Impact of digitalization on economic growth in middle and high income countries

Since the fourth industrial revolution (IR 4.0), there is a stark difference in terms of economic growth between high income and middle income countries, where the former exhibits higher economic growth. Simultaneously, there exist a digital divide between these two income groups when looking at three components of digitalization namely the number of individuals using the internet, number of mobile cellular subscriptions and fixed broadband subscriptions. Which begs the question, is it just a coincidence or are these components contributing toward the growth of these high income countries’ economy? If so, how does other country with low digitalization try to narrow or close the gap of the digital divide? Therefore, the first objective of the study is to examine the effects of digitalization on economic growth, where digitalization is measured by the three components stated above. Also, to reduce the digital divide, we look at the second objective, which is to identify the determinants of the digital divide. The Generalized method of moments (GMM) panel data analysis is used to estimate the model comprising data from more than 120 countries, consist of countries in the high and middle income groups, from the years 2000 to 2017. The empirical result shows that all component of digitalization used are positively and statistically significant determinants of economic growth for both countries in high and middle income. Based on the countries’ income groups, urbanization, trade openness, age population and human capital are found to be able to influence the adoption of either one, two or all three of the digitalization components in this study. At which, policy makers could devise a plan or approach to generate more trade openness, to incorporate digitalization in workplace and to provide better knowledge of digitalization, as well as to focus on increasing internet penetration rate.

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