Investigating the Effects of Financial Development and Inflation on the Ecological Footprint in Five Selected Leading African Economies

Abstract In recent times, global warming has received greater attention from economies as it could greatly affect the socioeconomic aspect of economies. Considering that corruption is a problem that can promote the rate of ecological damage in a country, the efficient distribution of domestic funds to investors utilizing energy-saving equipment can lessen the impact of pollution. Yet, owing to the high level of corruption in the selected African economies (Nigeria, South Africa, Egypt, Algeria, and Morocco), domestic financing may not be available to such prospective investors. Therefore, inspired by the growing threats to environmental quality, this study examines the mitigating effects of financial development (FD) and corruption control (CC) on the ecological footprint (EF) of these leading African economies. The research aims to provide empirical evidence to guide policymakers in formulating strategies that balance economic progress, environmental preservation, and resource utilization. We used the dynamic seemingly unrelated regression (DSUR), cross-sectional autoregressive distributive lag, and the Dumitrescu and Hurlin panel causality test using panel data from 1996 to 2021. The empirical findings surprisingly unveiled that financial development deteriorates environmental quality (a positive relationship between FD and EF), and the relationship between corruption control and ecological footprint is more complex when it comes to correlating it with ecological footprints. In other scenarios, attempts to curb corruption might overlap with the increasing ecological footprints owing to a low institutional preparedness, ineffective means of enforcement, or misuse of resources in transitional economies. This is an indication that corruption control may not result in immediate environmental gain in the event that there is a lack of a robust structural framework of financial and governmental systems. The results of the estimations also confirm the inverted U-shaped linkage between economic growth and ecological footprint in the sampled countries. In addition, financial development stimulates environmental sustainability through the interacting role of inflation through financial efficiency and monitoring mechanisms (negative relationship between the interaction term FD*INF and EF). Meanwhile, corruption control reduces the harmful ecological effect of financial development through indirect effects (negative relationship between the interaction term FD*CC and EF). The results of the causality test show that ecological footprint and corruption control, as well as economic growth, share a bidirectional causal relationship. Unidirectional causality is found from inflation to ecological footprint. Such a study is relevant to the body of literature on environmental economics because it presents novel information about the relationship between the quality of institutions and financial systems in the context of ecological footprint discussions in developing economies. In practice, the research is relevant to policymakers who enforce institutional relaxation, effective monitoring systems, and corruption control measures to achieve the twin goals of financial development and a sustainable environment.