Information and Communication Technologies (ICT) and Economic Growth in Latin America: An Empirical Analysis for the 2000-2020 Period

Introduction

Since the early 1990s, Information and Communication Technologies (ICT) have gradually transformed all aspects of human life, eliminating geographical boundaries, bringing societies and cultures closer together, and influencing economic activities such as Foreign Direct Investment (FDI) and trade (Ahmed & Le, 2021). The importance of ICT infrastructure for the development of emerging economies has been highlighted by several researchers (Niebel, 2018; Bahrini & Qaffas, 2019; Myovella, Karacuka, & Haucap, 2020; Röller & Waverman, 2001). However, it has been argued that the focus on ICT expansion as an engine of growth has overshadowed critical aspects such as human capital, health and civil infrastructure (roads, drinking water, electricity, etc.) (Bollou, 2006; Komninos, 2019).

Despite the debates, advocates of ICT infrastructure expansion argue that it facilitates the movement of capital, coordination of production and transportation, as well as new forms of cross-border investments and expansion of services (Antonelli, 2003). Various scholars have strongly endorsed the necessity and effectiveness of the development and application of technological infrastructures to drive economic and social advancement (Jordá-Borrell, & López-Otero, 2020; German-Soto et al., 2021; Yu, H. 2021; Appiah-Otoo & Song, 2021). In the words of Brynjolfsson & McAfee (2014) and Singh, Luthra, Mangla & Uniyal (2019) explain that investment in technology is essential to improve productivity and economic efficiency. In line, Nicholas Carr (2008) posits that IT adoption is not only an economic necessity, but also a catalyst for collective intelligence enhancement.

Furthermore, it has been argued that the impact of ICT extends beyond the economic realm, with positive effects on social dimensions such as learning (Abdullayev, 2020; Roztocki, Soja, & Weistroffer, 2019; Ahmed, Nathaniel, & Shahbaz, 2021), healthcare (Roztocki, Soja, & Weistroffer, 2019), women’s empowerment, promotion of indigenous knowledge, and good governance (Aduwa-Ogiegbaen & Iyamu, 2005; Von Lubitz & Wickramasinghe, 2006; Gurumurthi et al., 2003; Jain, 2006; Meso et al., 2005).

Institutions such as the World Bank, the International Telecommunication Union (ITU) and the International Monetary Fund (IMF) put pressure on Latin American economies to invest in the expansion of ICT infrastructure (Jain, 2006). However, the idea that ICT expansion guarantees high rates of economic growth has come under scrutiny (Gutiérrez & Berg, 2000). In that sense, the effectiveness of ICTs in driving economic development may be conditioned by various factors, such as the lack of adequate infrastructure, the digital divide, or inadequate technological implementation policies (Fraga, 2017). Also, resistance to the adoption of new technologies by some economic sectors (Rodrik, 2018).

Developing countries may not obtain the same returns on ICT investment as developed countries as they lack the absorptive capacity to implement and take advantage of ICTs, in addition to inadequate technological infrastructure and digital divides that limit equitable access and promote disparity (Mwakaje, 2010). In Latin America, ICT penetration is below developed world figures, and its impact on economic growth depends on crucial elements such as adequate access, diffusion of digital technologies, healthy business dynamism and adequate competition in the digital sector of the economy (Zapata et al., 2020). Although there has been a significant expansion of the Internet in the region, connection speeds remain low compared to the world average, limiting the digital services available (CEPAL, 2020).

In countries such as Brazil, Mexico, Chile and Argentina, the Internet infrastructure-based economy contributes significantly to GDP, according to Boston Consulting Group [BCG], (2021) and McKinsey (2022). However, the figures vary, and despite the improvement in connection speeds, the region remains below the world average. In this regard, the average investment of Latin American countries is projected to reach 3.3% in 2016 (CEPAL, 2013). Most research has focused on the impact of privatization on network expansion and efficiency (Birdsall & Nellis, 2003) or on institutional problems and socioeconomic barriers to technological adoption and development (García Martínez & Payró, 2022; Parente & Prescott, 1994). It is suggested that factors such as GDP per capita may affect ICT expansion rates (Bollou, 2006), but more research is needed to identify these factors and measure their effect.

Productivity growth, driven by investments in Information and Communication Technologies (ICT), has been recognized as essential for improving living standards, especially in developed countries, where most studies support the positive and economically significant relationship between ICT and productivity (Kretschmer, 2012). However, in Latin America, economic growth has experienced notable limitations, especially during the Covid-19 pandemic, with a stagnant trajectory and low average growth rates (CEPAL, 2021).

In the contemporary era, the role of Information and Communication Technologies (ICTs) has been the subject of extensive economic scrutiny. Several research studies have explored the relationship between ICT penetration and economic growth in different regions of the world. In this regard, Vu (2011), in his analysis focusing on 102 European countries, highlights how the penetration of Internet, cell phone and personal computer users impacts economic growth. The author reveals that the marginal effect of Internet penetration exceeds that of other devices, although this impact decreases as penetration increases. Using the Generalized Method of Momentum (GMM), Vu highlights that ICT positively influences growth by facilitating knowledge diffusion, improving decision making and reducing production costs.

For their part, Siddiqui and Singh (2019) delved into the relationship between ICT penetration, trade openness and economic growth in selected countries. They highlighted the significant connection between ICT penetration and growth, especially in emerging and high-income countries. These findings are in agreement with (Majeed and Ayub, 2018; Sinha and Sengupta, 2022) who highlighted positive and significant effects of ICT on economic growth. Likewise, Toader et al. (2018) evidence a positive effect of ICT infrastructure on growth in the European Union, but with varying magnitudes depending on the technology analyzed. In addition, macroeconomic factors such as inflation, unemployment and foreign direct investment also play a crucial role in GDP per capita.

