The Interplay of Financial Development, Globalization and Institutional Quality: A Sustainable Approach to long-run Economic Growth

Abstract

This dissertation examines the long-run effects of financial development, globalization, and institutional quality on economic growth within the context of environmental constraints. Using a balanced panel of 115 countries from 1995 to 2019 and employing advanced econometric techniques, including symmetric and asymmetric panel data estimators, quantile regression and accounting for cross-sectional dependence, heterogeneity, non-linearities and endogeneity, this study uncovers this nuanced relationship between economic growth and its determinants. The results show that financial development affect positively economic growth uniformly in the income distribution, while globalization, and political stability also display positive influences although their impacts vary across income levels. The ecological footprint maintains a positive association with growth although in diminishing returns as income rises, indicating that the countries of the sample being on the decreasing branch of the Environmental Kuznets Curve (EKC). Importantly, environmental vulnerability exerts a significant negative effect, especially in higher-income countries. Asymmetric modeling reveals that positive shocks to financial development increase growth moderately, while negative shocks produce disproportionately larger output losses, reflecting a financial “ratchet effect.” Political Stability/Absence of Violence can paradoxically harm long-run economic growth, consistent with “institutional sclerosis” hypothesis where prolonged calm encourages rent-seeking behavior. Conversely, periods of instability and increased environmental vulnerability can boost output through “reconstruction dividend” with reconstruction spending and adaptation investments, while reductions on environmental vulnerability coincide with lower growth as emergency-related stimulus fades. Overall, the findings suggest that sustainable growth requires integrating structural reforms with environmental risk management to balance economic development and ecological resilience.