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In 1957, Solow initiated a significant discussion on the factors influencing economic growth, particularly in East Asian nations, highlighting productivity, labor, and capital as the key drivers This was further explored by Mankiw et al (1992) and Young, emphasizing the crucial role these elements play in fostering economic development.
In 1995, pioneering research explored the origins of economic growth and the international disparities in growth and income The findings highlighted that productivity, labor force, and capital are crucial determinants of economic growth Barro's 1996 study, which examined the economic development of 100 countries from 1960 to 1990, revealed that key economic variables and human capital significantly enhance economic performance Factors such as reduced government consumption, lower inflation and birth rates, increased life expectancy and education, more effective legislation, and improved trade balance are all identified as essential drivers of economic growth.
Research indicates that factors such as population, labor force, inflation, unemployment rate, government spending, life expectancy, and education levels significantly drive economic growth (Bjork, 1999; Mankiw, 2012) Empirical studies highlight the importance of equitable opportunity distribution, natural capital preservation, effective governance, and anti-corruption measures in fostering economic development (Thomas et al., 2000) Human, physical, and natural capital are identified as essential resources for enhancing a nation's growth and welfare Additionally, Kpodar et al (2011) found that information and communication technology (ICT) played a crucial role in boosting economic growth in several African countries from 1988 to 2007 Lastly, the contribution of education to Pakistan's economic development has been evaluated, emphasizing its vital role since 1971.
In 2008, Khattak et al (2012) demonstrated through the least squares (OLS) method that education significantly contributes to economic growth They advocate for public policy to focus on educational improvements, particularly in primary education, and to reduce dropout rates to ensure sustainable economic development Additionally, numerous studies have assessed the impact of financial inclusion on growth while considering other economic factors such as inflation, trade openness, institutions, technology, labor force, and population (Kim et al., 2018; Neaime et al., 2018; Cabeza-Garcia et al., 2019; Emara et al., 2021; Pradhan et al., 2021; Sharma et al., 2022; Karim et al., 2022; Marcelin et al., 2022), with most of these factors showing a positive influence on economic growth.
Numerous studies employing various econometric techniques, including Granger causality analysis, dynamic panel estimation, and generalized moment method (GMM), have explored the relationship between financial inclusion and key economic factors such as poverty reduction, women's empowerment, efficiency, financial stability, and sustainable economic growth While financial inclusion can positively or negatively impact economic growth, it is also influenced by additional factors like education, labor, science and technology, economic openness, and institutional quality.
Financial inclusion remains a critical focus for national development across many countries, despite being a longstanding issue The evolving results and impacts of financial inclusion necessitate ongoing research to adapt to current circumstances This study specifically aims to evaluate the influence of financial inclusion on economic growth globally during the period from 2015 to 2021.
3.1 The concept of financial inclusion
Financial inclusion has gained significant attention since the late 1990s, driven by research on financial exclusion and the challenges faced by socially excluded groups, which are closely linked to poverty.
In 1993, research began to explore the exclusion of certain individuals from the formal financial system in the UK, with Leyshon et al (1995) highlighting the importance of bank accounts as a crucial financial service for low-income individuals By the early 2000s, the concept of financial inclusion gained official recognition and became widely adopted (Babajide et al., 2015).
Leyshon et al (1995) first introduced the concept of financial inclusion, describing it as the process by which specific groups and communities gain access to the formal financial system According to the IMF (2015), financial inclusion encompasses various dimensions, primarily focusing on the access to and utilization of formal financial services, highlighting the importance of these services in enhancing economic participation and stability.
Financial inclusion encompasses a range of services such as transfers, payments, savings, insurance, and credit for both individuals and enterprises It is characterized by the variety and availability of financial products, as well as the user perspective, which highlights the percentage of people utilizing accounts for receiving, transferring, and borrowing money Factors such as income, gender, and the number of businesses accessing bank credit, along with the usage of insurance products, play a crucial role According to the World Bank, financial inclusion ensures that financial services are delivered in a convenient, responsible, and sustainable manner, meeting the needs of all individuals and organizations at a reasonable cost (WB, 2018).
Financial inclusion refers to the accessibility and availability of financial services for all members of society, particularly vulnerable groups It aims to enhance the use of these services, facilitating investment capital circulation, supporting livelihoods, encouraging savings, and ultimately promoting economic growth.
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Financial inclusion refers to the ability of all individuals in the economy to access, utilize, and benefit from the formal financial system This concept highlights the importance of accessibility, availability, and usage of financial services for everyone.
The construction of comprehensive financial indicators is essential for measuring financial inclusion, with the IFI utilizing individual metrics known as component indicators Accessibility is gauged by the number of deposit accounts at microfinance institutions and commercial banks, as well as the number of registered mobile deposits per 1,000 adults The availability of financial services is assessed through the number of registered mobile financial service agents, ATMs, and banking transaction branches per 100,000 adults Finally, financial service usage is evaluated based on the total volume of credit transactions and deposits.
