Chapter development of financial markets make the environment of



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1.1 Background of the

countries have already reached the threshold level of development to capitalize
key development indicators. The mentionable key development indicators are ICT
diffusion, financial development, labor productivity and economic growth for those
economies learning from different literatures. If the developing countries
nurture these development indicators as their former, it will enable them to
flourish the development of their country. So, the purpose of the study is to
investigate the nexus amid ICT diffusion, financial development, labor
productivity and economic growth in developing countries. How they are linked
up with one another, the discussion will clarify these puzzles. First puzzle is
finance-growth nexus.

et al. (2011) said that financial development is an important explanatory
variable that induce economic growth. Since the development of financial
markets make the environment of the economy more efficient of a country
(Levine, 1997). A country with the developed financial system flourishes the
economy more quickly than that with undeveloped financial system (Beck et al.,
2011). Since a country belonging undeveloped financial system cannot extract
the benefits from the technological innovation and thus they gradually deviate
from growth rate of global Production Possibility Frontier (PPF) (Aghion et
al., 2005). On the contrary, the developed financial system helps the marginal
people 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 not
only the economic growth but the alleviation of poverty. The puzzle of
finance-growth nexus is whether for the economic development financial
development is preferable policy to economic growth or economic growth is
preferable policy to financial development or both should get priority
(Odhiambo, 2007). Since the financial sector of a country enables to make
mobilization of savings, redistribute resources from sick to profitable ones,
ensure proper distribution of credit, accumulate capital, enables smooth flow
of goods and services, facilitate trade and so on (Levine, 2005). These all are
the measures of economic growth. So the improvement of financial sector can
enhance economic growth. On the others view, if an economy grows, it will
create demand for financial services and products. And thus more financial
institutions will be established. So automatically economic growth enhances
economic growth (Robinson,1952). Blackburn and Hung (1998) deviated from this
view and said the financial development and economic growth is associated with
each other. Without one, another cannot be flourished. In one way, financial
development fastens economic growth and in another way economic growth deepens
financial development (Blackburn and Hung, 1998). Shan (2005) presented that
although the global financial crisis occurred, there is no impact on the
economic growth in Asian countries. So it is completely different view shows no
relation between them. So what is direction and nature of relationship in
between them creates the puzzle. It has clearly presented in the following

Figure 1.1: Finance-Growth Nexus

of Saving

of Resources in Profitable Sources

Distribution of Credit

of Capital

Flow of Goods and Services




Demand for Financial Services and Products

Greater Segments of People with the Financial System

of More Financial Institutions Due to the Growing Need
















Author’s compilation

            Based on the above direction of
relationship in between financial development and economic growth, Pattrick
(1966) generates four hypotheses which are given below:

a)      Supply-leading

b)      Demand-following

c)      Feedback

d)     Null

hypothesis shows the uni-directional relationship
which flows from the financial development to economic growth. It implies that
financial development is the pre-requirements for economic growth. In this
case, financial development facilitates long-run economic growth by mobilization
of savings, capital accumulation, removing asymmetric information about
investment, smooth flow of goods and services, proper distribution of credit
and so on (King and Levine, 1993).                   

hypothesis is also the uni-directional which was propounded by Robinson
(1952). But it is inverse of the previous hypothesis. Here the direction of
relationship flows from economic growth to financial development. It implies
that if the economy grows, there creates more demand for financial product and
services. The greater segment of the population is attached with the financial
system. So to keep pace with growing demand, there establishes more financial
institutions. To meet the demand, the financial institutions innovates new financial
products in the financial market. Besides if the growth of the economy
accelerates, the financial institutions can get easy access to acquire liquid
money for investment and it reduces the risk of financial institutions. Thus
economic growth leads to financial development. Blackburn and Hung (1998)
propounded Feedback hypothesis is
the bi-directional relationship which shows the complementary relationship in
between them. This implies that in one hand financial development is essential
for economic growth and in another hand economic growth is prerequisite for the
well-developed financial system. Lastly Null
hypothesis shows that there is no relationship in between financial
development and economic growth (Shan, 2005). In the above discussion, finance-growth
nexus is clear based on the four hypotheses which present the direction of
relation between financial development and economic growth.

