Digital Transformation, Financial Inclusion, and Poverty Reduction in Iraq: An Econometric Study Using the Vector Error Correction Model (VECM)
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Abstract
This paper uses a Vector Error Correction Model (VECM) to study the dynamic interaction of digital transformation, financial inclusion and poverty alleviation in Iraq in the period of 2000-2025. The aim of the study is to assess the short-run dynamic and long-run equilibrium relationship between the variables in an Iraqi economic system based on the annual time series data collected by the World Bank, International Telecommunication Union (ITU), International Monetary Fund (IMF) and United Nations Development Programme (UNDP). The econometric analysis includes Augmented Dickey-Fuller (ADF) unit root tests, Johansen cointegration analysis and Vector Error Correction Model (VECM) estimation as well. The empirical results show that a long-run equilibrium relationship exists between digital transformation, financial inclusion and poverty reduction in Iraq. In this respect, the findings indicate that digital transformation is a net positive factor for financial inclusion while financial inclusion can be gradually transformed to reduce poverty over time. But the relationship between these metrics is not very strong because of the structural and institutional constraints that exist in the Iraqi economy. The paper also concludes that digital transformation can help promote inclusive economic growth and poverty reduction in Iraq, when coupled with institutional change, infrastructure development and the transformation of the financial system.
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