Financial Inclusion and Environmental Sustainability in Emerging and Developing Countries: Do control of corruption and trade openness matter?

Emna Trabelsi and Thouraya Fhima
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Thouraya Fhima: Faculty of Economic and Management Sciences of Sousse, University of Sousse, Riadh City, Sousse, Tunisia

Journal of Economic Analysis, 2025, vol. 4, issue 1, 124-149

Abstract: This study investigates the impact of financial inclusion on environmental sustainability in 178 emerging and developing countries from 1996 to 2022. Employing a composite index derived through Principal Component Analysis (PCA) as a measure of financial inclusion and covering four aspects (access, depth, efficiency, stability), our analysis reveals negative outcomes. The findings indicate that enhancing financial inclusion is associated with a notable increase in CO2 per capita emissions as well as in Total Greenhouse Gas emissions. We demonstrate that controlling corruption improves environmental quality, yet this measure alone is insufficient to fully mitigate the impact of financial inclusion, as indicated by our moderation analysis. The same analysis, however, shows that fostering globalization through trade openness is an efficient tool to alleviate the positive effect of financial inclusion on the quality of the environment. The study employs various policies targeting the control of development levels, energy consumption, natural resource utilization, industry, and urban population dynamics to contextualize the influence of financial inclusion on environmental sustainability. Through econometric methods and a comprehensive examination of the specified time frame, our results provide insights into the complex interplay between financial inclusion and environmental outcomes in diverse socio-economic contexts. The research contributes to the discourse on sustainable development by highlighting the potential of certain factors as a catalyst for environmental improvement. Understanding these dynamics is crucial for policymakers, as it underlines the trade-off between integrating inclusive financial strategies and achieving environmentally sustainable development trajectories in emerging and developing nations. Moreover, shedding light on the underlying mechanisms, such as trade-offs, fills a significant gap in the literature.

Keywords: Financial inclusion; Environmental sustainability; PCA; Panel; Moderation analysis (search for similar items in EconPapers)
Date: 2025
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