The Digital Divide And The Great Divergence: Internet Penetration, Economic Growth, And Income Inequality In a Panel Of 58 Countries (2000–2022)

Abstract

This paper looks at the relationship between internet penetration, economic development and income inequality using an unbalanced panel of 58 countries between the years 2000 and 2022. We address the Kuznets hypothesis, and examine the possible moderating role of internet access in the income–inequality relationship based on processes of financial inclusion. Our pooled OLS, fixed effects and interaction models with country-clustered standard errors suggest robust support for an inverted-U Kuznets with the inflection point of around $6,636 per capita, which falls within the range of the data we were analyzing. Internet penetration might be associated with a reduction in the GINI coefficient by 0.66 percentage points for every 1% hike in the percentage of users holding income and structural factors fixed (at a 1% level of significance). The impact is not consistent as high-income countries have a negative but not significant relationship between internet penetration and inequality (–0.12, p = 0.626) and low-income countries have a positive but not significant relationship (0.16, p = 0.738), indicating that internet penetration does not initially affect inequality but through the income channel. When stratifying the internet–inequality relationship by the variable financial account ownership, mediation analysis shows that 41.2% of this relationship is through financial account ownership. Our results suggest that the investment in digital infrastructure is inequality reducing, at least in the sense that it increases incomes in developing economies.