economists also suggest that financial development is not only associated with
economic growth but associated with ICT diffusion. The improvement of ICT
infrastructure has the positive impact on the financial advancement of a
nation. ICT diffusion grows the connection of people more towards financial
services of a country. More accessibility to ICT communication tools, computer
and software reduces the expense of running the financial institutions and also
diminishes the cost of transaction. The mobile banking, a financial service,
enables the financial institutions to reach their services to people where
there is no branch of them. Intensive use of ICT communication tools makes
smooth flow information and hence enhance financial advancement. So now the
author discusses about the second puzzle, finance-ICT nexus. The following
diagram presents the direction of relationship in between financial development
and ICT diffusion.


Figure 1.2: Finance-ICT Nexus

more people to financial services

the cost of transaction

the cost of running financial institution

financial services

flow of information

access to credit and efficient allocation of credit

of financial transfers

of ICT


use of telephone computer, software

subscription of mobile cellular

subscription of broadband
















Author’s compilation

            In line with finance-growth nexus,
there are also four hypotheses regarding the relationship of finance-ICT. In
case of supply-leading hypothesis,
the direction of relationship flows from financial development to economic
growth. In other words, financial development is the key requirement for ICT
diffusion. If the financial system of one country develops, the financial
institutions of that country feel the need of intensive use of computers, more
use of the internet, more subscription of mobile cellular or broadband,
intensive use of the telephone and thereby it spreads the use of ICT
technology. The opposite direction is called demand-following hypothesis which flows from ICT diffusion to
financial development. This implies that ICT diffusion facilitates financial
development by attaching more people with the financial services, reducing the
cost of running the institutions and transaction, fastening financial transfers,
enabling smooth flow of information about credit and proper allocation of
credit. Then the feedback hypothesis,
a bi-directional relationship, shows that there exists complementary
relationship between them. In one side financial development is pre-condition
for ICT diffusion and in another side ICT diffusion is inevitable for financial
development. And the last one is null
hypothesis which shows there is no relation in between financial
development and ICT diffusion. The above discussed direction of relationship in
between them creates finance-ICT puzzle (Pradhan et al., 2016). Since there
exists association of financial development and economic growth, there has
certainly the linkage of ICT diffusion and economic growth because of
finance-ICT nexus. So the third and new puzzle is ICT-growth nexus. ICT
diffusion can escalate economic growth. At present in the service sector, ICT
tools are hugely used. Since by these tools, the economic agents such as
individuals or firms can easily get information about market, more specifically
consumer wants. Then they can analysis it properly and develop their existing
products and innovate new products. Since they do not need to go market
physically, it reduces their transaction cost. So they get the scope to achieve
economies of scale (Sassi and Goaied, 2012). The following figure presents the
ICT-growth nexus.

            There are also identical four
hypotheses regarding the issue of ICT-Growth nexus. First is supply-leading hypothesis. It implies
that ICT diffusion is pre-requirement of economic growth. The spread of ICT
technology enables people to obtain information easily about new products,
services and markets. The usage of ICT tools not only improve productivity of
labor but also make innovative them. Thus it creates wealth for the economy and
improves the growth of economy (Chakraborty and Nandi, 2011).


