CBN Journal of Applied Statistics Vol. 14 No.

1 (June 2023) 25-46

Digital Economy, Institutional Quality and Economic Growth in

Selected Countries

Olabode P. Olofin1
This study examines the role of digital economy and institutional quality on economic
growth of Bangladesh, Ethiopia, Kenya, and Nigeria. The study adopts the feasible
generalized least square method with annual panel data from 1985 to 2017. Results
show that digital economy, human capital and knowledge worker, and democratic
accountability promote economic growth, while corruption, socioeconomic condi-
tions, and bureaucratic quality retard economic growth. Furthermore, interaction
of digital economy with corruption promotes growth. However, the interaction of
digital economy with institutional quality retards economic growth, which could be
due to the deteriorating institutional quality and low level of economic digitaliza-
tion in these countries. The study concludes that digital economy and institutional
quality could play positive roles in the quest to becoming emerging markets. The
study suggests more involvement of the countries in digital economy and improved
institutional quality.
Keywords: Digital economy, economic growth, institutional quality.
JEL Classification: D73, D83, E02, O33
DOI: 10.33429/Cjas.14123.2/5

1. Introduction
A major focus of many countries of the world, especially developing countries is
how to grow their economies and join the group of emerging markets, which is, at
least closer to becoming developed. This is because emerging markets are noted for
their peculiar characteristics such as lower-than-average per capita incomes, rapid
growth rate, high volatility, less advanced capital markets and higher-than-average
returns on investment (Broner & Rigobon, 2004; Bilgili et al., 2016; Bekaert &
Harvey, 2014). According to World Economic Forum (2016), 10 countries have
been identified as likely emerging markets of the future by the Business Monitor
International (BMI). These countries are Bangladesh, Egypt, Ethiopia, Indonesia,
1 Departmentof Economics, Obafemi Awolowo University, Ile-Ife, Nigeria.
Email: opolofin@[Link]

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

Kenya, Myanmar, Nigeria, Pakistan, Philippines, and Vietnam. The BMI noted that
these countries are set to become new drivers of economic growth over the next
10 years, and that they will cumulatively add $4.3 trillion to global gross domestic
product (GDP) by 2025, which is roughly the equivalent of Japan’s current economy.
For a country to become an emerging economy, studies have noted that digitalization
of the economy matters (Myovella et al., 2020). This is due to the fact that digi-
tal markets can yield significant economic and social benefits to the people. Other
studies have also noted that digitization has the potential to boost productivity, create
new jobs, and enhance the quality of life for the society at large (Habibi & Zabar-
dast, 2020). However, most of these studies failed to consider the role of institutional
quality on economic growth. Understanding the role that institutional quality plays
in growth-targeted countries like Bangladesh, Ethiopia, Kenya and Nigeria will en-
able policymakers to consider the role of good institutions alongside promotion of
digitalization in their policy decisions.

It should be noted that achieving higher economic growth without good institutions
may not necessarily lead to sustainable economic development. Studies have shown
that among the serious problems facing emerging markets are the poor rule of law
which could lead to poor protection of investors (Klapper & Love, 2004), and cor-
ruption which might create additional costs on trade through extortion (Rodriguez
et al., 2005; Dutt & Traca, 2010). Many studies have found that adequate institu-
tional quality is capable of promoting investment, facilitating trade, thereby leading
to economic development, while digitalization has also been noted for its ability to
promote growth as well as enhance the performance of institutional quality in driv-
ing the growth of an economy (Francois & Manchin, 2007; Katz & Callorda, 2013).
Moreover, poor institutions can hinder trade facilitation, while poor policies and in-
frastructure can impede trade gains in emerging and developing markets (Otsuki et
al., 2013; Francois & Manchin, 2007).

