Policy reform, economic growth, and the digital divide - an econometric analysis

Rapid growth of Internet use in high-income economies, has raised the specter of a"digital divide"that will marginalize developing countries, because they can neither afford Internet access, nor use it effectively when it is available. Using a new cross-country data set, the authors investigate two proximate determinants of the digital divide: Internet intensity (Internet subscriptions per telephones mainline), and access to telecom services. Surprisingly, they find no gap in Internet intensity. When differences in urbanization, and competition policy are controlled for, low-income countries have intensities as high as those of industrial countries. While income does not seem to matter in this context, competition policy matters a great deal. Low-income countries with high World Bank ratings for competition policy, have significantly higher Internet intensities. The authors'findings on Internet intensity implies that the digital divide is not really new, but reflects a persistent gap in the availability of mainline telephones services. After identifying mobile telephones as a promising new platform for Internet access, they use panel data to study the determinants of mobile telephone diffusion during the past decade. Their results show that income explains part of the diffusion lag for poor countries, but they also highlight the critical role of policy. Developing countries whose policies promote economic growth, and private sector competition, have experienced much more rapid diffusion of mobile telephone services. Simulations based on the econometric results, suggest that feasible reforms could sharply narrow the digital divide during the next decade for many countries in Africa, Asia, and Latin America. The authors'review of the literature, also suggests that direct access promotion would yield substantial benefits for poor households, and that cost-effective intervention strategies are now available.