Financial Development, Economic Growth, and Environmental Degradation Nexus in ASIAN Emerging Markets

Intan Dana Lestari, Nury Effendi, Anhar Fauzan Priyono


Environmental degradation is one of the major problems in the world recently and one of the United Nations’ (UN) sustainable development goals (SDGs). Emerging markets countries that have become major players in the global economy and the main source of world economic growth have great potential to contribute the environmental degradation due to increased economic activities. This paper investigates the impact of financial development and economic growth on environmental degradation in Asian emerging markets. A panel environmental degradation model using financial development from banking sector and capital market sector, economic growth, Foreign Direct Investment (FDI), and urbanization variables that are major determinants of CO2 emission as a proxy of environmental degradation. The periods considered were 1980 – 2018 for banking model, and 1996 – 2018 for financial sector model (banking sector and capital market sector). A panel data approach applied such as cross-section dependence, panel unit root, panel cointegration, Fully Modified OLS (FMOLS) and Dynamic Ordinary Least Square (DOLS). The empirical finding revealed that in Asian emerging markets there is positively long-term relationship between financial development from banking model with environmental degradation. Nevertheless, we do not find any long-term relationship between financial development from financial sector model with environmental degradation. Moreover, the quadratic negative signed for economic growth showed the existence of Environmental Kuznets Curve (EKC).


Financial Development; Environmental Degradation; CO2 emission; Economic Growth; Environmental Kuznets Curve (EKC)

Full Text:



Abbasi, F., & Riaz, K. (2016). CO2 Emissions and Financial Development in an Emerging Economy: An Augmented VAR Approach. Energy Policy, 90(9), 102 – 114. doi:

Acheampong, A. O., (2019). Modelling for Insight: Does Financial Development Improve Environmental Quality?. Energy Economics, 83(8), 156 – 179. doi:

Al-mulali, U., Tang, C. F., & Ozturk, I. (2015). Does Financial Development Reduce Environmental Degradation? Evidence from a Panel Study of 129 Countries. Environmental Science and Pollution Research, 22(19). doi:

Bashir, A., Thamrin, K.M., Farhan, M., Mukhlis, M., & Atiyatna, D.P. (2019). The Causality between Human Capital, Energy Consumption, CO2 Emissions, and Economic Growth: Empirical Evidence from Indonesia. International Journal of Energy Economics and Policy, 9, 98-104.

Boutabba, M. A. (2014). The Impact of Financial Development, Income, Energy and Trade on Carbon Emissions: Evidence from the Indian Economy. Economic Modelling, 40(4), 33 – 41. doi:

Breusch, T. S., & Pagan, A. (1980). The Lagrange Multiplier Test and Its Application to Model Specification in Econometrics. Review of Economic Studies, 47(1), 239-253. doi:

Chang, S. (2015). Effects of Financial Developments and Income on Energy Consumption. International Review of Economics and Finance. 35(3), 28-44. doi:

Frees, E. W. (1995). Assessing Cross-sectional Correlation in Panel Data. Journal of Econometrics, 69(2), 393–414. doi:

Friedman, M. (1937). The Use of Ranks to Avoid the Assumption of Normality Implicit in the Analysis of Variance. Journal of the American Statistical Association. 32(200), 675–701. doi: 10.1080/01621459.1937.10503522.

Halkos, G. (2003). Environmental Kuznets Curve for Sulfur: Evidence Using GMM Estimation and Random Coefficient Panel Data Models. Environmental and Development Economics, 8(4), 581 – 601. doi:

Jalil, A., & Feridun, M. (2011). The Impact of Growth, Energy and Financial Development on the Environment in China: A Cointegration Analysis. Energy Economics, 33(2), 284 - 291. doi: 10.1016/j.eneco.2010.10.003.

Jamel, L., & Maktouf, S. (2017). The Nexus Between Economic Growth, Financial Development, Trade Openness, and CO2 Emissions in European Countries. General & Applied Economics. 5(1), 1 – 25. doi:

Kao, C. (1999). Spurious Regression and Residual-based Test for Cointegration in Panel Data. Journal of Econometrics, 90(1), 1 - 44.

Kao, C., & Chiang, M. H. (2000). On the Estimation and Inference of a Cointegrated Regression in Panel Data. Nonstationary Panels, Panel Cointegration and Dynamic Panels, 15(6), 179 – 222. doi:

Levine, A., Lin, C. F., & Chu, C. S. J. (2002). Unit Root Test in Panel Data: Asymptotic and Finite Sample Properties. Journal of Econometrics, 108(1), 1-24. doi:

Muhammad, S., Long, X., Salman, M., & Dauda, . (2020). Effect of Urbanization and International Trade on CO2 Emissions Across 65 Belt and Road Initiative Countries. Energy, (1), 1-15. doi: 10.1016/

Nasir, M. A., Huynh, T. L. D., & Tram, H. T. X. (2019). Role of Financial Development, Economic Growth & Foreign Direct Investment in Driving Climate Change: A Case of Emerging ASEAN. Journal of Environmental Management, 242(16), 131 – 141. doi:

Omri, A., Daly, S., Rault, C., & Chaibi, A. (2015). Financial Development, Environmental Quality, Trade and Economic Growth: What Causes What in MENA Countries. Energy Economics, 48, 242-252. doi:

Otoritas Jasa Keuangan (OJK). (2016). Master Plan Sektor Jasa Keuangan Indonesia 2015-2019.

Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61(3), 653 - 670. doi:

Pesaran M. H. (2004). General Diagnostic Tests for Cross Section Dependence n Panels. University of Cambridge, Faculty of Economics, Cambridge Working Papers in Economics No. 0435.

Pesaran M. H. (2006). Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure. Econometrica, 74(4), 967–1012. doi:

Sadorsky, P. (2010). The Impact of Financial Development on Energy Consumption in Emerging Economies. Energy Policy, 38(5), 2528 – 2535. doi:

Shahbaz, M., Aviral, K. T., & Nasir, M. (2013). The Effects of Financial Development, Economic Growth, Coal Consumption and Trade Openness on CO2 Emissions in South Africa. Energy Policy, 61, 1452 – 1459. doi:

Stern, D. I. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development, 32(8), 1419 – 1439. doi: 10.1016/j.worlddev.2004.03.004.

Westerlund, J., (2007). Testing for Error Correction in Panel Data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. doi:



  • There are currently no refbacks.

License URL:

Jurnal Ekonomi Pembangunan
Jalan Raya Palembang-Prabumulih Km. 32
Jurusan Ekonomi Pembangunan, Fakultas Ekonomi Universitas Sriwijaya
Indralaya, Sumatera Selatan, Indonesia
Email:, Tel/Fax : (0711)580231

p-ISSN: 1829-5843, e-ISSN 2685-0788

Creative Commons License

Jurnal Ekonomi Pembangunan by 

is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.  

Jurnal Ekonomi Pembangunan is Indexed by:


Logo Google Scholar Unsri Moraref One Search