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Environmental quality indicators and financial development in Malaysia: unity in diversity

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Abstract

Environmental quality indicators are crucial for responsive and cost-effective policies. The objective of the study is to examine the relationship between environmental quality indicators and financial development in Malaysia. For this purpose, the number of environmental quality indicators has been used, i.e., air pollution measured by carbon dioxide emissions, population density per square kilometer of land area, agricultural production measured by cereal production and livestock production, and energy resources considered by energy use and fossil fuel energy consumption, which placed an impact on the financial development of the country. The study used four main financial indicators, i.e., broad money supply (M2), domestic credit provided by the financial sector (DCFS), domestic credit to the private sector (DCPC), and inflation (CPI), which each financial indicator separately estimated with the environmental quality indicators, over a period of 1975–2013. The study used the generalized method of moments (GMM) technique to minimize the simultaneity from the model. The results show that carbon dioxide emissions exert the positive correlation with the M2, DCFC, and DCPC, while there is a negative correlation with the CPI. However, these results have been evaporated from the GMM estimates, where carbon emissions have no significant relationship with any of the four financial indicators in Malaysia. The GMM results show that population density has a negative relationship with the all four financial indicators; however, in case of M2, this relationship is insignificant to explain their result. Cereal production has a positive relationship with the DCPC, while there is a negative relationship with the CPI. Livestock production exerts the positive relationship with the all four financial indicators; however, this relationship with the CPI has a more elastic relationship, while the remaining relationship is less elastic with the three financial indicators in a country. Energy resources comprise energy use and fossil fuel energy consumption, both have distinct results with the financial indicators, as energy demand have a positive and significant relationship with the DCFC, DCPC, and CPI, while fossil fuel energy consumption have a negative relationship with these three financial indicators. The results of the study are of value to both environmentalists and policy makers.

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Notes

  1. Dailami and Aktin (1990); Jalilian and Kirkpatrick (2001) and Ayadi et al. (2013).

  2. Some previous studies, for example Bagehot (1873), explores that finance plays a key role in economic growth. The study of Schumpeter (1911) highlights the prominence of the banking system in economic growth. The studies of Goldsmith (1969), McKinnon (1973), and Shaw (1973) implied that financial system be supposed to have performed a key role in economic growth, where McKinnon (1973) and Shaw (1973) models indicate that financial development can increase saving, capital accumulation, and consequently economic growth. While in a study of Lucas (1988), finance is considered to be an “over-stressed” factor of economic growth. In contrast, the study of Robinson (1952) explicates that finance does not cause economic growth, while Saint-Paul (1992) suggests that financial development can attenuate economic growth.

  3. Yusof et al. (1994); Athukorala and Sen (2002); Ang and McKibbin (2007).

  4. Julian (2013)

  5. IMF (2014)

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Authors and Affiliations

  1. Department of Development Studies, COMSATS Institute of Information Technology, Abbottabad, Pakistan

    Arif Alam

  2. School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia, Sintok, Malaysia

    Muhammad Azam

  3. Faculty of Arts and Social Sciences, Department of East Asian Studies, University of Malaya, Kuala Lumpur, Malaysia

    Alias Bin Abdullah & Ihtisham Abdul Malik

  4. Department of Management Sciences, COMSATS Institute of Information Technology, Attock, Pakistan

    Anwar Khan

  5. Faculty of Arts and Social Sciences, Department of Geography, University of Malaya, Kuala Lumpur, Malaysia

    Tengku Adeline Adura Tengku Hamzah

  6. Department of Environmental Sciences, COMSATS Institute of Information Technology, Abbottabad, Pakistan

    Faridullah

  7. Department of Humanities, COMSATS Institute of Information Technology, Abbottabad, Pakistan

    Muhammad Mushtaq Khan & Hina Zahoor

  8. Department of Management Sciences, COMSATS Institute of Information Technology, Abbottabad, Pakistan

    Khalid Zaman

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  1. Arif Alam
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  3. Alias Bin Abdullah
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Correspondence to Arif Alam or Khalid Zaman.

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Alam, A., Azam, M., Abdullah, A.B. et al. Environmental quality indicators and financial development in Malaysia: unity in diversity. Environ Sci Pollut Res 22, 8392–8404 (2015). https://doi.org/10.1007/s11356-014-3982-5

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