ChapterOneIntroduction 1.
1 Background of theStudyDevelopedcountries have already reached the threshold level of development to capitalizekey development indicators. The mentionable key development indicators are ICTdiffusion, financial development, labor productivity and economic growth for thoseeconomies learning from different literatures. If the developing countriesnurture these development indicators as their former, it will enable them toflourish the development of their country. So, the purpose of the study is toinvestigate the nexus amid ICT diffusion, financial development, laborproductivity and economic growth in developing countries. How they are linkedup with one another, the discussion will clarify these puzzles. First puzzle isfinance-growth nexus.Becket al.
(2011) said that financial development is an important explanatoryvariable that induce economic growth. Since the development of financialmarkets make the environment of the economy more efficient of a country(Levine, 1997). A country with the developed financial system flourishes theeconomy more quickly than that with undeveloped financial system (Beck et al.,2011).
Since a country belonging undeveloped financial system cannot extractthe benefits from the technological innovation and thus they gradually deviatefrom growth rate of global Production Possibility Frontier (PPF) (Aghion etal., 2005). On the contrary, the developed financial system helps the marginalpeople of a country to keep pace with the growing economy (Beck et al., 2011).So it can be prescribed that financial development is the requirements for notonly the economic growth but the alleviation of poverty.
The puzzle offinance-growth nexus is whether for the economic development financialdevelopment is preferable policy to economic growth or economic growth ispreferable policy to financial development or both should get priority(Odhiambo, 2007). Since the financial sector of a country enables to makemobilization of savings, redistribute resources from sick to profitable ones,ensure proper distribution of credit, accumulate capital, enables smooth flowof goods and services, facilitate trade and so on (Levine, 2005). These all arethe measures of economic growth. So the improvement of financial sector canenhance economic growth. On the others view, if an economy grows, it willcreate demand for financial services and products. And thus more financialinstitutions will be established.
So automatically economic growth enhanceseconomic growth (Robinson,1952). Blackburn and Hung (1998) deviated from thisview and said the financial development and economic growth is associated witheach other. Without one, another cannot be flourished. In one way, financialdevelopment fastens economic growth and in another way economic growth deepensfinancial development (Blackburn and Hung, 1998).
Shan (2005) presented thatalthough the global financial crisis occurred, there is no impact on theeconomic growth in Asian countries. So it is completely different view shows norelation between them. So what is direction and nature of relationship inbetween them creates the puzzle. It has clearly presented in the followingdiagram.Figure 1.1: Finance-Growth Nexus Mobilization of Saving Redistribution of Resources in Profitable Sources Proper Distribution of Credit Accumulation of Capital Smooth Flow of Goods and Services Technological Innovation Financial Development Economic Growth Creates Demand for Financial Services and Products Attaches Greater Segments of People with the Financial System Establishment of More Financial Institutions Due to the Growing Need Source:Author’s compilation Based on the above direction ofrelationship in between financial development and economic growth, Pattrick(1966) generates four hypotheses which are given below:a) Supply-leadinghypothesisb) Demand-followinghypothesisc) Feedbackhypothesisd) Nullhypothesis Supply-leadinghypothesis shows the uni-directional relationshipwhich flows from the financial development to economic growth.
It implies thatfinancial development is the pre-requirements for economic growth. In thiscase, financial development facilitates long-run economic growth by mobilizationof savings, capital accumulation, removing asymmetric information aboutinvestment, smooth flow of goods and services, proper distribution of creditand so on (King and Levine, 1993). Demand-followinghypothesis is also the uni-directional which was propounded by Robinson(1952). But it is inverse of the previous hypothesis.
Here the direction ofrelationship flows from economic growth to financial development. It impliesthat if the economy grows, there creates more demand for financial product andservices. The greater segment of the population is attached with the financialsystem. So to keep pace with growing demand, there establishes more financialinstitutions. To meet the demand, the financial institutions innovates new financialproducts in the financial market.
Besides if the growth of the economyaccelerates, the financial institutions can get easy access to acquire liquidmoney for investment and it reduces the risk of financial institutions. Thuseconomic growth leads to financial development. Blackburn and Hung (1998)propounded Feedback hypothesis isthe bi-directional relationship which shows the complementary relationship inbetween them. This implies that in one hand financial development is essentialfor economic growth and in another hand economic growth is prerequisite for thewell-developed financial system.