Given the above potentials of institutional quality and digitalization, and consider-
ing the fact that most of the studies on emerging economies lay more emphasis on
digitalization and improvement in economic growth with little attention to the inter-
vening role of institutional quality, this study examines the effect of digitalization

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CBN Journal of Applied Statistics Vol. 14 No. 1 (June 2023) 25-46

and institutional quality on economic growth in Bangladesh, Ethiopia, Kenya and

Nigeria. The selection of these four countries was based on their similar character-
istics, in terms of corruption level, poverty rate, high income inequality as well as
weak institutional quality (World Atlas, 2020).
While digitalization can improve an economy’s progress, institutional quality can en-
hance its efficiency. Studies have shown that government functions can be effectively
digitalized in a way that they are performed with modern technology (Klapper, 2014;
Pillai, 2016). For example, information and communications technology (ICT) has
been noted for its ability to influence the way and pattern of government functions
through horizontal and vertical interactions and information flows.

It has also been noted that using ICT, government functions can be improved. For
example, we have: (i) electronic-Government (e-Govt.), an application for inter-
organizational relationships, which includes policy coordination, policy implemen-
tation and public service delivery; (ii) electronic-Administration, an application for
intra-organizational relationships which includes policy development, organizational
activities and knowledge management; and (iii) electronic-Governance, an applica-
tion for interaction among citizens, government organizations, public and elected
officials which includes democratic processes, open government, and transparent
decision-making (United Nations, 2004). Among the benefits of e-governance are:
(i) demystification of complicated government processes and empowerment of citi-
zens; (ii) improvement in government performance and facilitation of multiplier ef-
fect on economic progress.

Digitization of government functions can ensure efficiency, responsiveness and ac-

countability of government, which improve the quality of life and productivity of
citizens, especially the poor; and consequently, fostering economic growth. Over-
all, e-Governance is a channel through which government functions can be funda-
mentally changed, and this implies a new set of responsibilities for the government
officials. Also, it should be noted that, no matter how effective digitization can be
in promoting the growth of a country, institutional quality can slow down or pro-
mote its success. This implies that institutional quality has an important role to play
in determining the effectiveness of digitization towards ensuring the growth of an

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

economy.

The rest of this paper is structured as follows: Section 2 discuses literature review,
while Section 3 contains the data and methodology. Section 4 presents the results and
discussions, while Section 5 provides the conclusion and policy recommendations.
2. Literature Review
2.1 Theoretical Literature
Earlier theories of economic growth concentrate on physical capital accumulation
as engine of economic growth. This is noted in Neoclassical growth models where
labor, capital, and knowledge were assumed to be the basic sources of economic
growth. It was also assumed that the growth rates of knowledge and labor are con-
stant. For example, Solow-Swan neoclassical growth model was based on the long
run growth and the model is limited to exogenous factors such as population growth
and technological progress which are independent of savings rate. Recently, eco-
nomic growth theorists extended their view on economic growth towards endoge-
nous technological change. The endogenous growth model focuses on technological
innovation which is formed in the research and development (R&D) areas with the
inclusion of human capital and the existing knowledge stock, (Romer, 1986).

According to the endogenous growth theory, various factors that can create opportu-
nities and incentives that will generate technological knowledge are essential for long
run growth. To this theory, long run growth depends on the rate of growth of total fac-
tor productivity, and this in turn depends on the rate of technological progress. The
endogenous growth theory argued against the proposition of the Neoclassical growth
theory of Solow (1956) and Swan (1956) which assumed that long-run growth rate
can be taken as given, that is, it can be exogenously determined from outside the
economic system. In contrast to the view of Neoclassical theory, endogenous growth
theory proposed that long run growth rate can be influenced by economic factors.
This is because technological progress comes through innovation, which could be in
form of new products, processes and markets which are also end products of eco-
nomic activities. Not only this, innovation can also come from R&D undertaken
by profit-seeking firms, and or economic policies with respect to trade and competi-
tion. An early version of endogenous growth theory that was developed by Frankel

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(1962), posited that aggregate production function can exhibit constant or increas-
ing marginal product of capital. The reason is, as firms accumulate more capital,
some of these capitals are likely to be intellectual capital that can create technologi-
cal progress, which essentially can offset the tendency for marginal product of capital
to diminish. In a situation where marginal product of capital demonstrates constant
returns to scale, aggregate output (Y) is taken to be proportional to the aggregate
stock of capital (K) as shown in equation 1, also called AK theory:

Y = AK (1)

Where A is a positive constant. The AK theory assumes that an economy’s long-run

growth rate depends on its saving rate. Accordingly, if a fixed fraction of output (s) is
saved and there is a fixed rate of depreciation (d), the rate of aggregate net investment
dk
will be dt = sY − δ K which along with (1) implies that the growth rate is given by:

