Navigating the Energy Intensity Landscape: The Role of Financial Development  in Middle-Income Countries

Linda Rosalina; Wisnu Wibowo

doi:10.26905/jbm.v12i1.15826

Authors

Linda Rosalina
Wisnu Wibowo Universitas Airlangga Surabaya https://orcid.org/0009-0000-5402-2035

DOI:

https://doi.org/10.26905/jbm.v12i1.15826

Keywords:

Energy Intensity, Financial Development, GMM system, MICs

Abstract

Purpose: This study empirically examines the dynamic impact of financial development on energy intensity in 71 middle-income countries (MICs) from 1990 to 2021. MICs, significant contributors to global population and output, face escalating energy demand due to rapid industrialization and urbanization, necessitating a deeper understanding of energy efficiency drivers. The research also controls for trade openness, industrial value added, and economic growth. Methods: Employing the two-step System Generalized Method of Moments (System GMM) dynamic panel data methodology, this study effectively addresses potential issues of unobserved heterogeneity and endogeneity, ensuring robust and reliable findings. Results: The findings reveal that financial development significantly reduces energy intensity in both the short and long run. Economic growth also contributes to a decline in energy intensity. Conversely, trade openness and industrial value-added tend to increase energy intensity. Implications: These results underscore the critical importance of strengthening financial systems and market infrastructure. Such development is crucial for providing sufficient and stable financing for clean energy and energy efficiency projects, supported by targeted financial incentive policies. These measures can significantly accelerate MICs' transition to cleaner, more efficient energy patterns, thereby fostering sustainable development.

Downloads

Download data is not yet available.

References

Adom, Philip Kofi, Appiah, Michael Owusu, & Agradi, Mawunyo Prosper. (2020). Does financial development lower energy intensity? Frontiers in Energy, 14(3), 620–634. Retrieved from https://doi.org/10.1007/s11708-019-0619-x%0ARESEARCH ARTICLE Philip

Arellano, Manuel, & Bond, Stephen. (1991). Some tests of specification for panel data: Monte carlo evidence and an employment equations. The Review of Economic Studies, 58(2), 277–297. https://doi.org/https://doi.org/10.2307/2297968

Assi, Ala Fathi, Isiksal, Aliya Zhakanova, & Tursoy, Turgut. (2020). Highlighting the connection between financial development and consumption of energy in countries with the highest economic freedom. Energy Policy, 147, 111897. https://doi.org/10.1016/j.enpol.2020.111897

Blundell, Richard, & Bond, Stephen. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115–143. Retrieved from https://doi.org/10.1016/S0304-4076(98)00009-8

Canh, Nguyen Phuc, Thanh, Su Dinh, & Nasir, Muhammad Ali. (2020). Nexus between financial development & energy intensity: Two sides of a coin? Journal of Environmental Management, 270, 110902. https://doi.org/10.1016/j.jenvman.2020.110902

Chen, Zhongfei, Huang, Wanjing, & Zheng, Xian. (2019). The decline in energy intensity: Does financial development matter ? Energy Policy, 134, 110945. https://doi.org/10.1016/j.enpol.2019.110945

Donou-adonsou, Ficawoyi, Basnet, Hem, & Mathey, Samuel. (2025). Energy poverty and financial development: Evidence from developing countries. Energy Economics, 147, 108563. https://doi.org/10.1016/j.eneco.2025.108563

EIA. (2023). Statistical Review of World Energy (2024). Retrieved June 16, 2025, from Project Database website: https://ourworldindata.org/grapher/energy-intensity

Emir, Fırat. (2022). Do financial development and industrialization intensify energy consumption in Turkey ? Environmental Science and Pollution Research, 29, 44558–44572. https://doi.org/10.1007/s11356-022-19003-6

Engell, Sebastian, Beisheim, Benedikt, Rahimi-adli, Keivan, & Kr, Stefan. (2019). Energy performance analysis of continuous processes using surrogate models. Energy, 183, 776–787. https://doi.org/10.1016/j.energy.2019.05.176

Feng, Chao, Liu, Yu qi, & Yang, Jun. (2024). How does financial development affect global energy security? A functional data analysis. Emerging Markets Finance and Trade, 60(7), 1484–1497. https://doi.org/10.1080/1540496X.2023.2278650

Fukase, Emiko. (2010). Revisiting linkages between openness, education and economic growth: System GMM approach. Journal of Economic Integration, 25(1), 194–223. Retrieved from https://www.e-jei.org/upload/P2MG8X2J30G38157.pdf

Hossfeld, Tobias, Member, Senior, Wunderer, Stefan, Loh, Frank, & Schien, Daniel. (2024). Analysis of energy intensity and generic energy efficiency metrics in communication networks : limits, practical applications , and case studies. IEEE Access, 12(August), 105527–105549. https://doi.org/10.1109/ACCESS.2024.3435716

Hussein, Tanvir Mahmoud, Olanipekun, Dayo Benedict, Bassey, Jude U., & Goparaju, Anumolu. (2025). Technology Creation, International Trade and Economic Development in Africa. In Studies in Systems, Decision and Control (pp. 43–55). Retrieved from 10.1007/978-3-031-71318-7_5

