How does institutional quality affect the finance-energy-growth nexus? The case of low- and low-middle-income countries

Energy is critical for the sustainable development of countries and communities across the globe. However, using fossil fuels as a source of energy to power economic development has adverse repercussions on the environment. In this study, we explore the energy-economic growth nexus in LLMI countries, controlling for institutional quality and financial sector development. It is postulated that good institutions of governance can optimize the energy mix between fossil fuels and renewable energy. Conversely, sound financial sectors may foster the development of new financial instruments to ensure that a smooth energy transition plan is in place for sustainable economic development. These strategies should include the creation of new environmentally friendly jobs and “green” industries which are expected to contribute to economic growth. This study investigates the dynamics between four variables (energy, institutional quality, financial development and economic growth) in developing countries. More specifically, we use a panel vector auto-regressive model to ascertain the short-run and long-run dynamics between these variables in LLMI countries for the period ranging from 2005 to 2020. Based on the empirical findings, the study suggests that co-development policies can enable the LLMI countries to attain sustainable economic growth trajectories.