale effect of financial development.


Carbon emissions Financial development Institutional quality EKC 

JEL classifications

C23 Q5 



  1. Abbasi F, Riaz K (2016) CO2 emissions and financial development in an emerging economy: an augmented VAR approach. Energy Policy 90:102–114CrossRefGoogle Scholar
  2. Al-mulali U, Sab CNBC (2012a) The impact of energy consumption and CO2 emission on the economic growth and financial development in the sub Saharan African countries. Energy 39:180–186CrossRefGoogle Scholar
  3. Al-mulali U, Sab CNBC (2012b) The impact of energy consumption and CO2 emission on the economic and financial development in 19 selected countries. Renew Sust Energ Rev 16:4365–4369CrossRefGoogle Scholar
  4. Al-mulali U, Tang CF, Ozturk I (2015) Does financial development reduce environmental degradation? Evidence from a panel study of 129 countries. Environ Sci Pollut Res 22:14891–14900CrossRefGoogle Scholar
  5. Ang JB (2008) Economic development, pollutant emissions and energy consumption in Malaysia. J Policy Model 30:271–278CrossRefGoogle Scholar
  6. Antweiler W, Copeland BR, Taylor MS (2001) Is free trade good for the environment? Am Econ Rev 91(4):877–908CrossRefGoogle Scholar
  7. Birdsall N, Wheeler D (1993) Trade policy and industrial pollution in Latin America: where are the pollution havens? J Environ Dev 2(1):137–149CrossRefGoogle Scholar
  8. Boutabba MA (2014) The impact of financial development, income, energy and trade on carbon emissions: evidence from the Indian economy. Econ Model 40:33–41CrossRefGoogle Scholar
  9. Capelle-Blancard G, Laguna MA (2010) How does the stock market respond to chemical disasters? J Environ Econ Manag 59(2):192–205CrossRefGoogle Scholar
  10. Chousa JP, Khan HA, Melikyan D, Tamazian A (2005) Assessing institutional efficiency, growth and integration. Emerg Mark Rev 6:69–84CrossRefGoogle Scholar
  11. Claessens S, Feijen E (2007) Financial sector development and the millennium development goals. World Bank, Washington, D.CGoogle Scholar
  12. Cole MA (2007) Corruption, income and the environment: an empirical analysis. Ecol Econ 62:637–647CrossRefGoogle Scholar
  13. Dasgupta S, Laplante B, Mamingi N (2001) Pollution and capital markets in developing countries. J Environ Econ Manag 42:310–335CrossRefGoogle Scholar
  14. Dutt K (2009) Governance, institutions, and the environment-income relationship: a cross-country study. Environ Dev Sustain 11:705–723CrossRefGoogle Scholar
  15. Eskeland GS, Harrison AE (2003) Moving to greener pastures? Multinationals and the pollution haven hypothesis. J Dev Econ 70:1–23CrossRefGoogle Scholar
  16. Frankel J, Rose A (2002) An estimate of the effect of common currencies on trade and income. Q J Econ 117(2):437–466CrossRefGoogle Scholar
  17. Grossman GM, Krueger AB (1991) Environmental impacts of a North American free trade agreement. NBER Working Paper No 3914Google Scholar
  18. Grossman GM, Krueger AB (1995) Economic growth and the environment. Q J Econ 110(2):353–377CrossRefGoogle Scholar
  19. Ibrahim MH, Law SH (2014) Social capital and CO2 emission – output relations: a panel analysis. Renew Sust Energ Rev 29:528–534CrossRefGoogle Scholar
  20. Ibrahim MH, Law SH (2016) Institutional quality and CO2 emission-trade relations: evidence from sub-Saharan Africa. S Afr J Econ 84(2):323–340CrossRefGoogle Scholar
  21. Jalil A, Feridun M (2011) The impact of growth, energy and financial development on the environment in China: a cointegration analysis. Energy Econ 33:284–291CrossRefGoogle Scholar
  22. Javid M, Sharif F (2016) Environmental Kuznets curve and financial development in Pakistan. Renew Sust Energ Rev 54:406–414CrossRefGoogle Scholar
  23. Jensen AL (1996) Beverton and Holt life history invariants result from optimal trade off of reproduction and survival. Can J Fish Aquat Sci 53:820–822CrossRefGoogle Scholar
  24. Kumbaroglu G, Karali N, Arıkan Y (2008) CO2, GDP and RET: an aggregate economic equilibrium analysis for Turkey. Energy Policy 36(7):2694–2708CrossRefGoogle Scholar
  25. Lau L-S, Choong C-K, Eng Y-K (2014) Carbon dioxide emission, institutional quality, and economic growth: empirical evidence in Malaysia. Renew Energy 68:276–281CrossRefGoogle Scholar
  26. Leitao A (2010) Corruption and the environmental Kuznets curve: empirical evidence for sulfur. Ecol Econ 69(11):2191–2201CrossRefGoogle Scholar
  27. Masron TA, Subramaniam Y (2018) The environmental Kuznets curve in the presence of corruption in developing countries. Environ Sci Pollut Res 25(13):12491–12506CrossRefGoogle Scholar
  28. Moghadam HE, Dehbashi V (2018) The impact of financial development and trade on environmental quality in Iran. Empir Econ 54(4):1777–1799CrossRefGoogle Scholar
