A step toward inclusive green growth: can digital finance be the main engine?

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Inclusive green growth (IGG) has become a worldwide consensus to achieve the target of sustainable development goals. Although the prominent role of digital finance (DF) against the pandemic has drawn considerable attention from policymakers, its plausible effect on IGG and underlying mechanisms have not been distinctly explored in academia. The aim of the study is to explore the causal effect of DF on IGG based on prefecture city-level data from 2011 to 2019 in China. To this end, we employed the non-radial direction distance function approach within the global production technology to evaluate the aggregate IGG performance and its three sub-dimensions. The empirical results demonstrate that DF exerts a significant promotional effect on urban IGG. This finding continues to survive in an extensive set of robustness checks using an alternative dependent variable, model specifications, instrumental variable, and difference-in-difference approaches to address the endogeneity concerns. Meanwhile, sub-dimensional regressions show that this positive effect is driven predominantly by the scale economy of DF, while the depth of usage and digitalization playing a minor role. Moreover, we uncover that DF enhances IGG by leveraging greater marginal product of labor rather than capital, improving environmental externalities, increasing fuller employment, and reducing rural?urban income inequality. However, we also reveal the dark side of DF on imbalanced regional development. The promotional effect of DF on IGG is only prominent for cities with better inherent comparative advantages, and we are thus likely to see a widening digital divide resulting from the ?Matthew effect? on regional disparity without timely policy interventions.

» Publication Date: 10/08/2023

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