The impact of climate change on conflict: Does financial development matter?

As climate change intensifies, its destabilizing effects are increasingly recognized as a major threat to peace and security, particularly in vulnerable regions like Africa. This is evident from recent studies that show a 38 % increase in conflicts is linked to climate change. This study investigates the underexplored role of financial development (FD) in moderating the relationship between climate change (CC) and conflict, addressing three key dimensions: the direct impact of CC on conflict, the moderating influence of FD on this relationship, and the nonlinear effects within this dynamic. Using panel data from 49 African countries spanning 2005 to 2023, we employ the two-way fixed effect regression, and Method of Moments Quantile Regression (MMQR) model to systematically examine whether and how FD can mitigate the effects of climate change on conflict. MMQR is particularly suited for this analysis as it captures heterogeneity in the relationship across different quantiles. Our results first reveal that climate change significantly contributes to conflict across Africa, with the impact being more pronounced in high-conflict, low-income, and agriculture-dependent countries. Second, both linear and nonlinear models confirm that FD moderates this relationship. Lastly, we uncover notable spatial and income-based heterogeneity in the moderating effect of FD, which is more potent in upper-middle-income, financially developed, and non-agriculture-dependent countries. Our findings highlight the need for both short-term and long-term policy interventions, including the development of climate-resilient financial products such as agricultural insurance and climate-risk loans, the development of sustainable financial systems such as green bonds, investments in sustainable infrastructure, and the integration of climate-smart agricultural practices such as drought-resistant crops and IoT-enabled irrigation systems.