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Investigating Financial Development and Its Direct and Indirect Environmental Effects in South Africa: Fresh Policy Insights

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  • Maxwell Chukwudi Udeagha

    (University of Pretoria
    University of Pretoria)

  • Marthinus Christoffel Breitenbach

    (University of Pretoria)

Abstract

Results on the connection between financial development and CO2 emissions are presented in contradicting ways in earlier research. In order to solve this conundrum, the Environmental Kuznets Curve (EKC) framework is used in this study to examine both the direct and indirect effects of financial development on environmental degradation. Our empirical analysis is supported by the cutting-edge dynamic ARDL simulations framework for the 1960–2020 time span in South Africa. The estimated results, which are based on five separate financial development indices, corroborate South Africa's claim that the country's financial development prevents pollution. For South Africa, we also confirm the validity of the EKC theory. The results of the indirect channels demonstrate that financial development also lessens the negative impacts of income, energy usage, trade openness, and foreign direct investment (FDI) on pollution emissions. A weak financial structure is also necessary for the viability of the polluted haven hypothesis (PHH), which is examined using trade openness and FDI variables. For each of these variables, PHH vanishes at a particular point in financial development. Last but not least, increased industrial value-added increases pollution emissions, whereas increased technical innovation decreases the former. On the basis of these findings, South Africa should offer financial incentives and tax breaks to attract green FDI and encourage investments that prioritize environmental sustainability. These incentives can include grants, subsidies, and preferential tax rates for FDI projects that align with South Africa's environmental goals. Providing a favourable investment climate for green projects can stimulate sustainable economic growth and attract responsible investors.

Suggested Citation

  • Maxwell Chukwudi Udeagha & Marthinus Christoffel Breitenbach, 2024. "Investigating Financial Development and Its Direct and Indirect Environmental Effects in South Africa: Fresh Policy Insights," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 36(2), pages 428-495, April.
    • Handle: RePEc:pal:eurjdr:v:36:y:2024:i:2:d:10.1057_s41287-023-00608-7
    DOI: 10.1057/s41287-023-00608-7
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    More about this item

    Keywords

    Financial development; Trade openness; CO2 emissions; Dynamic ARDL simulations; Energy consumption; EKC; Cointegration; Economic growth; Foreign direct investment; Industrial value-added; South Africa;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • F1 - International Economics - - Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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