Digital payments, informality and economic growth

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 0.10 percentage point rise in per capita GDP growth over a two-year period (equivalent to 0.05 percentage 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 0.10 percentage 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