Digital Financial Inclusion, Financial Freedom and Sustainable Economic Development: Role of Governance

Abstract

This study examined the impact of digital financial inclusion and financial freedom on sustainable economic development and the moderating role of governance. Data for 58 developing countries from 2000 to 2022 was utilized. This research constructed indices for digital financial inclusion and governance using principal component analysis (PCA). Ordinary Least Square (OLS) regression, Panel regression, and Two-Stage Least Square (2SLS) techniques were employed with robust error correction. Results revealed that both digital financial inclusion and financial freedom have a statistically significant and positive relationship with sustainable economic development. Furthermore, governance plays a significant moderating role in strengthening the positive effect of digital financial inclusion and financial freedom on economic development. The empirical findings suggest that promoting financial inclusion and financial freedom, alongside good governance, can be powerful levers for achieving sustainable development in developing countries. While limitations exist, such as data availability and potential endogeneity concerns, this study provides valuable insights for policymakers seeking to harness these factors for inclusive and sustainable growth.