Độ mở kinh tế, phát triển tài chính, tăng trưởng kinh tế và chất lượng môi trường bằng chứng từ các nước đang phát triển

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 (coauthor) (2020); (ii) Tạp chí Cơng 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
Table 4.2. Correlations between of the variables for Objective 1, whole sample,
2003-2017
Table 4.3. The impacts of openness on financial development: posterior
estimates under uniform model priors
Table 4.4. Summary statistics of the variables for Objective 2, whole sample, 64
economies, 2003-2017
Table 4.5. Correlations between of the variables for Objective 2, whole sample,
2003-2017
Table 4.6. The impacts of financial development on economic growth: posterior
estimates under uniform model priors
Table 4.7. Summary statistics of the variables for Objective 3, whole sample, 64
economies, 2003-2017
Table 4.8. Correlations between of the variables for Objective 3, whole sample,
2003-2017

104

105

109

117

118

122

126

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
Figure 1.2. Openness in developing countries over the period 2003-2017
Figure 1.3. Economic growth in developing countries over the period 20032017
Figure 1.4. Environmental quality in developing countries over the period
2003-2017

4

5

7

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
Figure 2.4. A theoretical approach to financial development and economic
growth
Figure 2.5. A conceptual framework for the impact of financial development
on economic growth
Figure 2.6. A theoretical approach to trade openness and environmental quality
Figure 2.7. A conceptual framework for the impact of trade openness on
environmental quality

31

35

44

47

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
Figure 4.2. Marginal densities of trade openness, financial openness, and the
interaction between trade openness and financial openness from BRIC
Figure 4.3. Cumulative model probabilities from BRIC for Object 1
Figure 4.4. Scatter plots of financial development and economic growth in
developing countries, 2003 - 2017

106

111

114

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

environmental quality, developing countries, Bayesian model averaging.

growth,


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 tailormade 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 profits that exceed the negative effects of
competition. In contrast, McKinnon (1991) suggests that trade liberalisation should
precede financial liberalisation to promote financial development, especially in
developing countries. The simultaneous openness hypothesis of Rajan and Zingales
(2003), as well as the empirical work of Baltagi et al. (2009) is one of the most
important ideas for motivating this thesis. The empirical studies for the relationships
between openness and financial development are mixed and have not achieved a
unique consensus across developed and developing economies that can be drawn:
positive (Beck, 2002; Chinn and Ito, 2002; Rajan and Zingales, 2003; Braun and
Raddatz, 2005; Law and Demetriades, 2006; Baltagi et al., 2007, 2009; WoldeRufael, 2009, David et al., 2014; Karimu and Marbuah, 2017); negative or mixed
(Svaleryd and Vlachos, 2002; Aizenman and Noy, 2003; Aizenman, 2004; Do and
Levchenko, 2004, 2007; Ito, 2006; Chinn and Ito, 2006; Svaleryd and Vlachos, 2005;


3

Kim et al., 2010a; Kim et al., 2010b; Trabelsi and Cherif, 2017), null effects (WoldeRufael, 2009; Gries et al., 2009; Hauner et al., 2013). The thesis focuses on
developing countries where there were relatively few works from this perspective.

Trade and financial liberalisation have marked in the past two decades,
especially in developing countries. At the turn of the 1980s, some international
organisations, including International Monetary Fund, World Bank, and World Trade
Organisation, have commonly imposed structural adjustment policies on developing
countries (Goldberg & Pavcnik, 2007). Free-market programs were governed by
reduction of trade barriers, deregulation, and privatisation while financial
liberalisation policies were regulated by removing financial repression such as the
interest rate ceilings, administrative credit allocation, high reserve requirements, and
other government-induced distortions. With respect to financial development, there
have been remarkable differences between developing countries and developed ones
in financial development, measured by the ratio of private credit to GDP in the past
two decades. Financial development in developing countries has been increasing
steadily during this period, but it has been gradually stagnating in developed
economies especially from 2009 (Figure 1.1). In contrast, the trends in trade openness
and financial openness have become more unpredictable compared with financial
development in developing countries (Figure 1.2). Accordingly, this thesis seeks to
examine whether or not trade openness and financial openness have important roles
in the financial development process in developing countries in the light of the
inconclusive results of previous studies. Moreover, understanding the causes
underlying financial development is crucial because it allows countries, especially
developing ones, to encourage banking sector activities and this can affect economic
growth.


