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Do Financial Development and Trade Liberalization Influence Environmental Quality in Indonesia? Evidence-based on ARDL Model

Author

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  • Abdul Rahim Ridzuan

    (Faculty of Business and Management, Universiti Teknologi MARA, Malaysia; Faculty of Economics and Business, Universitas Airlangga, Indonesia; Institute for Big Data Analytics and Artificial Intelligence, Universiti Teknologi MARA, Malaysia; Centre for Economic Development and Policy, Universiti Malaysia Sabah, Malaysia; Accounting Research Institute, Universiti Teknologi MARA, Malaysia; Institute for Research on Socio Economic Policy, Universiti Teknologi MARA, Malaysia,)

  • Bayu Arie Fianto

    (Faculty of Economics and Business, Universitas Airlangga, Indonesia)

  • Miguel Angel Esquivias

    (Faculty of Economics and Business, Universitas Airlangga, Indonesia)

  • Vikniswari Vija Kumaran

    (Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Malaysia)

  • Mohd Shahidan Shaari

    (Faculty of Applied and Human Science, Universiti Malaysia Perlis, Malaysia,)

  • Aliashim Albani

    (Renewable Energy and Power Research Interest Group (REPRIG), Malaysia; Faculty of Ocean Engineering Technology and Informatics, Universiti Malaysia Terengganu, 21030, Kuala Nerus, Terengganu, Malaysia.)

Abstract

The deepening of financial development and trade liberalization has been taking place in Indonesia since the Association of Southeast Asian Countries (ASEAN) formed in 1967. As a result, Indonesia experienced substantial growth in various economic sectors. However, this growth could also bring a negative externality such as environmental degradation to this country. This research paper investigated how financial development and trade liberalization could affect the country s environmental quality. This research utilized the time series approach, such as the Autoregressive Distributed Lag Model (ARDL), to test the determinant of environmental quality for Indonesia based on selected macroeconomic determinants with special emphasis on financial development and trade liberalization. The study used annual data from 1971 until 2020, which spans about 50 years. Based on the main outcomes, deepening financial development helps to improve environmental quality. However, at the same time, higher trade liberalization has caused greater environmental degradation. Therefore, the policymakers must ensure that more financial institutions in the country support their government in promoting sustainable growth by giving more loans to companies that promote using clean energy for development purposes. Besides, the country should monitor more closely any heavy industries such as chemicals production that operate to meet the demand for the oversea market by ensuring strict rules are enforced to avoid any negative externalities to the environment.

Suggested Citation

  • Abdul Rahim Ridzuan & Bayu Arie Fianto & Miguel Angel Esquivias & Vikniswari Vija Kumaran & Mohd Shahidan Shaari & Aliashim Albani, 2022. "Do Financial Development and Trade Liberalization Influence Environmental Quality in Indonesia? Evidence-based on ARDL Model," International Journal of Energy Economics and Policy, Econjournals, vol. 12(5), pages 342-351, September.
    • Handle: RePEc:eco:journ2:2022-05-40
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    More about this item

    Keywords

    Financial development; trade liberalization; environmental quality; ARDL; urbanization; sustainable energy;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • F18 - International Economics - - Trade - - - Trade and Environment
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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