Summary
Focus
Digital payments have become quite popular in advanced economies, but their rapid growth in emerging market and developing economies (EMDEs) is especially noteworthy. Between 2014 and 2021, the number of adults in EMDEs using digital payments increased from 35% to 57%. This raises the question of how digital payments contribute to economic growth and development. To date, macro evidence is limited on the extent to which digital payments impact economic growth. To address this gap, we examine the relationship between digital payment adoption and growth, productivity and informal labour in 101 economies from 2014 to 2019.
Contribution
Building on existing research on growth, we employ panel regressions to examine the relationship between the lagged levels of digital payment use and subsequent growth rates of gross domestic product (GDP) per capita, total factor productivity and the share of employment in the informal sector. We incorporate various controls to account for factors that could influence the results. We also investigate the specific channels through which digital payments contribute to economic growth, while considering the strong correlation between digital payments and broader measures of information technology proliferation.
Findings
Our findings reveal a noteworthy relationship between use of digital payments and economic indicators. Specifically, a 1 percentage point increase in the use of digital payments corresponds to a 0.10percentage point rise in per capita GDP growth over a two-year period (equivalent to 0.05percentage points annually). Digital payments are also strongly associated with informal employment, which falls by 0.06 percentage points over the same two-year period (or 0.03 percentage points annually) per 1 percentage point increase in digital payment use. This effect is significant considering the wide range of digital payment adoption, spanning from 0 to 100% of the population in the economies studied. Additionally, digital payments are linked to improved access to credit and other financial services, further enhancing their role in facilitating financial inclusion.
Abstract
We examine the relationship between digital payment innovation, economic growth and informal activities in 101 economies over 2014–19. Following the economic growth literature, panel regressions relate growth rates of GDP per capita, total factor productivity (TFP) and the share of informal sector employment to lagged levels of these variables, the extent of digital payments use and various controls for endogeneity. We find that a one-percentage point increase in digital payments use is associated with increases in the growth of GDP per capita of 0.10percentage points over a two-year period, and a decline in the share of informal sector employment of 0.06 percentage points over a two-year period. Insofar as the reported share of the population making digital payments ranges nearly from 0 to 100%, this is substantial. Digital payments do not appear to be significantly associated with rises in TFP, once controlling for general measures of digitalisation and government effectiveness, but they are linked to greater financial inclusion and credit access. Our results reinforce the case for government policies to encourage digital payments and, as complementary factors, access to the financial sector and information technology.
JEL Classification: G21, G23, O32
Keywords:digital innovation, informal economy, productivity, economic growth
FAQs
Informal firms do not contribute to the tax base and tend to remain small, with low productivity and limited access to finance. As a result, economic growth in regions or countries with large informal sectors remains below potential.
What is the role of digital economy in economic growth? ›
Previous studies have shown that the digital economy is considered the main driver of economic growth in both developed and developing countries (25, 26). The digital economy mainly based on ICT helps to increase capital and labor productivity and to obtain goods and services at lower prices (13).
How does digital transformation affect economic growth? ›
The study concludes that digitization positively and significantly affects economic growth, even if several control variables are considered. A study examined the digital transition situation of countries that joined the EU earlier and later [38].
How does information technology affect economic growth? ›
Production of information and communication technology goods and services has contributed quite substantially to economic growth in many developed and newly industrialized countries. The average share of ICT goods in manufacturing value added was 7.2 per cent in the OECD countries in 1993.
What are 3 advantages of an informal economy? ›
The informal economy provides employment opportunities, especially within developing countries, to those who do not have employment security, work security and social security. It is an easily accessible economy and provides an opportunity to acquire skills and knowledge to transition to the formal economy.
What are 5 examples of informal businesses? ›
The informal sector can include vendors, such as people selling various merchandise such as vegetables. The workers in this sector also include hawkers, marketers, vendors, artisans, small veranda (khondes) businesses, and cross-border traders.
How does digital money affect the economy? ›
Digital money streamlines financial infrastructure, making it cheaper and faster to conduct monetary transactions. It can also make it easier for central banks to implement monetary policy. Examples of types of digital money are central bank digital currencies, cryptocurrency, and stablecoins.
How does digital technology affect the economy? ›
The latest advances in digital technologies could impact trade flows and gross domestic product (GDP) by enabling a rise in both local and global production. The way businesses and consumers share the value created from ownership of technology and data determines whether there is demand destruction or demand creation.
How does technology impact economic growth? ›
Technology can affect growth by increasing productivity and expanding markets for goods and services. For example, improvements in agricultural technology have led to increased yields per acre and greater food security.
What are the negative effects of technology on the economy? ›
Negative Impacts of Technology on Society:
Job Loss: As machines and robots become more advanced, they are capable of performing tasks that were previously done by humans. This can lead to job loss and economic instability for those who are displaced.
There is a relationship between technology and economic growth. Technology is one important factor that drives the economy. Technology work together with the other factors of production that trigger economic growth to realize efficiency in the process.
What are the disadvantages of the informal economy? ›
While offering the advantage of employment flexibility in some economies, a large informal sector is associated with low productivity, reduced tax revenues, poor governance, excessive regulations, and poverty and income inequality.
What is the problem with the informal economy? ›
Social and political implications and issues. According to development and transition theories, workers in the informal sector typically earn less income, have unstable income, and do not have access to basic protections and services.
What are the economic effects of economic growth? ›
An effect on employment - Consistent growth encourages employment and helps to cut unemployment rates, which in turn aids in reducing income disparity. Economic dividend: Stronger economic growth will increase tax collections and decrease government spending on welfare benefits connected to unemployment and poverty.
How does economic development affect economic growth? ›
Economic development has a lasting impact on a community. Job providers purchase goods and services they need to operate, and their workers purchase goods and services they need to live. Money changes hands many times as it flows through the local economy and creates overall prosperity enjoyed by all citizens.