4

Figure 1.1. Financial development in developing countries over the period
2003-2017
Private credit
0,120

0,100
0,080
0,060
0,040
0,020
0,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Developed countries

Developing countries

Source: Global Financial Development Database (GFDD) and author’s calculations.


5

Figure 1.2. Openness in developing countries over the period 2003-2017
Trade openness

Financial openness

0,120

0,003

0,100

0,002

0,080

0,002

0,060

0,001

0,040

0,001

0,020
0,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Developed countries

Developing countries

-0,001

Developed countries

Developing countries

Source: World Development Indicators (WDI), Annual report on Exchange Arrangements and Exchange Restrictions (AREAER),
Chinn and Ito (2019) and author’s calculations.

6

This thesis contributes to the empirical literature on openness and financial
development in six aspects. Firstly, the thesis uses a BMA approach suggested by several
seminal works such as Raftery (1993), Raftery et al. (2005), Raftery et al. (1997),
Hoeting et al. (1999), etc. to consider model uncertainty. This approach has not been
used before in investigating the impacts of openness on financial development; therefore,
the present thesis aims at filling this gap in the econometrics literature. Secondly, as
there are several controversies that surround the measurement of financial development,
this thesis uses the ratio of private credit to GDP to capture the state of financial
development, due to its being often taken as the most suitable indicator for developing
countries (Beck et al., 2007; Ito, 2006). Thirdly, there is a persistent scarcity of empirical
works on the impacts of openness on financial development for developing countries
using the legal origins variable as an important determinant of its protection of corporate
shareholders and creditors in a financial system. Fourthly, the thesis utilises a variety of
the interactions between trade openness with other variables including financial
openness, institutional quality, and real GDP per capita to capture the different channels
through which trade liberalisation can affect financial development. Fifth, the
regional dummy variables are included in the regressions as control variables to compare
levels of financial development across regions. Finally, due to data availability, data for
the period 2003 – 2017 are adequate for maximising the number of collected developing
countries to investigate the impacts of openness on financial development; hence, this
thesis obtains the optimal sample size compared with previous studies focusing on
developing countries.
The impact of financial development on economic growth
The relationship between financial development and economic growth has
traditionally been a central issue in development economics research over the past few
decades (Andersen & Tarp, 2003; Chinn & Ito, 2002; Estrada et al., 2015; King &

7

Levine, 1993a; Levine et al., 2000; Menyah et al., 2014). Most empirical studies
conclude that financial systems influence savings and investment decisions, leading to
economic growth in both developed and developing countries (Levine, 2004; Zhuang et
al., 2009). Specifically, Levine (2005, p. 869) suggests that the overall functions of
financial systems include the reduction of information, enforcement, and transaction
costs through five channels of (i) producing information ex-ante regarding possible
investments and allocation of capital; (ii) monitoring investments and corporate
governance following financial provision; (iii) facilitating the trade, diversification, and
management of risk; (iv) mobilizing and pooling savings; and (v) easing the exchange
of goods and services. Financial system efficiency refers to the effective performance of
the five basic functions, and financial development implies an improvement in financial
systems’ efficiency.
Figure 1.3. Economic growth in developing countries over the period 2003-2017
Economic growth
0,006
0,004
0,002
0,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-0,002
-0,004
-0,006

Developed countries

Developing countries

Source: World Development Indicators (WDI) and author’s calculations.
Over the last two decades, developing economies have experienced a wave of
financial sector reforms facilitated by the elimination of government restrictions on the