1 dY 1 dK
g≡ = sA − δ (2)
Y dt K dt
The above therefore suggests that an increase in the saving rate (s) will lead to a
permanently higher growth rate. Similar argument with a more general production
structure, under the assumption that saving is generated by intertemporal utility max-
imization instead of the fixed saving rate of Frankel (1962) was made by Romer
(1986). Also, Lucas (1988) while analyzing human capital rather than physical capi-
tal in following the work of Uzawa (1965) produced similar results. Lucas explicitly
assumed that human capital and technological knowledge were one and the same.

The foundation of digital economy according to Knichrehm et al. (2016) in broader

terms, is “the share of total economic output derived from a number of broad dig-
ital inputs. These digital inputs include digital skills, digital equipment (hardware,
software and communications equipment) and the intermediate digital goods and ser-
vices used in production. Such broad measures reflect the foundations of the digital
economy”. Theoretically, the impact of digital economy on economic growth works
through its influence on total productivity of workers. It improves the skill and allows
innovation and self-learning through information flows.

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

2.2 Empirical Literature

Recent interest on the contribution of digitalization to modern day economy, espe-
cially to the emerging markets is on the rise. For example, it has been noted that
ICT has the capacity to increase growth of GDP (Stanley et al., 2018; OECD, 2019;
Remes et al.,2018). Studies such as Koutroumpis (2009) and Czernich et al. (2009)
concluded that a 10 percent rise in internet penetration correlates with a 0.9 to 1.5,
and a 0.3 to 0.9 percentage points in GDP growth, respectively. Qiang et al. (2009)
examined the impact of various components of ICT on GDP growth during the pe-
riod 1980-2006 for 120 developing and developed countries. The findings show that
a 10-percentage point rise in broadband penetration correlates with a 1.38 percentage
point growth in GDP. Similarly, in the of work Vu (2011) which reviewed ICT cross-
country studies as well as national studies, and examined 107 countries, economic
growth was found to be positively affected by ownership of personal computers,
mobile phones and the internet, while Katz and Callorda (2013) in their studies of
Ecuadoran households between 2009 and 2011 where they used fixed effect method
submitted that broadband penetration increased average annual income by 3.67 per-
cent in Ecuador, but the gains were higher for computer and internet users at 3.92 and
5.01 percent respectively. Also, Paunov and Rollo (2014) used ordinary least squares
and quantile regression methods to investigate a sample of 49,610 firms in 117 de-
veloping nations between 2006 and 2011. It was found that firms that were using
internet, including firms facing electricity, financial and skill constraints, corruption
and heavy labour regulations reported increased productivity, although to a lesser
extent than firms not facing these constraints. The findings of McKinsey Global In-
stitute (2011) suggested that firms with online presence grow two times faster, and
export twice as much as those that were offline, while businesses allocating at least
30 percent of their budget to web technologies increased revenues nine-fold, com-
pared to firms allocating less than 10 percent.
It has also been confirmed that the impacts of broadband in emerging countries are
more compared to countries with a higher rate of income, with a percentage increase
of 1.21 per capita GDP growth and 10 per cent increase in broadband subscription
in the work of Qiang et al., (2009) where they used cross country analysis. To be-
come emerging market, businesses in a country need to gain a competitive edge over

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rivals in a particular industry through advanced technology. However, technology

differs among countries. The implication is that a multinational corporation can-
not necessarily take advantage of technological advancements in another country if
that country lacks necessary infrastructure such as telephone systems and satellite
communications systems to support new technology, as well as organized and well-
functioning institutions.

