Motivated by trade and financial liberalisation policies have become
increasingly important in developing countries over the past two decades and the
existing gaps in the literature regarding financial development, economic growth, and
environmental quality research need to be addressed. Therefore, this thesis aims to
provide new evidence on the impacts of trade and financial openness on financial
development, the impact of financial development on economic growth, and the
impact of trade openness on environmental quality in 64 developing countries over
the period 2003-2017. One major contribution of this thesis for three objectives is the
adoption of the regression model based on Bayesian model averaging approach to
consider model uncertainty (Raftery et al., 1997; Hoeting et, al., 1999; Chipman et
al., 2001; Fragoso et al., 2018).
Regarding the impacts of openness on financial development, the thesis
demonstrates that the contribution of trade openness to financial development is
important in developing economies with better institutions. However, financial
openness has an insignificant positive effect on financial development. There is no
evidence to support the Rajan and Zingales hypothesis that the simultaneous openness
to both trade and capital flows promotes financial development. The findings also
indicate that a better institutions environment allows a developing economy to exploit
the benefits of openness to financial development.
Regarding the impact of financial development on economic growth, the
main findings indicate that financial development has a significant U-shaped effect
on economic growth, providing new insight concerning the relationship between
financial development and economic growth in developing countries. The results also
demonstrate that investment to gross domestic product ratio and foreign direct
investment have significant positive effects on economic growth, whereas population
growth has a significant negative impact on economic growth.
With regard to the impact of trade openness on environmental quality, the
empirical results reveal that trade openness in developing countries does not cause
environmental degradation. Besides trade openness, the findings provide strong
evidence in favour of financial openness and renewable energy consumption as two
of the most important determinants of environmental quality by reducing carbon
dioxide emissions. Meanwhile, inward FDI stock to domestic capital stock and
income have harmful effects on environmental quality in the context of developing
countries.
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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 5 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
5 can be combined into two papers for further publications.
The work presented in Chapter 2 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 (co-
author) (2020); (ii) Tạp chí Công 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 1 - INTRODUCTION ........................................................................... 1
1.1. Research problems ........................................................................................... 1
The impacts of openness on financial development .................................. 2
The impact of financial development on economic growth ...................... 6
The impact of trade openness on environmental quality ........................... 9
1.2. Research objectives ........................................................................................ 11
1.3. Research contributions ................................................................................... 13
1.4. Structure of the thesis ..................................................................................... 14
CHAPTER 2 - 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 3 - 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 4 - 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 5 - 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 1 72
Table 3.2. Information on variables for Objective 2 81
Table 3.3. Information on variables for Objective 3 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
104
Table 4.2. Correlations between of the variables for Objective 1, whole sample,
2003-2017
105
Table 4.3. The impacts of openness on financial development: posterior
estimates under uniform model priors
109
Table 4.4. Summary statistics of the variables for Objective 2, whole sample, 64
economies, 2003-2017
117
Table 4.5. Correlations between of the variables for Objective 2, whole sample,
2003-2017
118
Table 4.6. The impacts of financial development on economic growth: posterior
estimates under uniform model priors
122
Table 4.7. Summary statistics of the variables for Objective 3, whole sample, 64
economies, 2003-2017
126
Table 4.8. Correlations between of the variables for Objective 3, whole sample,
2003-2017
130
ix
Table 4.9. The impacts of trade openness on environmental quality: posterior
estimates under uniform model priors
133
x
LIST OF FIGURES
Figure 1.1. Financial development in developing countries over the period
2003-2017
4
Figure 1.2. Openness in developing countries over the period 2003-2017 5
Figure 1.3. Economic growth in developing countries over the period 2003-
2017
7
Figure 1.4. Environmental quality in developing countries over the period
2003-2017
10
Figure 2.1. The McKinnon–Shaw model 16
Figure 2.2. A theoretical approach to openness and financial development 21
Figure 2.3. A conceptual framework for the impacts of openness on financial
development
31
Figure 2.4. A theoretical approach to financial development and economic
growth
35
Figure 2.5. A conceptual framework for the impact of financial development
on economic growth
44
Figure 2.6. A theoretical approach to trade openness and environmental quality 47
Figure 2.7. A conceptual framework for the impact of trade openness on
environmental quality
57
Figure 2.8. An integrated conceptual framework for three objectives 59
Figure 3.1. Legal origins of developing countries 101
xi
Figure 4.1. Scatter plots of openness and financial development in developing
countries, 2003 – 2017
106
Figure 4.2. Marginal densities of trade openness, financial openness, and the
interaction between trade openness and financial openness from BRIC
111
Figure 4.3. Cumulative model probabilities from BRIC for Object 1 114
Figure 4.4. Scatter plots of financial development and economic growth in
developing countries, 2003 - 2017
119
Figure 4.5. Marginal densities of financial development from BRIC 124
Figure 4.6. Cumulative model probabilities from BRIC for Object 2 121
Figure 4.7. Scatter plots of trade openness and environmental quality in
developing countries, 2003 – 2017
131
Figure 4.8. Marginal densities of openness from BRIC 135
Figure 4.9. Cumulative model probabilities from BRIC for Object 3 136
xii
ABSTRACT
Motivated by trade and financial liberalisation policies have become
increasingly important in developing countries over the past two decades and the
existing gaps in the literature regarding financial development, economic growth, and
environmental quality research need to be addressed. Therefore, this thesis aims to
provide new evidence on the impacts of trade and financial openness on financial
development, the impact of financial development on economic growth, and the
impact of trade openness on environmental quality in 64 developing countries over
the period 2003-2017. One major contribution of this thesis for three objectives is the
adoption of the regression model based on Bayesian model averaging approach to
consider model uncertainty (Raftery et al., 1997; Hoeting et, al., 1999; Chipman et
al., 2001; Fragoso et al., 2018).
