Policy Reform, Economic Growth and the Digital Divide

Rapid growth of internet use in high-income economies has raised the spectre 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, this paper investigates two proximate determinants of the digital divide: internet intensity (internet subscriptions per telephone mainline); and access to telecom services. Surprisingly, no gap in internet intensity was found. 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 paper's finding on internet intensity implies that the digital divide is not really new, but reflects a persistent gap in the availability of mainline telephone services. After identifying mobile telephones as a promising new platform for internet access, the paper uses panel data to study the determinants of mobile telephone diffusion during the past decade. The results show that income explains part of the diffusion lag for the 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 phone service. 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.