With the recent meteoric popularity in ICT, it has been noted that, internalizing dig-
ital economy into the traditional economic system, can benefit almost all sectors of
the economy. Empirical findings have also shown that, digital economy can solve
various bottlenecks that may hinder the smooth running of an economy (Rogoff,
2016). In other words, digitalization of an economy can facilitate breakthroughs for
developing countries toward becoming emerging markets. Recent knowledge and
experience on the increased usage of ICT have shown that digitalization of an econ-
omy can improve countries’ institutional quality. Also noted is the fact that majority
of government manual processes can be replaced by digital technology. Aside from
this, the use of ICT has been recognized to be among what can be used to reshape
government functions, thus the positive effect of digitalization on the economy is
well documented in literature (Meijers, 2014; Hanclova et al., 2015). Noted by the
estimates of The European Commission is that digitalization could contribute up to
USD 3.7 trillion to the world economy (The European Commission, 2016), and at
the same time be a powerful anti-corruption tool (Andersen et al., 2011).

Another important determinant of a country becoming an emerging market is the

quality of her institutions. Some of the characteristics of developing countries are
poor institutional qualities such as high level of corruption, poor democratic account-
ability and poor bureaucratic quality. Corruption has been seen as one of the major
impediments, frustrating the advancement of sustainable development in these coun-
tries. Corruption can exist in various forms. For example, it shows in democratic
accountability, as well as delay in government’s functioning. Unfortunately, despite
the rapid economic growth in the countries under study, all efforts to cross over from
low per capita income, less developed capital markets and high volatility are fruit-
less. These countries are constrained by poor institutional quality which is mostly

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Olofin

caused by government officials. For example, the detrimental effect of corruption on

economic growth where perpetrators are mostly government officials has been well
documented in the literatures such as Méon & Sekkat (2005) and Mo (2001). How-
ever, it has been noted that one of the ways through which institutional quality can
be improved is the adoption of digitalization into the economy (Meijers, 2014).

According to Acemoglu and Robinson (2010), institutions play a significant and fun-
damental role in determining economic growth and development stages across coun-
tries. It was also noted by Murphy et al., (1993) that Poor quality institutions may
slow down economic activities, thereby causing economic agents to remain busy in
redistributive politics with lower economic returns rather than growth promoting eco-
nomic activities, while good quality institutions may promote incentive structure that
will spur economic growth through reducing uncertainty and promoting efficiency
(North, 1990). Aside from the above, Hall and Jones (1999) argued that overall pro-
ductivity of factors of production in a country is determined by the quality of her
institutions. Also noted by Bernard and Jones (1996) is that good quality institution
is capable of enabling country’s adoption of new technologies which could promote
development.

Considering the above, the role of digital economy and institutional quality in foster-
ing efforts towards becoming emerging countries cannot be overemphasized. Moreso,
it is extremely difficult to underrate the role that digital economy can play when it
comes to the functions of public institutions. Probably this is why various govern-
ments have been trying to introduce e-Governance with the aim of reducing cost of
governance as well as ensuring well organized, appropriate and transparent services
to citizens through the use of ICT. E-Governance involves making decision through
the use of ICT in such a way that wider participation of citizens in public affairs is
ensured. Government functions include: maintenance of law and order, ensuring of
peace and justice, funding of public utilities, and collection of taxes. Records on
these functions are not always accurate since most of them are performed by corrupt
officials. In view of the above, we argue in this study that, becoming an emerging
economy without a sound institutional quality might be an illusion, thus, digitaliza-
tion and institutional quality might complement each other in the quest to become an

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emerging economy.

3. Data and Methodology

3.1 Data
Annual data between 1985 and 2017 were used in this study. We capture digital econ-
omy with ICT using data on imports of ICT goods (% total goods imports), mobile
cell phone (number of postpaid subscriptions, number of active prepaid accounts [i.e.
those that have been used during the last three months] including all mobile cellular
subscriptions that offer voice communications) and fixed telephone subscription [i.e.
active number of analogue fixed telephone lines, voice-over-IP (VoIP) subscriptions,
fixed wireless local loop (WLL) subscriptions, ISDN voice-channel equivalents and
fixed public payphones]. Human capital is proxied with secondary school enrolment
(total % net). Data on the above variables were obtained from the World Develop-
ment Indicators. Data on institutional qualities (i.e. corruption (crpt), democratic
accountability (dat), bureaucratic quality (bq)) and socioeconomic conditions index
were obtained from the publication of International Country Risk Guide. Socioeco-
nomic condition is an assessment of the socioeconomic pressures at work in societies
that could constrain government action or fuel social dissatisfaction. Concerning the
computation of socioeconomic conditions, the risk rating assigned is the sum of three
subcomponents, each with a maximum score of 4 points and a minimum score of 0.
A score of 4 equates to very low risk and a score of 0 to very high risk. The subcom-
ponents are unemployment, consumer confidence and poverty (International Country
Risk Guide Methodology, 2014).