IMF. (2005). Assessing Financial Structure and Development. In Financial Sector Assesment: A Handbook (pp. 69–99). Retrieved from https://www.imf.org/external/pubs/ft/fsa/eng/pdf/ch04.pdf

Jafary, Faeze, Ashani, Ali Nazemi, & Afsharirad, Majid. (2024). Exploring the impact of financial development on energy intensity in a global study: Do levels of innovation and technology matter ? Heliyon, 10(21), e39331. https://doi.org/10.1016/j.heliyon.2024.e39331

Ma, Xiaoxin, & Fu, Qiang. (2020). The influence of financial development on energy consumption: Worldwide evidence. International Journal of Environmental Research and Public Health, 17(4), 1428. Retrieved from https://doi.org/10.3390/ijerph17041428

Ma, Yu, Zhao, Yingying, Jia, Rong, Wang, Wenxuan, & Zhang, Bo. (2022). Impact of financial development on the energy intensity of developing countries. Health Econ, 8. https://doi.org/10.1016/j.heliyon.2022.e09904

Mohamed, Maha, Mohamed, Alsebai, Liu, Pingfeng, & Nie, Guihua. (2022). Causality between technological innovation and economic growth: Evidence from the economies of developing countries. Sustainability, 14(6), 1–39. Retrieved from https://doi.org/10.3390/su14063586

Mollaahmetoğlu, Ebubekir, & Akçalı, Burçay Yaşar. (2019). The missing-link between financial development and economic growth: Financial innovation. Procedia Computer Science, 158, 696–704. https://doi.org/10.1016/j.procs.2019.09.105

Neal, Timothy. (2014). Panel cointegration analysis with xtpedroni. The Stata Journal, 14(3), 684–692. https://doi.org/10.1177/1536867X1401400312

Patil, Vivek H., & Franken, Frederick H. (2022). Correction to: Visualization of statistically significant correlation coefficients from a correlation matrix : a call for a change in practice. Journal of Marketing Analytics, 10(1), 102. https://doi.org/10.1057/s41270-021-00127-6

Petrova, Yana. (2020). On cointegration between the insurance market and economic activity. Empirical Economics, 59(3), 1127–1138. https://doi.org/10.1007/s00181-019-01669-6

Roodman, David. (2009). How to do xtabond2 : An introduction to difference and system GMM in Stata. The Stata Journal, (1), 86–136.

Sadorsky, Perry. (2010). The impact of financial development on energy consumption in emerging economies. Energy Policy, 38(5), 2528–2535. https://doi.org/10.1016/j.enpol.2009.12.048

Sim, Khang Yi, & Sek, Siok Kun. (2024). Does economic development affect energy intensity level and vice versa? A comparison of nonstationary panel models with nonlinearity. 29th National Symposium on Mathematical Sciences, SKSM 2022. Retrieved from 10.1063/5.0171914

Svirydzenka, Katsiaryna. (2016). Introducing a new broad-based index of financial development (No. 16/5). Retrieved from https://doi.org/10.5089/9781513583709.001

The World Bank. (2024). GDP (current US$) - Middle income, World. Retrieved June 16, 2025, from Data World Bank website: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2023&locations=XP-1W&start=1960&view=chart

Uddin, Kamal, Pan, Xiongfeng, Saima, Umme, & Zhang, Chengming. (2022). In fl uence of fi nancial development on energy intensity subject to technological innovation: Evidence from panel threshold regression. Energy, 239, 122337. https://doi.org/10.1016/j.energy.2021.122337

UNSDG. (2024). UN Deputy Secretary-General | Message at the Middle Income Countries Conference on “Solutions to Address Development Challenges of a Middle Income Country in a Changing World.” Retrieved June 16, 2025, from Announcement website: https://unsdg.un.org/latest/announcements/un-deputy-secretary-general-message-middle-income-countries-conference#:~:text=Middle-income countries represent close,not disappear with income level.

Wen, Jun, Hong, Liu, Khalid, Samia, Mahmood, Hamid, & Zakaria, Muhammad. (2023). Nexus between renewable energy consumption, foreign capital flows, and financial development: New evidence using CUP-FM and CUP-BC advanced methods. Structural Change and Economic Dynamics, 67, 82–88. https://doi.org/10.1016/j.strueco.2023.07.001

Yakubu, Ibrahim Nandom, Kapusuzoglu, Ayhan, & Ceylan, Nildag Basak. (2024). Navigating the energy transition: How R&D investment and governance quality drive clean energy in the MENA region. In Contributions to Management Science (pp. 159–171). https://doi.org/10.1007/978-3-031-51532-3_13

Yay, Meral. (2022). Relationship between right atrial pressure and the model for end-stage liver disease (MELD) score in patients with advanced heart failure: Correlation analysis and ROC curve method. Turkish Journal of Thoracic and Cardiovascular Surgery, 30(1), 8–10. https://doi.org/10.5606/tgkdc.dergisi.2022.40073

Yeo, Yeongjun, & Lee, Jeong dong. (2020). Technology in society revitalizing the race between technology and education: Investigating the growth strategy for the knowledge-based economy based on a CGE analysis. Technology in Society, 62(101295). https://doi.org/10.1016/j.techsoc.2020.101295