3.2 The role of financial inclusion
Numerous studies have established the significant impact of financial inclusion on socioeconomic development, as evidenced by research from Levine (2005), Beck et al (2008), Johnson et al (2009), Hastak et al (2015), Erlando et al (2020), and Pradhan et al (2021).
Financial inclusion significantly impacts economic growth by enhancing savings and facilitating investments in startups, which ultimately reduces poverty and inequality It also ensures that affordable financial services are available to disadvantaged populations, thereby improving their welfare As emphasized by Beck et al (2008) and supported by Hastak et al (2015), financial inclusion is crucial for developing countries, enabling low-income communities to access essential financial services, which in turn fosters economic development and poverty alleviation A robust financial system, driven by a large number of participants and their savings, can stimulate growth through increased investments in productive sectors.
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The research utilizes the Variance Inflation Factor (VIF) test to assess potential multicollinearity issues, as illustrated in Table 5.3 A VIF index of less than 10 indicates that the correlation between the independent variables is weak, confirming the absence of multicollinearity in the model.
Therefore, the variables included in the model are consistent with the research data.
OSL 7.32 0.136 ATM 7.25 0.137 BORR 6.78 0.147 OSD 5.28 0.189 BAS 4.60 0.217 DEPO 4.45 0.224 GEF 3.87 0.258
Source: Processing results from Stata 13
The study conducted a principal component analysis (PCA) to assign weights to selected input variables for index construction, ultimately determining a new index value based on the first principal component, which best represents the selected variables (Radovanovic et al., 2018) The resulting weights indicate the significance of each input variable in the analysis.
28 correlation between a given input variable and the resulting index Based on that, we will determine which variables are essential in explaining the outcome index.
Component Eigenvalues % of Variance Cumulative %
Source: Processing results from Stata 13
Table 5.4 indicates that PCA effectively generates a proxy for financial inclusion, accounting for 72.86% of the total variance As noted by Hair et al (2006), factors with an eigenvalue of 1 or higher are deemed significant and retained Consequently, the first principal component will be utilized to represent the financial inclusion index in the research model (Radovanovic et al., 2018) The study will focus on the first factor, which is the number of deposit accounts at commercial banks per 1,000 adults, to assess the penetration aspect of financial inclusion's impact on economic growth Additionally, Bartlett and Kaiser-Meyer-Olkin (KMO) tests were conducted to validate the appropriateness of the collected samples and research methods (Table 5.5).
Table 5.5 Suitability's examination of principal component analysis
Chi2 coefficient 3233.380 Bartlett's test Degrees of freedom 21
Source: Processing results from Stata 13
The Bartlett test evaluates whether the correlation matrix in PCA is an identity matrix, with a P-value less than 0.05 indicating that factor analysis is suitable (Hair et al., 2006; Tabachnick et al., 2007) Additionally, the KMO test assesses sampling adequacy, requiring a KMO index greater than 0.5 for factor analysis to be appropriate The results presented in Table 5.5 show a KMO coefficient of 0.855, which falls within the acceptable range of 0.5 to 1, further supporting the use of factor analysis (Hair et al., 2006; Tabachnick et al., 2007).
29 of Bartlett test = 0.000 < 0.05 Therefore, the criteria selected to build the comprehensive financial index are appropriate and can be used in the research.
Table 5.6 Model selection test results
Source: Processing results from Stata 13
The study employs the Breusch-Pagan test and Hausman test to determine the appropriate panel data model The Breusch-Pagan test indicates that the POLS model is unsuitable, as evidenced by a P-value less than 0.05, suggesting the presence of spatial differences among countries Furthermore, the Hausman test reveals a significant correlation between the independent variables and country-specific effects (ci), leading to the conclusion that the Fixed Effects Model (FEM) is more appropriate than the Random Effects Model (REM) for analyzing the impact of financial inclusion and other economic and institutional factors on economic growth Additionally, Wald and Wooldridge tests confirm the presence of autocorrelation and variable variance in the model, with both tests yielding a P-value of 0.0000, necessitating the use of a panel data regression model with robust standard errors The results of the FEM regression model with robust standard errors are presented in Table 5.7.
Table 5.7 Estimated result with robust standard error
Source: Processing results from Stata 13
The findings in Table 5.7 indicate that most variables are statistically significant with a p-value of 0.000, except for the total population (TP) Specifically, the number of accounts at commercial banks (BAS), the labor force (LF), trade openness (OPE), Internet users (IU), and government efficiency (GEF) positively influence economic growth (ECOG) In contrast, government spending (GE), the unemployment rate (TU), and inflation level (INF) negatively affect economic growth.