3.2 Model Specification

While the contributions of innovation in technology to economic growth cannot be
underrated, its relation to productive resources is not direct. Its impact on eco-
nomic growth works through total factor productivity. Following endogenous growth
model, and given the roles of ICT capital, as well as considering the role of technol-
ogy in output growth, we can specify a technology function as:

γ
Ait = Ai0Cit eρt+εit (3)

where Ait is the level of technology at time t, Ai0 is the initial information technology

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

at time t, Cit is the current information technology at time t, ρt is the growth rate
of current information technology, while ε it ∼ N(0, σε2 ) is the error term. Taking
the logarithm of equation (3), we have the following transformation, which shows
that technology is a component of the initial technological level, elements of ICT,
influence of time and stochastic error term:

lnAit = lnAi0 + γlnCit + ρt + εit (4)

In growth rate term, Equation (4) can be rewritten as:

lnAit − lnAi0 lnCit − lnCi0

=γ + ρ + ε̌it (5)
t t
where the model implies that the initial ICT level is set to 1, its log-transformation is
set to zero as lnCi0 = 0. We assume an output-augmented production function given
by:

Yit = Ait F(Kit , Hit , Iit , Zit ) (6)

Where Yit = output; Ait = technology; Hit = human capital; Kit = physical capi-
tal; Iit = institutional quality and Zit denotes other variables such as socioeconomic
conditions that affect output at time t. This specification suggests that output is non-
neutral to technological advancement and with respect to capital, labour or any other
production factor presupposed by the alternative specifications such as the labour- or
capital-augmented technology. More specifically, we assume a Cobb-Douglas pro-
duction function given as:

β
Yit Ait Kitα Hit Iit Zitλ (7)

Where all variables remain as earlier defined while α, β and are estimatable param-
eters . In logarithm term, we have:

lnYit = lnAit + αlnKit + β lnHit + lnI it + λ lnZit (8)

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CBN Journal of Applied Statistics Vol. 14 No. 1 (June 2023) 25-46

This then implies that the average growth rate between periods 0 and t is:

lnYit − lnY0 lnAit − lnA0 lnKit − lnK0 lnHit − lnH0

= +α +β
t t t t
lnIit − lnI0 lnZit − lnZ0
+ϑ +λ (9)
t t
In a more compact form, equation (9) can be written as follows:

yit = ρ +γcit +αkit +β hit +ϑ Iit +λ zit +εit (10)

Where all the variables in (10) are in their growth rates, Méon & Sekkat (2005). We
proxy digital economy with imports of ICT goods (ct ), number of active mobile cell
phones (mbc) and fixed telephone subscriptions (ftl), where mbc and ftl represent
primary platform for mitigating digital divide and telephone infrastructure respec-
tively (Forenbacher et al., 2019). We also consider the role of human capital (h) to
economic growth (Mutula, 2010). We use different types of institutional quality (I)
such as corruption (crpt), democratic accountability (dat) and bureaucratic quality
(bq), as well as socioeconomic conditions (sec), and specify the following:

yit = ρ + γ1 cit + γ2 mbcit + ã3 f tl it + β1 hit + α1 crptit + α2 datit + α3 bqit +

α 4 secit + ε̌it (11)

To determine the role institutional quality plays in becoming an emerging economy,

we interact ICT (ct ) with bq, dat, sec, and crpt to obtain equation (12)

yit = ρ + γ1 cit + γ2 mbcit + γ3 f tl it + β1 hit + α1 crptit + α2 datit + α3 bqit

+α4 secit + α5 ccrptit + α6 cdatit + α7 cbqit + α8 csecit + ε̌it (12)

where ccrpt, cdat, cbq and csec are the interaction variables, where ccrpt is the in-
teraction of corruption and digital economy, cdat is the interaction of digital econ-
omy and democratic accountability, cbq is the interaction of bureaucratic quality and
digital economy and csec is the interaction of digital economy and socioeconomic
conditions.

