Digitalisation and Structural Change: Evidence from Cross-Country Analysis

This study examines digitalisation as a driver of Structural Change (SC), a core mechanism of economic development. Using a cross-country panel of 51 economies from 1990 to2018, and panel data methodologies of Fixed Effects estimation and two-step System GMM, we find that digitalisation significantly accelerates economy-wide structural change. A doubling of internet penetration is associated with a 0.14 to 0.18- unit increase in the SC component of labour productivity growth, holding other factors constant. However, the effects of digitalisation on SC are heterogeneous across countries, with stronger effects noted for low and lower-middle income economies, structurally under-developed economies, and countries with higher forward linkages in global value chains (GVCs) than their counterparts. Moreover, digitalisation reduces manufacturing employment shares, pointing to a pattern of digital-led (de)industrialisation in developing countries. Overall, our findings contribute new evidence that digitalisation facilitates a form of leapfrogging in which developing countries transition directly from agriculture to digitally enabled services, bypassing traditional manufacturing-led industrialisation pathways.