The significant number of accounts at commercial banks positively influences economic growth, with a 1% rise in financial inclusion leading to a 2.8% increase in economic growth, corroborating previous research by Emara et al (2021), Kim et al (2018), Sharma (2016), and Erlando et al (2020) Financial inclusion is vital for sustainable poverty reduction and economic development, effectively mobilizing social resources (Kim, 2015; Neaime et al., 2018; Dahiya et al., 2020; Sharma et al., 2022) Enhanced access to financial products and services enables individuals and businesses to secure resources for borrowing, thereby fostering savings and investments that boost market cash flows and stimulate economic growth During the Covid-19 pandemic, the collaboration between national governments and financial institutions to expand digital banking and online mobile account services significantly improved access to financial resources.
31 using banking services continues to be consolidated, thereby improving financial inclusion and contributing to economic growth.
Financial openness has a statistically significant and positive impact on economic growth, with a 1% increase in financial openness correlating to an 8.8% rise in economic growth This finding aligns with the research conducted by Feghali et al (2021), Neaime et al (2018), Van et al (2019), Nguyen et al (2020), Amponsah et al (2021), Emara et al (2021), and Sharma et al.
(2022) This result, however, is in contrast to the results of Kim et al (2018), Huang et al.
The Covid-19 pandemic significantly affected the economy, disrupting the import and export of commercial goods due to a broken supply chain However, by actively fostering a favorable business environment and enhancing trade and investment activities, the government has effectively improved the marketing of service needs from abroad, which has played a crucial role in promoting economic growth.
The labor force is statistically significant and positively affects economic growth.
A 1% increase in the labor force can drive economic growth by 2.075%, aligning with findings from Huang et al (2021) and Sharma et al (2022), but contrasting with Cabeza-Garcia et al (2019) Increased employment enhances disposable income, reduces inequality, and boosts financial participation, thereby fostering economic growth Huang et al (2021) emphasize that employment is crucial for both economic and social development, contributing to individual well-being and broader societal goals like social cohesion, poverty reduction, and overall productivity Furthermore, job creation promotes knowledge acquisition, empowers women, and fosters social stability in conflict-affected areas (Sharma et al., 2022).
The significant increase in Internet users positively impacts economic growth, with a 1% rise correlating to a 0.5% growth in the economy While studies by Cabeza-Garcia et al (2019) and Pradhan et al (2021) support this finding, Ozili et al (2023) present contrasting results Ozili (2018) emphasizes that Internet access enhances financial inclusion by facilitating remote banking, digital payments, and mobile money services, ultimately improving individual welfare This technological advancement fosters economic growth and development, indicating that future economic progress will rely less on traditional factors of production.
32 production, such as capital and employment, but also on innovation in economic activity due to technological adoption (Cabeza-García et al., 2019).
Government efficiency plays a crucial role in driving economic growth, with a 1% increase in efficiency correlating to an 11% rise in economic growth This finding aligns with Sharma et al (2022) but contrasts with Marcelin et al (2022) Effective governance, characterized by sound policies, regulatory frameworks, judicial independence, corruption control, and political stability, ensures safe and effective access to comprehensive financial solutions for the populace, thereby fostering growth Furthermore, firms' access to finance is most impactful when supported by robust institutions, particularly through the availability of corporate bank loans for investment financing (Sharma et al., 2022).
Government spending has a statistically significant negative impact on economic growth, with a 1% increase leading to a 0.04% reduction in growth potential This finding aligns with the research of Amponsah et al (2021) but contrasts with the conclusions of Marcelin et al (2022) and Emara et al (2021) Additionally, insights from Sahay et al (2015) and Marcelin et al further emphasize this relationship.
In 2022, the size and sector of government spending significantly impacted economic growth, often negatively Research indicates that increased government expenditure may stem from a larger government presence and spending on non-governmental activities, leading to an unequal distribution of resources This trend became apparent during the pandemic, where there was a heightened demand for investment in sectors like agriculture and manufacturing due to supply chain disruptions, yet resources were predominantly allocated to health and public health initiatives.
A 1% rise in the unemployment rate results in a 2.2% decline in economic growth, a finding consistent with studies by Kim et al (2018), Karim et al (2022), Erlando et al (2020), and Kim (2015) This relationship is largely attributed to the strict social distancing measures during the pandemic, which adversely impacted the labor market and led to higher unemployment rates Consequently, businesses faced challenges in accessing financial support, further hindering economic growth Additionally, as more employees exit their positions, small and medium-sized enterprises experience increased capital intensity, resulting in a heightened demand for loans.
At the same time, strict lending conditions from financial institutions and the availability of funds can also negatively affect the economy (Erlando et al., 2020).