Financial globalization and tropical deforestation

Previous studies in the growing literature on globalization and environmental degradation primarily focus on overall or economic globalization, mostly in advanced economies. These studies often fail to specify which dimensions of globalization policymakers should target to mitigate its environmental impacts and rarely address the global south. Building on research examining the environmental effects of financial crises, this paper fills these gaps by demonstrating that financial globalization is the key aspect driving environmental degradation, particularly deforestation in tropical countries. Unlike trade, political, cultural, interpersonal, and informational dimensions, financial dimension has a significant impact, with a doubling of the financial globalization index associated with a 15 percentage points increase in deforestation rates. However, institutional quality, pro-climate legislation, and environmental awareness can mitigate these effects. The paper also underlines the potential of international agreements, such as the Paris Agreement, in reducing deforestation linked to financial globalization. International capital inflows, especially in sectors such as infrastructure, agriculture, forestry, and mining, are identified as the main transmission channel. • Financial globalization is the most impactful aspect of globalization on the environment. • Doubling financial globalization increases tropical deforestation by 15 percentage points. • Capital flows fuel deforestation via infrastructure, agriculture, mining, and logging. • Strong institutions and pro-climate laws can reduce financial globalization’s harm.