The double-edged sword of digital technology: U-shaped effects on income inequality in Vietnam

Abstract

Digital transformation is often expected to promote more inclusive development, yet its distributional effects remain contested, particularly in developing economies. This study examines the relationship between ICT development and income inequality in Vietnam, a lower-middle-income country undergoing rapid digital expansion. Using a unique provincial panel covering six biennial waves from 2012 to 2022, and combining a two-step system GMM estimator with a dynamic threshold model, we find robust evidence of a nonlinear, U-shaped relationship between ICT and income inequality. At lower levels of digital development, ICT is associated with narrower income gaps; beyond an estimated threshold, however, this equalizing effect weakens and inequality tends to rise. The results also reveal marked heterogeneity across provinces, showing that the distributional consequences of ICT depend on local economic conditions and structural characteristics. By moving beyond cross-country averages, the study provides new subnational evidence on the stage-dependent and context-specific nature of digital inequality in developing countries. The findings suggest that digital expansion is not inherently inclusive and must be accompanied by policies that broaden access, strengthen digital capabilities, and adapt implementation to local conditions