Digitalization widens human development gap between developed and developing countries

The study states that digital technologies, particularly internet penetration and broadband subscriptions, play a significant role in improving sustainable development in developed countries. Using a Generalized Method of Moments (GMM) framework, the researchers found that a 1% increase in internet usage leads to a 1.43% rise in HDI, illustrating the efficiency of digital tools in enhancing education, income, and life expectancy.

Digitalization significantly improves human development in advanced economies but delivers far more ambiguous results in developing nations, according to a new study published in the Journal of Risk and Financial Management.

Based on panel data across 55 countries over two decades, the research highlights that while internet use and broadband access fuel sustainable development in wealthy nations, their effects in poorer states are inconsistent and, at times, counterproductive. Using the Human Development Index (HDI) as a proxy for sustainable development, the study compares how digital infrastructure and institutional factors affect outcomes in both economic clusters.

The findings are detailed in a paper titled "Impact of Digitalization on Sustainable Development: A Comparative Analysis of Developed and Developing Economies." 

How does digitalization affect sustainable development?

Digital technologies, particularly internet penetration and broadband subscriptions, play a significant role in improving sustainable development in developed countries. Using a Generalized Method of Moments (GMM) framework, the researchers found that a 1% increase in internet usage leads to a 1.43% rise in HDI, illustrating the efficiency of digital tools in enhancing education, income, and life expectancy.

In these countries, mobile subscriptions and trade openness also delivered significant positive effects. Gross fixed capital formation had a strong, positive impact, suggesting that infrastructure investments are more effectively absorbed into development systems.

However, the story diverges sharply in developing economies. Despite high mobile subscription rates, the study found that core digital variables such as internet use and fixed capital investment were negatively associated with HDI. In these regions, broadband had a small but positive effect, while mobile and internet indicators often failed to produce meaningful gains.

The authors argue that these disparities stem from institutional weaknesses, inefficient capital allocation, and limited internet penetration quality. In poorer countries, digital access is often superficial, lacking the depth required to generate inclusive education or healthcare benefits. Furthermore, public investment fails to translate into tangible outcomes when governance and transparency are weak.

Does corruption undermine the gains from digitalization?

The study incorporated two corruption indicators, Corruption Perception Index (CPI) and Control of Corruption (CoCr), to evaluate whether governance quality mediates the relationship between digitalization and development.

In developing countries, control of corruption had a small but significant positive impact on HDI, confirming that clean governance enhances the digital economy’s effectiveness. Conversely, the CPI measure was negatively correlated with sustainable development, though not significantly, highlighting the gap between perceived and actual institutional performance.

In developed countries, both corruption indicators showed either negative or statistically insignificant effects. This unexpected result suggests that even in high-income contexts, lax enforcement or systemic complacency may undercut the effectiveness of digital governance initiatives.

The research stresses that measurement limitations, particularly reliance on perception-based indexes, can obscure the true institutional dynamics at play, especially in settings where informal corruption is widespread or normalized.

Are policy prescriptions universal or context-specific?

The study separates digitalization’s effects by development level. By using econometric models such as FMOLS, error correction models (ECM), and dynamic GMM estimators, the study reveals that policy interventions must be highly tailored.

For developed countries, policies that expand digital infrastructure and internet access are effective in enhancing human well-being. These nations possess the institutional maturity to convert digital investment into sustained development gains.

In contrast, for developing nations, the digital economy’s contribution to sustainable development remains highly conditional. Broadband access showed some promise, but without supporting institutional capacity, its potential is constrained. Internet use, surprisingly, showed negative correlations in several models, implying that without aligned educational and policy frameworks, digital tools alone do not drive development.

Even fixed capital investments, often assumed to be universally beneficial, showed a negative effect on HDI in developing contexts. The authors attribute this to inefficiencies, corruption, and weak governance that hinder the productive deployment of infrastructure funds.

Population growth also had divergent effects. While negative in developed countries, it showed a small positive contribution in developing countries, pointing to a potential demographic dividend if policies align to support education, employment, and health.

Future outlook

Going forward, the authors call for future research into how global disruptions, such as pandemics and digital currency regulation, may further reshape the digital-sustainability nexus. They also recommend incorporating new variables like cybercrime and blockchain governance to refine our understanding of digital development pathways.

For policymakers in developing countries, the research offers a cautionary roadmap: investing in digital infrastructure is not enough. Institutional capacity-building, anti-corruption efforts, and inclusive policy design are essential to ensure that digitalization translates into meaningful human development.