Structure of Economy, Institutional Quality, and Growth Inclusiveness: An Empirical Analysis

Abstract

This study examines how the economic structure, distinguishing between knowledge-based and resource-based systems, affects financial growth inclusiveness, while also accounting for the moderating role of institutional quality. Despite increasing global emphasis on financial inclusion as a tool for sustainable development, there is limited empirical evidence on how the structural composition of developing economies influences inclusive financial growth, particularly under different levels of institutional quality. It is analyzed using panel data of 78 developing countries and using the two-step System Generalized Method of Moments (System GMM) of estimation. The findings indicate that economies oriented toward knowledge and innovation are more likely to enhance financial growth and inclusiveness. Conversely, resource-dependent economies are more likely to suffer negative impacts, indicating that the high dependency on natural resources will limit the inclusive financial growth. In addition, even though when institutional quality is stronger, financial inclusion tends to be promoted, a resource-based economic structure negatively affects it, though not entirely. On the whole, the findings indicate that facilitating activities of innovation and diversification of the economy are important in attaining wider and more inclusive financial growth.