Impact of Digital Services Trade on Economic Growth of Developing, Emerging and Developed Countries: P-VAR Approach.

Abstract

Purpose: The objective of this study was to evaluate the impact of digital services trade on economic growth of a panel of developing, emerging and developed countries for the period 2005- 2019. Methodology: Panel-Vector Auto-Regression (P-VAR) and Fixed Effects models (FE) were employed to evaluate the impact of digital services trade on a panel of 32 developing, 45 emerging and 24 developed countries respectively. Findings: The Vector Error Correction Models (VECM) indicated that digital services exports have a significant long run positive impact on GDP in all the country panels. Specifically, a 1% increase in digital service exports increased per capita GDP by 0.88%, 0.78% and 0.34% in developed, emerging and developing countries respectively. Moreover, there was a long run causality running from digital services export models to GDP in all the three country panels. The study found that for every 1% increase in the number of people using the internet, GDP increased by 0.62%, 0.75% and 0.02% in developed, emerging and developing country panels respectively. Fixed Effects (FE) models showed that digital services trade had a significant positive impact on GDP of 0.07% only in developed countries. In terms of adjustment to a long run equilibrium, results indicated that the speed of adjustment was fastest in emerging countries panel at 0.81% followed by developing countries panel at 0.75%, and it was slowest in developed countries panel at 0.29%.These preliminary results clearly indicated that the panel of developing countries were trailing behind in digital services trade. Recommendations: Given that developing countries panel was trailing behind in digital services trade relative to emerging and developed countries panels, it was recommended that developing countries governments and other stakeholders should increase investments in both institutional and physical digital infrastructure that would enable more people, especially small and medium enterprises (SMEs) and those in rural areas to access and participate in digital trade related services. Access to stable, high speed and affordable internet services should be prioritized. This study contributes to the evolving literature on digital services trade and economic growth.