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

3.4 Estimation Technique

To determine the influence of ICT on economic growth and institutional quality in the
four countries studied, we use feasible generalized least square (FGLS) MethodThe
use of FGLS is justified by the models capability to tackle the problem of outliers,
heteroskedasticity and bias in data. In this study, we use data with missing values.
Moreover, our panel is less than the time period (N < T), t further justifiying the the
use of FGLS (Beck & Katz, 1995). Although FGLS standard errors underestimate
true variability, at least for normal errors (Freedman & Peters, 1984), it performs well
in large samples and that in the limit, it is equivalent to full maximum likelihood, and
so has all the optimal asymptotic properties of maximum likelihood (Cramer, 1986).
It is also known that it yields unbiased estimators under general conditions that are
usually met in practice (Kakwani, 1967).
4. Results and Discussion
4.1 Descriptive Statistics
We first examine the descriptive statistics of our data, and the results are presented
in Table 1. Economic growth (Y) has mean of 24.5%, while that of human capital
is13.37%. Mobile cell phone a has mean of -0.07. Equally, human capital has high
standard deviation, indicating that it has a high dispersion from the mean. Demo-
cratic accountability (dat) has a standard deviation of 0.38. Overall, the deviation of
all our variables from their mean is minimal, indicating that the variables used in the
study are adequate.
We also examine the unit root of the variables used, using Fisher’s unit root test to
ensure whether there is presence of unit root or not (i.e., we establish whether the
mean and the variance are constant overtime). This test is suitable for unbalanced
panel data that we use in this study. Our results show that all the variables are sta-
tionary at first difference except corruption that is stationary at levels (Table 3). We
also tested for serial correlation of our model. Our results show that there is no first
order autocorrelation. This confirms the evidence of no model misspecification in
the study. The results of autocorrelation test are presented in Table 2.

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Table 1: Summary Statistics

Obs Mean Sd Min Max
y 117 24.5 1.16 22.47 27.07
c 72 1.50 1.66 5.30e-06 6.66
sec 128 3.25 1.62 1.5 7
crpt 128 1.91 0.78 0.00 3.46
h 40 13.37 11.56 4.00 42.66
dat 108 1.18 0.38 0.5 1.70
bq 129 1.46 0.86 0.00 3.0
mbc 103 -0.07 4.24 0.00 4.54
ftl 50 10.53 2.74 10.53 1.52
cbq 71 -3.22 3.34 5.30e-06 13.33
cdat 71 6.13 6.29 0.00 19.99
csec 71 3.01 3.94 8.80e-06 16.66
ccrpt 71 6.13 3.57 5.30e-06 12.14
Note: y is GDP growth; c is digital economy (i.e. import of ICT goods); sec is socioeconomic condi-
tions; crpt is corruption; h is human capital and knowledge workers; dat is democratic accountability;
bq is bureaucratic quality; mbc is mobile cell phone; ftl is fixed telephone subscription; cbq is the
interaction of digital economy and bureaucratic quality; cdat is the interaction of digital economy and
democratic accountability; csec is the interaction of digital economy and socioeconomic conditions
and ccrpt is the interaction of digital economy and corruption.

Table 2: Autocorrelation Test

Wooldridge test for autocorrelation in panel data
H0: no first order autocorrelation
F( 1, 3) = 4.508
Prob > F = 0.1238

We also examined the correlation of the variables used in the study to ensure the
absence of perfect multicollinearity. The results also showed that the correlation
among the variables was not too high. These results are presented in Table 4.

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

Table 3: Fisher’s Unit Root Test

Variables Probability Probability Decision
(Level) st
(1 difference)
y 1.00 0.00 I(1)
c 0.48 0.00 I(1)
sec 0.32 0.00 I(1)
crpt 0.002 0.00 I(0)
h 0.99 0.005 I(1)
dat 0.55 0.00 I(1)
bq 0.25 0.00 I(1)
mbc 1.00 0.00 I(1)
ftl 0.97 0.00 I(1)
cbq 0.49 0.00 I(1)
cdat 0.44 0.00 I(1)
csec 0.54 0.00 I(1)
ccrpt 0.50 0.00 I(1)
Note: y is GDP growth; c is digital economy (i.e. import of ICT goods); sec is socioeconomic condi-
tions; crpt is corruption; h is human capital and knowledge workers; dat is democratic accountability;
bq is bureaucratic quality; mbc is mobile cell phone; ftl is fixed telephone subscription; cbq is the
interaction of digital economy and bureaucratic quality; cdat is the interaction of digital economy and
democratic accountability; csec is the interaction of digital economy and socioeconomic conditions
and ccrpt is the interaction of digital economy and corruption.

