Efficiency of Financial Integration, Foreign Direct Investment and Output Growth: Policy Options for Pollution Abatement in Africa

Abstract

This paper evaluates the impact of financial integration on environmental pollution through foreign direct investment and output growth channels between 1980 and 2017. The study employs panel cointegration techniques using the fully modified ordinary least squares to estimate the country-specific and panel data from the five largest African nations. The findings show that financial integration positively impacts pollution in Nigeria, Algeria, Egypt, Angola, and in the panel, while it reduces pollution in South Africa. Also, financial integration lowers pollution through the foreign investment channel in the panel, Nigeria, Egypt, Angola and Algeria, but not in South Africa. Lastly, financial integration increases pollution through the output growth channel in the panel, Algeria, South Africa, Nigeria and Angola, but not in Egypt. Pollution-reduction policies are then recommended for the African region.