Environmental Externalities of Digital Financial Inclusion: a Green Growth perspective

Abstract Transitioning to a resource-efficient, equitable and sustainable economy is one of the biggest goals in the twenty-first century, for developing and developed nations alike. For developing economies, however, aligning their economic growth trajectories with globally agreed-upon targets to reduce climate change and pollution is often debated as an unfair challenge. While earlier literature showed that financial inclusion, coupled with the right conditions in terms of governance and internationalization of an economy, is a crucial enabling factor in the green transitioning of an economy, the development of digital tools having wide-reaching impacts could come to the aid of policymakers. This research looks at the role ‘digital’ financial inclusion (DFI) plays in the green growth of a selected set of middle and upper-middle income countries, while also looking at the dynamics of the impact of globalization. Using the Pooled Mean Group method of ARDL, it was found that DFI does have a positive impact on a country’s green growth. While globalization seems to positively impact green growth in the short run, for our set of economies, globalization led to poorer green growth in the long run. We also discover a feedback effect in the form of bidirectional causality between green growth and digital financial inclusion, and green growth and globalization respectively. Moreover, education also aids the process of green growth of an economy, thus potentially adding a tool in the toolbox of the governance machinery in developing economies as they aim to achieve the dual goals of economic growth and sustainable development.