8

financial system in terms of interest rates, high reserve requirements, and quantitative
restrictions on credit allocation to promote economic growth (McKinnon, 1973; Shaw,
1973). However, economic growth in developing economies has been unsteady,
suffering reversals at certain times during the 2003–2017 period. Relatively rapid
economic growth was experienced during 2003–2007, a period of relatively high
financial development. Economic growth suddenly decreased during 2007–2009,
dramatically reversing in 2009, followed by stagnation in economic growth that
prevailed from the latter period 2010–2017 (Figure 1.3). This thesis aims to provide new
evidence on the impact of financial development on economic growth in developing
countries over the period 2003–2017.
This investigation extends the literature in six respects. First, research on the
relationship between financial development and economic growth that considers
openness factors (trade and financial openness) has received considerably less attention,
particularly for developing countries. The present thesis aims to close this gap in the
literature by investigating whether and how economic growth is influenced by financial
development and openness in developing countries. Second, previous empirical studies
primarily focus on panel data methods based on traditional or frequentist statistics,
whereas no studies examine the impact of financial development on economic growth
using approaches based on Bayesian statistics. To fill this gap, this thesis applies the
Bayesian model averaging (BMA) approach proposed by several seminal studies, such
as Raftery (1993), Raftery et al. (2005), Raftery et al. (1997), and Hoeting et al. (1999),
to consider model uncertainty. Third, there are several controversies regarding the

measurement of financial development. The ratio of private credit to gross domestic
product (GDP) is widely used as a proxy for financial development (Beck et al., 2007;
Ito, 2006) and has often been assumed as the most suitable indicator for the
characteristics of developing countries. Fourth, there is a persistent scarcity of empirical
studies on the impact of financial development on economic growth for developing


9

economies examining legal origins variables as an important determinant of the
protection of corporate shareholders and creditors in a financial system. Fifth, the thesis
employs a variety of the interactions between trade openness with other variables,
including financial openness and institutional quality, to capture different channels
through which trade liberalisation might influence economic growth. Finally, regional
dummy variables are included in the regressions as control variables to compare the
levels of economic growth across regions.
The impact of trade openness on environmental quality
International trade could be one of the most crucial factors explaining
environmental quality (Antweiler et al., 2001; Liddle, 2001; Atici, 2009, 2012; Mutascu,
2018; Shahbaz et al., 2016; etc.). Trade increases the size of the economy leading to an
increase in pollution, and hence trade, ceteris paribus, is the principal cause of
environmental degradation (Harrison, 1995; Rock, 1996; Tobey, 1990). However,
Birdsall and Wheeler (1993), Lee and Roland-Holst (1997), and Jones and Manuelli
(1995) suggest that environmental damage linked to trade is not caused by trade. Due to
the scale effect (through an increase of the size of the economy originating from
increased trade volume), environmental quality could decline, thereby increasing
pollution. However, trade could enhance the environmental quality via the technique
effect and/or composition effect (i.e., as trade increases, income leading to
environmental regulation and supervision is tightened). The production of pollutionintensive goods in one nation causes environmental pollution while increasing in other
nations through international trade. This composition effect is attributed to two related

hypotheses: the displacement hypothesis and the pollution haven hypothesis. The two
hypotheses are associated with the contribution of the composition effect.
Fundamentally, there is no difference between these two hypotheses regarding
comparative advantage in international trade. Given that trade relates one country with


10

international communities, an underdeveloped economy could rely on technology
transfer via foreign direct investment (FDI), which may reduce environmental pollution.
Therefore, free trade has contradictory influences on environmental quality, both
positive and negative.
Figure 1.4. Environmental quality in developing countries over the period
2003-2017
CO2 emissions (metric tons per capita)
10
9
8
7
6
5
4
3
2
1
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Developed countries

Developing countries

Source: World Development Indicators (WDI) and author’s calculations.
Over the last two decades, the increasing greenhouse gases emissions are a key
threat of global warming, and the current ongoing climate change has been a crucial
concern to all societies from developed to developing countries. Figure 1.4 shows that
CO2 emissions (metric tons per capita) in developed countries are significantly higher
than in developing countries. Overall, there were steep upward trends in the CO2
emissions per capita in developing countries during the period 2003-2017, while this
indicator of developed countries went down significantly.