1.3: ICT-Growth Nexus




for advanced Technology


innovative capacity

of wealth




ICT Infrastructure








Author’s compilation

                Second one is demand-following hypothesis which flow
the direction of relationship from economic growth to ICT diffusion. If the
level of economic development increases, the socio-economic condition of the
people increases. To keep pace with the social and economic status, there
creates more demand and usage of advanced technology. The government of that
country invests more funds to the development of ICT infrastructure due to
growing demand for ICT tools. Thus economic growth accelerates ICT adoption
(Pradhan et al., 2013). The third one is feedback
hypothesis. On one hand, ICT adoption can enhance economic growth and on
the other hand, economic growth can enhance ICT adoption.There exists causal
relationship between them. This implies that ICT diffusion increases the
productivity and innovative capacity of labor. Thus it creates wealth for the
economy. Again, if the wealth of the economy increases, the government of that
country increases investment in ICT infrastructure as an indicator of economic
growth. Thus the people get easy access to use ICT tools and it improves the
quality 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 and
economic growth (Chakraborty and Nandi, 2011). So the above mentioned direction
of relationship has clarified the nexus between ICT diffusion and growth. So
the partly nexus in between finance-growth; finance-ICT and ICT-growth clear
the nexus amid ICT diffusion, financial development and economic growth.

             The author incorporates the fourth
variable growth of labor productivity which is the indicator of economic
growth. The author includes the labor productivity growth in the
ICT-finance-growth nexus encouraged from the empirical literature by Hofman
(2016). The empirical literature of Hofman is presented in the following

Figure 1.4: Empirical Example of
Hofman et al. (2016)


American Countries

GDP Growth

Lower GDP Growth

of GDP Growth

of Productivity Growth

of ICT Development









Author’s compilation

(2016) in his study incorporates two study areas. One is U.S.A as a developed
nation and others are Latin American Countries as the developing nations. The
study found that there is huge gap in the GDP growth in between developed and
developing nations. The author found the question why there is so much
divergence in the GDP growth. The answer the author found is that there is gap
of the development of ICT infrastructure and usage of ICT tools. In Latin
American countries, the labors were not much touched with ICT tools than their
counterpart. It creates the gap of labor productivity growth. Since the labors
those who intensively use ICT tools are 0.1 percent more productive than those
who are not much touched with ICT tools.


1.2 Justification of
the Study

 So the logic to incorporate growth of labor
productivity in this study is that there is articulate association of growth of
labor productivity with economic growth and ICT diffusion. So from the figure
1.4, the author finds ICT-economic growth-labor productivity growth nexus.
Since financial development is directly related with economic growth and ICT
diffusion, there may be the association of labor productivity growth and
financial development. The author wants to show the nexus amid ICT diffusion,
financial development, labor productivity growth and economic growth.

1.3 Objective of the Study

To find out whether there is
existence of uni-directional or bi-directional relationship amid ICT diffusion,
financial development and economic growth in developing countries

1.4 Empirical

author chalks out the growth of GDP per capita, internet users per 100 people
and depositors in commercial bank per 1,000 people in Bangladesh. The following
figure has been shown that the three variables are increasing over the time
period. The existing literatures support that GDP per capita is a measure of
economic growth, internet users is an influential factor of ICT diffusion and
depositors in commercial bank is a role playing factor in financial
development. Since the three are increasing simultaneously, the author thinks
that there is a relational aspect between them.

Figure 1.5: GDP
per Person Employed, Internet Users and Depositors in Commercial Bank over the
Time Period in Bangladesh

Author’s compilation based on World Bank data (2017)

1.5 Research Gap

studies have been done on partly nexus in between ICT and finance or finance
and growth or ICT and growth or amid ICT, finance and growth together. But
there is no literature where show the nexus amid ICT diffusion, financial
development, labor productivity growth and economic growth although there has a
deep relationship amid them as the author has discussed above. There are few
literatures where the authors of those literatures have dealt with partly nexus
let alone the nexus considering in this study. Another innovation of the study
may be the study area. There is no study on developing countries on this type
of issue. So the purpose of the study is to find out nexus amid ICT diffusion,
financial development, labor productivity growth and economic growth in
developing countries.

1.6 Organization of the Paper

 The paper is organized as follows. Chapter one
describes the background of the research, chapter two presents review of the
literature. Data and methodology are presented in chapter three.

1.7 Limitation of the Study

All required data of the experiment has been closely-knit
from secondary sources, through all sources are dependable and globally
obtained, but it may occur that very slight portion of the data can be affected
or manipulated by the organization which has uploaded the data.