A Preliminary Study On The Nexus Between Financial Inclusion And Economic Growth In E7 Economies

This study aims to examine the role of financial inclusion in effecting economic growth,with composite risk index,government expenditures,and trade openness as control variables,of Emerging Seven(E7)countries over the period of 2004 to 2019.Financial inclusion can be defined as access to suitable financial services like insurance,credit,and deposit that have been recognized as important drivers of economic growth.Theoretically,financial inclusion can lead to GDP growth in several ways.First,low and sensible costs of access to credit reduce the weakness of the poor by improving their living standard.The reason is as follows.Low-cost credit is beneficial to small-income and feeble groups.With low-cost credit available,these groups can start to plan their production activities,which leads to a rise in services and production.As a result,such production and service activities increase national income,thereby contributing to macro-level growth.This also leads to the enhancement of living standards of the weak groups by raising their level of income.In other words,financial inclusion leads to a decrease in the level of poverty,thereby contributing to economic growth.Second,worldwide access to insurance goods and bank deposit enables people and companies to raise funds easily in the financial marketplace,which,in turn,induces people to invest their money in financial system.And the financial market is well capable of distributing these funds to long-run investment plans in the economy.Hence,the financial market reduces liquidity risk for companies by alleviating their shortage of funds through external financing,which will further expand their investment.This process also generates more production and employment,which leads to a rise in income of the poor.Third,the relationship between financial inclusion and economic growth can also be viewed from the perspective of financial intermediaries that reduce the negative impact of information asymmetry,thereby facilitating transactions and promoting economic growth.It should be pointed out that it is difficult to determine the direction of causality between economic growth and financial inclusion as they might have a mutually-influencing relationship.On the one hand,financial inclusion may influence economic growth positively because it fosters easy access of firms to financial services which may not be readily accessible otherwise,thereby helping them improve their financing and eventually enhancing economic growth.Financial inclusion is beneficial to economic growth in sectors which depends on external financing.As a result,high-growth economies have a higher degree of financial inclusion than their low-growth counterparts.This means that financial inclusion influences economic growth positively through minimizing firms’ financial difficulties.In a good financial services system,the poor or needy have the same opportunity for investment in their physical property and education,which reduces income inequality and increases economic growth.In a similar vein,easy access of households and corporations to banking services,together with the rise of women users of these services,has a strong positive impact on economic growth.In addition,financial inclusion enhances economic growth by value formation of small businesses,with continuous spillover effects on human development indicators such as declines in poverty,education,health,and inequality.On the other hand,financial inclusion can also be influenced by the growth of an economy,and high economic growth frequently leads to improved financial inclusion.The extant research results indicate that the level of financial inclusion is directly linked to human development,and is significantly associated with socio-economic and infrastructure indicators such as urbanization,income,inequality,physical infrastructure,and literacy.And apparently these indicators are all influenced by economic growth.This study is worth conducting because the results would be beneficial for many stakeholders.First,identifying the nexus between financial inclusion and economic growth is of great theoretical and practical importance for researchers,academics,policy makers and regulators in E7 economies.Second,this research would benefit financial institutions by assisting them in identifying factors that will increase their market share and financial efficiency.Managers who understand the financial inclusion matrix would be better able to determine what policies they need to implement to endorse financial inclusion and grow their market share in E7 economies.Third,improving financial inclusion to better channel the inflow of remittance to investment can help economies to overcome financial risk,thereby promoting economic growth in these countries.Last but not least,financial inclusion is important for poverty reduction.Increased access to finance by poor households and micro-enterprises would open up income-generating opportunities and self-reliance for a large number of people,positively impacting a country’s economic growth.The E7 economies are selected as subject of study based on the following reasons:First,in recent years the E7 economies have achieved significant growth performance and have,in fact,they have outperformed many other economies in terms of growth.Second,these seven countries are among the top 20 economies of the world in terms of their respective aggregate GDP and,as a result,keep their economic dominance in the developing world.They are the top remittances receiving countries in the world,with three of the them being the top three remittances recipients in the world in 2018--remittance of India at US$78.6 billion,that of China at US$67.4 billion,and that of Mexico at US$35.7 billion.To channel the remittances to economic development,a well-developed financial system is a pre-requisite.It is therefore clear that,judged by their high-performing