Table 4: Correlation matrix of the variables

c sec crpt h dat bq mbc ftl cbq cdat csec ccrpt
c 1.00
sec -0.05 1.00
crpt 0.52 0.17 1.00
h 0.39 -0.28 0.31 1.00
dat -0.71 -0.09 -0.32 -0.41 1.00
bq 0.66 -0.14 -0.01 0.05 -0.27 1.00
mbc 0.36 -0.06 -0.03 0.22 -0.38 0.25 1.00
ftl -0.30 -0.07 -0.04 0.03 0.53 -0.35 -0.21 1.00
cbq 0.44 -0.40 0.18 0.17 -0.24 0.21 -0.4 -0.19 1.00
cdat -0.59 -0.09 -0.47 -0.04 0.42 -0.22 -0.35 0.36 -0.07 1.00
csec 0.51 -0.33 0.22 -0.08 -0.27 0.25 0.07 -0.07 0.26 -0.29 1.00
ccrpt 0.62 -0.52 0.47 0.07 -0.19 0.06 0.29 0.35 0.05 0.0.5 -0.37 1.00
Note: y is GDP growth; c is digital economy (i.e. import of ICT goods); sec is socioeconomic condi-
tions; crpt is corruption; h is human capital and knowledge workers; dat is democratic accountability;
bq is bureaucratic quality; mbc is mobile cell phone; ftl is fixed telephone subscription; cbq is the
interaction of digital economy and bureaucratic quality; cdat is the interaction of digital economy and
democratic accountability; csec is the interaction of digital economy and socioeconomic conditions
and ccrpt is the interaction of digital economy and corruption.

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4.2 Estimation Results

After ensuring absence of autocorrelation in our data set, we estimate the study
model. Our results show that digital economy captured, human capital and knowl-
edge worker, democratic accountability, mobile cell phone and fixed telephone sub-
scription promote economic growth in the four countries. These results were sta-
tistically significant and confirm the importance of these variables in promoting eco-
nomic growth in these countries. These findings support Stanley et al. (2018), Lamb-
sdorff (1999), and the European Commission (2016). Perhaps, this could be one of
the major reasons why many countries are striving towards improving on digitaliza-
tion.
In addition,, the study found that, corruption and bureaucratic quality retard eco-
nomic growth. The study found that a one percent increase in corruption causes
0.45% decrease in economic growth. The negative relation between economic growth
and corruption is supported by “the sand in the wheel” hypothesis in Mauro (1995).
Also, Rahman et al. (2000) found that if Bangladesh, an example of highly cor-
rupt nation, had reduced corruption to a moderate level, its GNP during the period
1990-1997 would have increased by 18%. Corruption has also been described as
both the cause and effect of poor government performance. It reduces trust in the
government’s capacity to address citizens’ demands (Della Porta, 2000). These re-
sults might not be far-fetched for the countries in this study given their rating on
Human Development Index. For example, in 2012, Nigeria was estimated to have
lost more than $400 billion to corruption since independence (United Nations Office
on Drugs and Crimes). In 2018, she was ranked 144th in the 180 countries listed
in Transparency International Corruption Index. Ethiopia that is presently battling
with political instability was ranked 96th least corrupt nation out of 180 countries
in 2019, while Kenya was ranked 137th least corrupt nation (Corruption Perception
Index, 2018 and 2019). One thing that is common among these countries is that, they
share almost the same characteristics in terms of corruption, poverty, high income
inequality as well as weak institutional quality. On the other hand, socioeconomic
conditions are not significant in fostering economic growth.

