Broadband penetration, financial development, and economic growth nexus: evidence from the Arab League countries

ABSTRACT

This paper examines the mutual relationship between broadband penetration, financial development, and economic growth in the 22 Arab League countries for the period between 2001 and 2013. Financial development (represented by broad money supply, claims on the private sector, domestic credit to the private sector, domestic credit provided by the banking sector, market capitalization, turnover ratio, and traded stocks) is assessed both individually, and by a composite index. Our results reveal that there is a long-run equilibrium relationship between broadband penetration, financial development, and economic growth. Additionally, we use a panel vector autoregression model to reveal the nature of Granger causality between the covariates. The most important insight of this study is the presence of bidirectional causality from economic growth to broadband penetration in the long run. In addition, we find that financial development together with broadband penetration Granger-cause economic growth in the long run.

KEYWORDS:

• Broadband penetration
• financial development
• economic growth
• Arab League countries

JEL CLASSIFICATION:

• G10
• O16
• O53

Acknowledgement

The authors acknowledge the useful comments of two exceptionally helpful reviewers on an earlier draft of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Financial development refers to a process that marks improvements in the quantity, quality, and efficiency of financial intermediary services (Chaiechi 2012). It covers a wide range of factors and includes both banking sector development and stock market development (see, for instance, Zaman et al. 2012).

2. Economic growth refers to the per capita growth of the gross domestic product of individual countries.

3. Broadband penetration is one of the non-monetary variables usually used in information and communication technology (ICT) development studies, considering the casual relationship between ICT development and economic growth (see, for instance, Ishida 2015).

4. One exception is a study by Arvin and Pradhan (2014), which looks at the direction of causality between economic growth and broadband penetration. However, their study covers the G-20 countries instead. Moreover, the focus of their study is on the link between broadband penetration, economic growth, the degree of urbanization, and foreign direct investment.

5. The relationship between broadband penetration and financial development is not available in the literature and this is one of the major contributions of this study.

6. AL is a regional organization of 22 Arab countries in and around North Africa, the Horn of Africa, and Southwest Asia.

7. The 22 AL countries included in the panel are Algeria, Bahrain, Comoros, Djibouti, Egypt, Eritrea, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, Tunisia, the United Arab Emirates, and Yemen. Additionally, the regional organization has had three observer countries: Brazil (in 2003), Venezuela (in 2006), and India (in 2007). However, these three observer countries are not included in our empirical investigation.

8. The choice of measurement for broadband penetration is guided by the literature (see, for example, Bojnec and Fertő 2012) and data availability. Holt and Jamison (2009) offer a discussion of some of the challenges of precisely analysing the impact of broadband on economic development in the U.S. It is likely that some of these challenges also exist with our data and analysis.

9. This follows given that our variables are in logarithmic forms.

10. A detailed description of the construction of this index is available in Pradhan et al. (2014a).

11. The developing countries within the G-20 are a reasonable comparator group to the Arab League countries. Arvin and Pradhan (2014) also present results with respect to developed countries within the G-20 (see Table 1).

Additional information

Notes on contributors

Rudra P. Pradhan

Rudra P. Pradhan is a SAP Fellow and an Associate Professor at Indian Institute of Technology, Kharagpur, India, where he has been associated with Vinod Gupta School of Management and RCG School of Infrastructure Design and Management. Pradhan is affiliated with various professional journals like Telecommunications Policy, Cities, Empirica, Neural Computing and Applications, and Review of Economics and Finance. He has been a visiting scholar to University of Pretoria, Republic of South Africa and a visiting professor to Asian Institute of Technology, Thailand.

Mak B. Arvin

Mak B. Arvin is a Full Professor of Economics at Trent University, Peterborough, Ontario, Canada, where he has been a faculty member for the past 30 years. Arvin’s research has resulted in over 150 publications in journals, edited volumes, and books. He has served on the editorial board of over a dozen professional journals and is the Editor-in-Chief of the International Journal of Happiness and Development. Arvin has been a visiting professor to Boston College and a consultant to the IFO Institute for Economic Research, Germany. His latest book is the Handbook on the Economics of Foreign Aid published in 2015 (with Byron Lew).

Sahar Bahmani

Sahar Bahmani is an Associate Professor at Department of Economics, University of Wisconsin at Parkside, Kenosha, Wisconsin 53144, USA. Her area of interest includes ICT infrastructure and technology management. She has published extensively in monetary economics and was named a Wisconsin Teaching Fellow for the 2013–2014 academic year.

Sara E. Bennett

Sara E. Bennett is an Assistant Professor of Finance in the School of Business and Economics at Lynchburg College in Lynchburg, VA, USA. Her areas of interest include macroeconomics, financial development, ICT infrastructure, corporate financial management, and financial derivatives. She is the author of several papers and reviews in refereed journals in the area of finance.