The Effect of Digital Financial Inclusion on Inclusive Growth and Poverty in Emerging and Developing Economies: A System-Generalized Method of Moments Model

Abstract

This study investigates the effect of digital financial inclusion on both inclusive growth and poverty in Emerging and Developing Economies (EMDEs). While previous research has examined the relationship between digital financial inclusion and inclusive growth or poverty, there is a notable gap in the literature regarding the indirect effect of digital financial inclusion on poverty through inclusive growth. Additionally, many existing studies have focused on specific countries, leaving a need for a cross-sectional analysis across various EMDEs, particularly in under-researched regions such as Central Africa, Southern Africa, West Africa, Oceania, and South-Eastern Europe. To address these gaps, this research employs panel data and the System-Generalized Method of Moments (GMM) as the main estimation technique, which provides robust and efficient estimates while addressing potential endogeneity. The study constructs a new digital financial inclusion index using the Principal Component Analysis (PCA) approach to enable consistent cross-country comparisons. The findings reveal that digital financial inclusion has a positive and significant effect on inclusive growth, indicating that as digital financial inclusion increases, inclusive growth increases as well. The results also demonstrate that inclusive growth has a negative and significant effect on poverty, suggesting that equitable economic expansion is a key driver of poverty reduction. These findings provide policymakers and governments in EMDEs with valuable insights, helping them prioritize investments and strategies that leverage digital financial inclusion to foster inclusive growth and alleviate poverty.