Lastly Nullhypothesis shows that there is no relationship in between financialdevelopment and economic growth (Shan, 2005). In the above discussion, finance-growthnexus is clear based on the four hypotheses which present the direction ofrelation between financial development and economic growth.Manyeconomists also suggest that financial development is not only associated witheconomic growth but associated with ICT diffusion. The improvement of ICTinfrastructure has the positive impact on the financial advancement of anation. ICT diffusion grows the connection of people more towards financialservices of a country. More accessibility to ICT communication tools, computerand software reduces the expense of running the financial institutions and alsodiminishes the cost of transaction. The mobile banking, a financial service,enables the financial institutions to reach their services to people wherethere is no branch of them. Intensive use of ICT communication tools makessmooth flow information and hence enhance financial advancement.
So now theauthor discusses about the second puzzle, finance-ICT nexus. The followingdiagram presents the direction of relationship in between financial developmentand ICT diffusion. Figure 1.2: Finance-ICT Nexus Attaches more people to financial services Reduces the cost of transaction Reduces the cost of running financial institution Branchless financial services Smooth flow of information Easy access to credit and efficient allocation of credit Easing of financial transfers Development of ICT Financial Development Intensive use of telephone computer, software More subscription of mobile cellular More subscription of broadband Source:Author’s compilation In line with finance-growth nexus,there are also four hypotheses regarding the relationship of finance-ICT.
Incase of supply-leading hypothesis,the direction of relationship flows from financial development to economicgrowth. In other words, financial development is the key requirement for ICTdiffusion. If the financial system of one country develops, the financialinstitutions of that country feel the need of intensive use of computers, moreuse of the internet, more subscription of mobile cellular or broadband,intensive use of the telephone and thereby it spreads the use of ICTtechnology.
The opposite direction is called demand-following hypothesis which flows from ICT diffusion tofinancial development. This implies that ICT diffusion facilitates financialdevelopment by attaching more people with the financial services, reducing thecost of running the institutions and transaction, fastening financial transfers,enabling smooth flow of information about credit and proper allocation ofcredit. Then the feedback hypothesis,a bi-directional relationship, shows that there exists complementaryrelationship between them. In one side financial development is pre-conditionfor ICT diffusion and in another side ICT diffusion is inevitable for financialdevelopment. And the last one is nullhypothesis which shows there is no relation in between financialdevelopment and ICT diffusion. The above discussed direction of relationship inbetween them creates finance-ICT puzzle (Pradhan et al., 2016).
Since thereexists association of financial development and economic growth, there hascertainly the linkage of ICT diffusion and economic growth because offinance-ICT nexus. So the third and new puzzle is ICT-growth nexus. ICTdiffusion can escalate economic growth. At present in the service sector, ICTtools are hugely used. Since by these tools, the economic agents such asindividuals or firms can easily get information about market, more specificallyconsumer wants. Then they can analysis it properly and develop their existingproducts and innovate new products. Since they do not need to go marketphysically, it reduces their transaction cost. So they get the scope to achieveeconomies of scale (Sassi and Goaied, 2012).
The following figure presents theICT-growth nexus. There are also identical fourhypotheses regarding the issue of ICT-Growth nexus. First is supply-leading hypothesis.
It impliesthat ICT diffusion is pre-requirement of economic growth. The spread of ICTtechnology enables people to obtain information easily about new products,services and markets. The usage of ICT tools not only improve productivity oflabor but also make innovative them. Thus it creates wealth for the economy andimproves the growth of economy (Chakraborty and Nandi, 2011). Figure1.
3: ICT-Growth Nexus Information highway ICT diffusion Demand for advanced Technology Economic Growth Improving innovative capacity Creation of wealth Improving productivity Development ICT Infrastructure Source:Author’s compilation Second one is demand-following hypothesis which flowthe direction of relationship from economic growth to ICT diffusion. If thelevel of economic development increases, the socio-economic condition of thepeople increases. To keep pace with the social and economic status, therecreates more demand and usage of advanced technology. The government of thatcountry invests more funds to the development of ICT infrastructure due togrowing demand for ICT tools. Thus economic growth accelerates ICT adoption(Pradhan et al.