Regarding the impacts of openness on financial development, the thesis
demonstrates that the contribution of trade openness to financial development is
important in developing economies with better institutions. However, financial
openness has an insignificant positive effect on financial development. There is no
evidence to support the Rajan and Zingales hypothesis that the simultaneous openness
to both trade and capital flows promotes financial development. The findings also
indicate that a better institutions environment allows a developing economy to exploit
the benefits of openness to financial development.
Regarding the impact of financial development on economic growth, the
main findings indicate that financial development has a significant U-shaped effect
on economic growth, providing new insight concerning the relationship between
financial development and economic growth in developing countries. The results also
demonstrate that investment to gross domestic product ratio and foreign direct
investment have significant positive effects on economic growth, whereas population
growth has a significant negative impact on economic growth.
xiii
With regard to the impact of trade openness on environmental quality, the
empirical results reveal that trade openness in developing countries does not cause
environmental degradation. Besides trade openness, the findings provide strong
evidence in favour of financial openness and renewable energy consumption as two
of the most important determinants of environmental quality by reducing carbon
dioxide emissions. Meanwhile, inward FDI stock to domestic capital stock and
income have harmful effects on environmental quality in the context of developing
countries.
Keywords: Openness, financial development, economic growth,
environmental quality, developing countries, Bayesian model averaging.
1
CHAPTER 1 - INTRODUCTION
1.1. Research problems
It is now widely accepted that trade and financial openness constitute
potentially important mechanisms for financial development (Rajan and Zingales,
2003; Baltagi et al., 2007, 2009; Chinn and Ito, 2002, 2006; Law and Demetriades,
2006; David et al., 2014; Svaleryd and Vlachos, 2002, 2005; etc.) which in turn can
influence economic growth, especially in developing countries (Caporale et al., 2014;
Estrada et al., 2010, 2015; Menyah et al., 2014; Calderón and Liu, 2003; Bittencourt,
2012; Law and Singh, 2014; Rioja and Valev, 2004a, b). Regarding trade openness,
it could be one of the most crucial factors explaining environmental quality
(Antweiler et al., 2001; Cole and Elliott, 2003; Managi et al., 2009; Atici, 2009, 2012;
Baek et al., 2009; Nasir and Rehman, 2011; Shahbaz et al., 2016; Mutascu, 2018).
Although there have been numerous investigations attempting to understand
financial development, growth and environmental quality research, the majority of
studies only utilised methodologies for panel data basing on traditional statistical
inference (Gries et al., 2009; Chinn & Ito, 2002; Cecchetti & Kharroubi, 2012;
Estrada et al., 2015; Zhang et al., 2012; Ergungor, 2008; Adu et al., 2013; Frankel &
Rose, 2005; Antweiler et al., 2001; Cole & Elliott, 2003; Le et al., 2016). The standard
statistical approaches ignore model uncertainty, leading to over-confident inferences,
“all-or-nothing” constraint, and omitted variable bias that generalize poorly (Raftery,
1993; Raftery et al., 1997, 2005; Hoeting et al., 1999; Chipman et al., 2001; Fragoso
et al., 2018, Hinne et al., 2020). Moreover, the competitive theories and empirical
studies have remarkably emerged from the literature on financial development,
growth and environmental quality determinants, which poses a significant challenge
for development economics. Therefore, Bayesian model averaging (BMA) is a tailor-
made approach to deal with the model uncertainty that surrounds the large set of
candidate regressors. In this thesis, the adoption of BMA proposed by several seminal
2
works, such as Raftery (1993), Raftery et al. (2005), Raftery et al. (1997), and Hoeting
et al. (1999), can make significant contributions at bridge the methodology. Besides,
previous findings are not conclusive; hence financial development, economic growth,
and environmental quality studies have been highly controversial in development
economics.
The impacts of openness on financial development
Regarding the impacts of openness on financial development, the seminal
work of Rajan and Zingales (2003) argue that, for genuine financial development, a
combined liberalisation of both trade and capital accounts are a necessary condition
(the simultaneous openness henceforth); this is the simultaneous openness hypothesis
on financial development. According to Rajan and Zingales (2003), interest groups
(incumbents) are often against financial development because it generates stronger
competition that erodes their rents. They argue that contemporaneous opening of both
the trade and capital flows will reduce incumbents’ powers, hence enhancing
financial development. Moreover, through new opportunities, trade and financial
openness might bring sufficient new profi