economies,E7 countries’ financial systems,including financial inclusion,should also be strong.Hence,it is important to use the E7 economies as subjects of study to investigate the relationship between financial inclusion and GDP growth.Third,these economies are connected through globalization,especially in the forms of international trade engagements and FDI flows among these economies.Thus,a particular macroeconomic shock can be expected to impact each of the E7 economies in a similar manner.Of course,there are also sufficient variations among the E7 economies which would make possible the statistical analysis of their economic data.The empirical part of the study is as follows.This study uses panel data from E7 economies in 2004-2019 to test the short-run and long-run links amongst economic growth,financial inclusion,composite risk index,trade openness,and government expenditures.The Panel unit root test is used in this study to determine if the series are stationary or not.To check the cointegration connection between variables,the Kao Residual Panel Cointegration Test and the Johansen Fisher Panel Cointegration Test are used.The error corrections model(ECM)is used to investigate the long-term and short-term relationships between specified variables.To test robustness,the cross-sectionally augmented autoregressive distributed lags(CS-ARDL)method is used.The descriptive analysis part of the study shows the mean levels of financial inclusion and economic growth in E7 countries.Further,it also depicts the maximum and minimum levels of financial inclusion and economic growth.Kurtosis and Skewness indicate that our data is normally distributed.For the five variables,FI(financial inclusion),EG(economic growth),TO(trade openness),CRI(comprehensive risk index),and GE(Government expenditure),five techniques of panel unit root tests are used.With all control variables included,the Levin Lin and Chu test findings demonstrate that FI and EG are at the level of significance for rejecting the null hypothesis of unit root.With all control variables included,the Breitung test results demonstrate that FI and EG are at the level of significance for rejecting the null hypothesis of unit root.The results of the Im Pesaran and Shin test reveal that neither FI nor EG have unit roots for accepting the null hypothesis when all control variables are included.With all control variables included,the results of both ADF and PP fisher Chi squaretests reveal that FI and EG are at the level of significance for rejecting the null hypothesis.With all control variables included,it should be concluded that both FI and EG are significant enough to reject the null hypothesis.In order to find short-term correlations,we have applied error correction mechanism(ECM).The results obtained from ECM show that there exist conclusive association among financial inclusion and economic growth in the context of E7 economies.Specifically,a one unit increase in financial inclusion leads to a 0.412 unit rise in economic growth.Furthermore,ECM(-1)shows the adjustment speed towards long run equilibrium,with its values falling between 1 and-1.In this study,the ECM(-1)value is negative and significant,showing convergence towards equilibrium.And almost 21% of adjustment takes place every year towards equilibrium.Similarly,F-stats values indicate that there is no autocorrelation in our model,and that our model as a whole is the best fit.The results of CS-ARDL method indicate that there is a significant long-run association amid economic growth and financial inclusion,composite risk index,trade openness,and government expenditure,respectively.It should especially be noted that the interaction term FI*DUM(financial inclusion*financial crisis)has a significant but negative coefficient.In addition,robustness is checked by using industrial production(IP)as a proxy for economic growth,as well as using financial development(FD)as a proxy for financial inclusion.Both tests confirm the robustness of the model.Moreover,by dividing our sample into subsamples based on GDP per capita,a heterogeneity analysis is conducted.The results show a positive and significant link between financial inclusion and economic growth in both the high GDP per capita group and its low GDP per capita counterpart,indicating that the link between financial inclusion and economic growth remains significant regardless of level of economic development.In last we have employed Dumitrescu Hurlin(DH)granger causality test to check the causal relationship in variables,and the results indicate changes in financial inclusion,trade openness,government expenditures and composite risk granger cause economic growth in E7 economies.Overall,the results of this study indicate that economic growth is significantly associated with financial inclusion in emerging economies,and to a larger extent,in developing economies in general.The implications for national governments in these economies are: First,in the E7 economies should address the diffusion and accessibility problems by implementing reform programs,which can enhance access and usage to better financial products and services to a large number of people.Second,policymakers in E7 economies should also exert efforts to increase government expenditures and improve their trade openness by engaging in more free-trade agreements with other economies in the world.These policy measures should also promote economic growth.Finally,the fact that the interaction term FI*DUM(financial inclusion*financial crisis)has a significant but negative coefficient in the regression equation implies that policy makers must bear in mind that during abnormal times such as the global financial crisis,high levels of financial inclusion actually lead to more exposure to the adverse effects of financial calamities.Therefore,national governments should have contingency plans in place which will,to some extent,shield people from such adverse effects of a financial crisis or other financial calamities.