  29. Muhammad J, Fatima SG (2013) Energy consumption, financial development and CO2 emissions in Pakistan, MPRA Paper No. 48287Google Scholar
  30. Nasreen S, Anwar S (2015) The impact of economic and financial development on environmental degradation: an empirical assessment of EKC hypothesis. Stud Econ Financ 32(4):485–502CrossRefGoogle Scholar
  31. Omri A, Daly S, Rault C, Chaibi A (2015) Financial development, environmental quality, trade and economic growth: what causes what in MENA countries. Energy Econ 48:242–252CrossRefGoogle Scholar
  32. Ozturk I, Acaravci A (2013) The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Econ 36:262–267CrossRefGoogle Scholar
  33. Panayotou T (1997) Demystifying the environmental Kuznets curve: turning a black box into a policy tool. Environ Dev Econ 2:465–484CrossRefGoogle Scholar
  34. Sadorsky P (2010) The impact of financial development on energy consumption in emerging economies. Energy Policy 38:2528–2535CrossRefGoogle Scholar
  35. Sahli I, Rejeb JB (2015) The environmental Kuznets curve and corruption in the Mena Region. Procedia Soc Behav Sci 195:1648–1657CrossRefGoogle Scholar
  36. Saidi K, Mbarek MB (2016) The impact of income, trade, urbanization, and financial development on CO2 emissions in 19 emerging economies. Environ Sci Pollut Res.
  37. Shahbaz M (2013) Does financial instability increase environmental degradation? Fresh evidence from Pakistan. Econ Model 33:537–544CrossRefGoogle Scholar
  38. Shahbaz M, Lean HH (2012) Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy 40:473–479CrossRefGoogle Scholar
  39. Shahbaz M, Hye QMA, Tiwari AK, Leitao NC (2013a) Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renew Sust Energ Rev 25:109–121CrossRefGoogle Scholar
  40. Shahbaz M, Tiwari AK, Nasir M (2013b) The effects of financial development, economic growth, coal consumption and trade openness on CO2 emissions in South Africa. Energy Policy 61:1452–1459CrossRefGoogle Scholar
  41. Shahbaz M, Mallick H, Mahalik MK (2015) Does globalization impede environmental quality in India? Ecol Indic 52:379–393CrossRefGoogle Scholar
  42. Sharma SS (2011) Determinants of carbon dioxide emissions: empirical evidence from 69 countries. Appl Energy 88(1):376–382CrossRefGoogle Scholar
  43. Stern DI (2004) The rise and fall of the environmental Kuznets curve. World Dev 32(8):1419–1439CrossRefGoogle Scholar
  44. Tadesse SA (2005) Financial development and technology. Working Paper No. 749Google Scholar
  45. Tamazian A, Rao BB (2010) Do economic, financial and institutional developments matter for environmental degradation? Evidence from Transitional Economies. Energy Econ 32:137–145CrossRefGoogle Scholar
  46. Tamazian A, Chousa JP, Vadlamannati KC (2009) Does higher economic and financial development lead to environmental degradation: evidence from BRIC countries. Energy Policy 37:246–253CrossRefGoogle Scholar
  47. Wooldridge JM (2002) Econometric analysis of cross section and panel data, MIT PressGoogle Scholar
  48. Yandle B, Vijayaraghavan M, Bhattarai M (2004) The Environmental Kuznets curve: a review of findings, methods, and policy implications. PERC Research Study, Property and Environment Research, MontanaGoogle Scholar
  49. Yang J, Zhang Y, Meng Y (2015) Study on the impact of economic growth and financial development on the environment in China. J Sys Sci & Info 3(4):334–347CrossRefGoogle Scholar
  50. Yazdi SK, Shakouri B (2014) The impact of energy consumption, income, trade, urbanization and financial development on carbon emissions in Iran. Adv Environ Biol 8(5):1293–1300Google Scholar
  51. Yuxiang K, Chen Z (2010) Financial development and environmental performance: evidence from China. Environ Dev Econ 16:93–111CrossRefGoogle Scholar
  52. Zhang Y-J (2011) The impact of financial development on carbon emissions: an empirical analysis in China. Energy Policy 39:2197–2203CrossRefGoogle Scholar
  53. Zhang Y-J, Jin Y-L, Chevallier J, Shen B (2016) The effect of corruption on carbon dioxide emissions in APEC countries: a panel quantile regression analysis. Technol Forecast Soc Chang 112:220–227CrossRefGoogle Scholar
  54. Zugravu N, Duchêne G, Millock K (2009) The factors behind CO2 emission reduction in transition economies. Rech Econ Louvain 75(4):461–501Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.School of Economics and FinanceXi’an Jiaotong UniversityXi’anPeople’s Republic of China
  2. 2.University Institute of Management SciencesPir Mehr Ali Shah Arid Agriculture UniversityRawalpindiPakistan

Personalised recommendations