, 2013). The third one is feedbackhypothesis. On one hand, ICT adoption can enhance economic growth and onthe other hand, economic growth can enhance ICT adoption.
There exists causalrelationship between them. This implies that ICT diffusion increases theproductivity and innovative capacity of labor. Thus it creates wealth for theeconomy. Again, if the wealth of the economy increases, the government of thatcountry increases investment in ICT infrastructure as an indicator of economicgrowth. Thus the people get easy access to use ICT tools and it improves thequality of ICT tools. Because of the enhancement of the quality of ICT tools,firms may able to get economies of scale.
And last one is null hypothesis which shows no relation between ICT diffusion andeconomic growth (Chakraborty and Nandi, 2011). So the above mentioned directionof relationship has clarified the nexus between ICT diffusion and growth. Sothe partly nexus in between finance-growth; finance-ICT and ICT-growth clearthe nexus amid ICT diffusion, financial development and economic growth. The author incorporates the fourthvariable growth of labor productivity which is the indicator of economicgrowth. The author includes the labor productivity growth in theICT-finance-growth nexus encouraged from the empirical literature by Hofman(2016).
The empirical literature of Hofman is presented in the followingdiagram:Figure 1.4: Empirical Example ofHofman et al. (2016) U.S.
A Latin American Countries Higher GDP Growth Lower GDP Growth Gap of GDP Growth Gap of Productivity Growth Gap of ICT Development Source:Author’s compilationHofman(2016) in his study incorporates two study areas. One is U.S.A as a developednation and others are Latin American Countries as the developing nations. Thestudy found that there is huge gap in the GDP growth in between developed anddeveloping nations. The author found the question why there is so muchdivergence in the GDP growth.
The answer the author found is that there is gapof the development of ICT infrastructure and usage of ICT tools. In LatinAmerican countries, the labors were not much touched with ICT tools than theircounterpart. It creates the gap of labor productivity growth. Since the laborsthose who intensively use ICT tools are 0.
1 percent more productive than thosewho are not much touched with ICT tools. 1.2 Justification ofthe Study So the logic to incorporate growth of laborproductivity in this study is that there is articulate association of growth oflabor productivity with economic growth and ICT diffusion. So from the figure1.4, the author finds ICT-economic growth-labor productivity growth nexus.Since financial development is directly related with economic growth and ICTdiffusion, there may be the association of labor productivity growth andfinancial development. The author wants to show the nexus amid ICT diffusion,financial development, labor productivity growth and economic growth.1.
3 Objective of the StudyTo find out whether there isexistence of uni-directional or bi-directional relationship amid ICT diffusion,financial development and economic growth in developing countries1.4 EmpiricalMotivationTheauthor chalks out the growth of GDP per capita, internet users per 100 peopleand depositors in commercial bank per 1,000 people in Bangladesh. The followingfigure has been shown that the three variables are increasing over the timeperiod. The existing literatures support that GDP per capita is a measure ofeconomic growth, internet users is an influential factor of ICT diffusion anddepositors in commercial bank is a role playing factor in financialdevelopment. Since the three are increasing simultaneously, the author thinksthat there is a relational aspect between them. Figure 1.5: GDPper Person Employed, Internet Users and Depositors in Commercial Bank over theTime Period in Bangladesh Source:Author’s compilation based on World Bank data (2017)1.
5 Research GapSeveralstudies have been done on partly nexus in between ICT and finance or financeand growth or ICT and growth or amid ICT, finance and growth together. Butthere is no literature where show the nexus amid ICT diffusion, financialdevelopment, labor productivity growth and economic growth although there has adeep relationship amid them as the author has discussed above. There are fewliteratures where the authors of those literatures have dealt with partly nexuslet alone the nexus considering in this study. Another innovation of the studymay be the study area. There is no study on developing countries on this typeof issue.
So the purpose of the study is to find out nexus amid ICT diffusion,financial development, labor productivity growth and economic growth indeveloping countries. 1.6 Organization of the Paper The paper is organized as follows.
Chapter onedescribes the background of the research, chapter two presents review of theliterature. Data and methodology are presented in chapter three.1.7 Limitation of the StudyAll required data of the experiment has been closely-knitfrom secondary sources, through all sources are dependable and globallyobtained, but it may occur that very slight portion of the data can be affectedor manipulated by the organization which has uploaded the data.
