Does climate finance foster happiness in African economies? Assessing the direct and indirect pathways

Abstract

In the face of Africa's persistent development and well-being challenges, climate finance emerges as a beacon of hope, promising not only environmental benefits but also potential improvements in quality of life. In this light, the present study set out to examine the effect of climate finance on subjective well-being in Africa using data from 37 African countries between 2012 and 2021. Employing ordinary least squares, the two-step system Generalized Method of Moments, and fixed effects Driscoll and Kraay regressions, the study finds that climate finance positively and significantly affects happiness. This effect remains robust even when considering endogeneity, cross-sectional dependence, alternative measures of climate finance, and sub-regional variations. Furthermore, the analysis of transmission channels validates natural resource rents and political stability as potential indirect pathways through which climate finance enhances well-being. Based on the findings, the study recommends that policymakers prioritize and scale up climate finance initiatives, integrate them with broader development strategies, control inflation, and establish transparent monitoring and evaluation systems to enhance the well-being of the populations.