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

Table 5: Estimation Results

Dependent variable: y Coef. [Link] z P>|z|
c 5.08 0.88 5.75 0.000
sec -0.10 0.08 -1.17 0.244
crpt -0.45 0.15 -3.08 0.002
h 0.03 0.01 2.80 0.005
dat 1.01 0.23 4.49 0.000
bq -2.62 0.11 -23.52 0.000
mbc 0.50 0.03 14.74 0.000
ftl 0.04 0.02 2.20 0.028
cbq -2.29 0.45 -5.13 0.000
cdat -0.15 0.03 -4.33 0.000
csec -0.16 0.26 -0.63 0.530
ccrpt 0.26 0.06 4.42 0.000

Wald chi2(12): 6172.34

Prob>chi2: 0.0000
N: 22
Number of groups: 4
Note: y is GDP growth; c is digital economy (i.e. import of ICT goods); sec is socioeconomic condi-
tions; crpt is corruption; h is human capital and knowledge workers; dat is democratic accountability;
bq is bureaucratic quality; mbc is mobile cell phone; ftl is fixed telephone subscription; cbq is the
interaction of digital economy and bureaucratic quality; cdat is the interaction of digital economy and
democratic accountability; csec is the interaction of digital economy and socioeconomic conditions
and ccrpt is the interaction of digital economy and corruption.

Interacting ICT with corruption (ccrpt), socioeconomic conditions (csec), democratic

accountability (cdat) and democratic bureaucratic quality (ctbq), we find that ccrpt re-
lates positively with economic growth, while cbq, cdat and csec relate negatively with
it. The implication of these results is that the influence of digital economy on cor-
ruption (ccrpt) has suppressed the negative impact of corruption on economic growth
and caused it to spur economic growth instead of retarding it, while its influence
on bureaucratic quality (cbq), democratic accountability (cdat) and socioeconomic
conditions (csec) failed to promote economic growth. These results were statisti-
cally significant except for the influence of ICT on socioeconomic conditions (csec).
This confirms the possibility of the countries not becoming emerging economies as
predicted by World Economic Forum, given their current institutional quality. Our
findings also reveal the potentials of digitalization in propelling these countries to
become emerging economies. This is possible in the sense that if corrupt officials

40
CBN Journal of Applied Statistics Vol. 14 No. 1 (June 2023) 25-46

know they could be caught, they are likely to refrain from corruption. Our results
also support that of Andersen et al. (2011) where they found that internet is a power-
ful anti-corruption technology. The findings confirmed the role that digital economy
can play when countries focus on reducing corruption to ensure sustainable develop-
ment as well as becoming emerging economy (Table 5).

After obtaining our results, we conduct cross-sectional dependence test of the resid-
ual to confirm validity. The results show no cross-sectional dependence. These re-
sults are presented in Table 6.
Table 6: Correlation matrix of residuals
C1 C2 C3 C4
r1 0.000
r2 0 0.003
r3 0 0 0.007
r4 0 0 0 0.005
Note: r1, r2, r3 and r4 are the residuals for each of the four countries studied and C1, C2, C3 and C4
are country 1, country 2, country 3 and country 4 respectively.

5. Conclusion and Policy Recommendations

This study considered the characteristics of Bangladesh, Ethiopia, Kenya and Nigeria
that were predicted by World Economic Forum as likely emerging market economies
and examined the roles that digitalization and institutional quality can play in making
this prediction a reality. Corruption, democratic accountability, socioeconomic con-
ditions, fixed telephone subscription, human capital and knowledge workers, inter-
action of ICT and corruption, bureaucratic quality, democratic accountability and so-
cioeconomic conditions were regressed on growth rate of real GDP using the FGLS.
Our results showed that digitalization can play an active role of suppressing negative
effect of corruption on growth as well as fast-tracking the process of becoming an
emerging economy. However, institutional qualities and socioeconomic conditions
retard the efficiency of digital economy from promoting economic growth. This
suggests that without improvement in institutional quality, the prediction of these
countries becoming emerging markets might be an illusion.

The study recommends that, countries studied should promote the digitalization of
their economies to bridge the gap between them and the emerging economies. Fur-

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Digital Economy, Institutional Quality and Economic Growth in Selected Countries
Olofin

thermore, timely and urgent policies that can improve various institutional qualities
of their economies should be implemented.

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