Financial flows and environmental quality in ECOWAS member states: accounting for residual cross-sectional dependence and slope heterogeneity

Abstract

Due to rising economic growth, financial flows have been of particular interest to nations. However, their environmental concerns have been overlooked particularly in developing countries. To aid in filling this gap, an exploration on the link between financial flows and environmental quality in ECOWAS member countries for the period 1990�2017 was undertaken. In achieving the study�s goal, second generation econometric methods that account for cross-sectional dependence and slope heterogeneity among others were engaged. From the results, the studied panel was heterogeneous and cross-sectionally correlated. Also, the investigated variables were stationary and cointegrated in the long-run. The dynamic common correlated effects mean group (DCCEMG), augmented mean group (AMG) and the common correlated effects mean group (CCEMG) estimators were employed to examine the elastic effects of the predictors on the explained variable, and from the results, remittances worsened environmental quality in the region. Also, foreign direct investment was detrimental to ecological quality validating the pollution haven hypothesis. Further, economic growth and urbanization were not friendly to environmental quality in the bloc. However, environmental innovations improved the ecosystem of the region. On the causal connections amidst the series, there was feedback causalities between remittances and environmental pollution, between economic growth and ecological deterioration, and between urbanization and environmental degradation. Also, there was a one-way causality from foreign direct investment to ecological pollution, but there was no causality between environmental innovations and ecological pollution. Based on the findings, the study recommended that remittances received by the nations should be invested into research and development, green innovations, energy efficiency and green energy sources to help improve environmental quality in the region. Also, the region�s environmental policies should be modified to control the influx of polluting FDIs into the countries. � 2022, The Author(s), under exclusive licence to Springer Nature B.V.