Digital inclusion or exclusion? Exploring the moderating role of governance in digitalization's impact on income inequality in developing countries

Abstract

Digitalization plays a critical role in economic development and ensuring social equity. The advancement of digitalization is expected to expand economic opportunities for previously underserved populations, thereby narrowing income disparities. However, it may also exacerbate inequality due to differences in access and skill levels. In this study, we utilize panel data from 45 developing countries over the period 2002–2023, employing the recently developed Method of Moments Quantile Regression (MMQR) by Machado & Santos Silva (2019) to examine the empirical relationship between digitalization and income inequality and to assess the role of governance quality in this relationship. Our findings reveal a strong negative impact of digitalization on income inequality across all specific and composite digitalization measures. Furthermore, we find that the relationship between digitalization and income inequality is contingent on governance quality and the type of digitalization adopted. Based on our research results, several governance implications are proposed to enhance the effectiveness of digitalization in reducing income inequality in developing countries.