For their part, Neffati and Besbes (2013), focusing on Arab countries, supported the endogenous growth theory by suggesting that ICT and labor skills are key factors for economic growth. Taken together, these studies reveal the complexity of the interactions between ICT, trade openness, foreign investment and financial development, highlighting their role in the global economic landscape.

In contrast, Nabi et al. (2022) explored ICT expansion in N11 countries, revealing a long-term negative impact on economic growth. Furthermore, they emphasized that financial development has both short- and long-term adverse effects. These findings are consistent with (Cardona, 2013; Van Reenen et al., 2010; Banco Mundial, 2022) who point out that despite the recognition of the potential of ICTs to reduce poverty, increase productivity and foster economic growth, the empirical evidence in developing countries, such as those in Latin America, has been weak and ambiguous. The differential impact of ICTs in developing countries is articulated with possible limitations in absorptive capacities, such as the lack of human capital and other complementary factors, has been pointed out as a relevant variable (Steinmueller, 2001).

Based on the above, the presence of digital divides associated with unequal access to ICTs according to income, age and geographic location is highlighted, which impacts Internet use and, therefore, the contribution of ICTs to economic growth in the region (CEPAL, 2013). Therefore, this research highlights the complexities and challenges faced by Latin America in the effective adoption of ICTs to boost its economic development.

Methods

This research adopts the hypothetico-deductive method, starting from a problem related to Information and Communication Technologies (ICT) and economic growth in Latin America. It is classified as an explanatory research, since it examines the key events and trends related to ICTs and economic growth in the region during the study period. In addition, it is considered correlational, since it uses an econometric model to explain the relationship between the variables of interest in a specific period.

To carry out the research, a fixed effects econometric model is implemented using panel data. Among the nested data regression models, the fixed effects approach stands out for making various assumptions about the behavior of the residuals, being the most fundamental and consistent (Martínez, 2016). This model minimizes assumptions about the behavior of the residuals by assuming that the model to be estimated is as follows:

Where ${\alpha }_i=\alpha +v_i$, then replacing in (1) is:

That is, it assumes that the error (${\epsilon }_{\mathit{it}}$) can be broken down into two parts a fixed part, constant for each individual ($v_i$) and another random one that meets the MCO requirements ($u_{\mathit{it}}$) (${\epsilon }_{\mathit{it}}=v_i+u_{\mathit{it}}$), which is equivalent to obtaining a general trend by regression giving each individual a different point of origin (ordinates). This operation can be performed in several ways, one of them is by introducing a dummy for each individual (eliminating one of them for statistical reasons) and estimating by OLS. Consistent (fixed effects) and efficient (random effects) estimates differ significantly. This implies that it is preferable to select the estimator that we consider more consistent, which in this case is the fixed effects estimator. In contrast, if they are orthogonally equal, the most efficient estimator should be chosen, which is the random effects estimator (Martínez, 2016).

For the application of a nested data model, the Hausman test is used, which compares the estimates between the fixed effects model and the random effects model. If systematic differences are identified (the null hypothesis of equality is rejected, i.e. a high test value and a low p-value, less than 0.05, is obtained) and provided we are reasonably confident of the specification, we can conclude that the correlation between the error and regressors persists. (Cov(X_it, u_i) ≠ 0), being preferable to choose the fixed-effect model (Martínez, 2016).

Since ICT penetration cannot be explained by a single variable and there is no aggregate index available to measure ICT penetration in a country, this research uses three of the most relevant variables to measure ICT penetration. The variables used are: a) Individuals using the Internet (as a percentage of the population), b) Fixed telephone subscriptions (per 100 people) and c) Mobile cellular subscriptions (per 100 people).

Once the ICT variables have been determined, the panel data analysis is carried out, starting by verifying the stationarity of the series, panel cointegration and, finally, panel regression. To evaluate the research objectives, the equation formulated is as follows:

Where:

GDP per capita is annual data at constant prices in US dollars.

ICT is ICT penetration, measured by the variables: Individuals using the Internet, fixed telephone subscriptions and mobile cellular subscriptions.

BC trade balance of goods and services) in relation to GDP.

FDI is foreign direct investment as a percentage of GDP.

IC is domestic credit provided by financial institutions as a percentage of GDP used as a proxy for financial development.

Results

In the last decade, Information and Communication Technologies (ICTs) have played a crucial role in economic and social transformation worldwide. Latin America, as a developing region, has not been immune to this phenomenon. ICTs, which include the Internet, mobile telephony, and other forms of digital technologies, have significantly altered the way societies communicate, access information, and participate in the global economy (Parra, Agudelo, García, Hernández, Sellens, de Llano Feliú & Chamorro, 2022). The behavior of variables aligned with ICTs in Latin America is shown below.

As shown in Figure 1, the percentage of people using the Internet in Latin America has grown. Latin America grew from 3.2% in 2000 to 64.8% in 2020. In this regard, Pérez (2022) highlights the importance of policies that promote connectivity in rural areas to maximize the positive impact on economic growth. Table 1 below shows the variables used, the source of information and the expected sign.

Figure 1. People using the Internet (% of the population) in Latin America (average of 17 countries), period (2000-2020).

Source: Own elaboration based on Banco Mundial (2023b).

Figure 2 shows that during the 2000-2020 period, Chile stands out with 52.43% on average, exceeding Uruguay by 7 percentage points. Argentina is in third place with 43.58% on average. Guatemala, Honduras and Argentina occupy the last places with 17.69%, 16.68% and 13.94% respectively. Internet access has boosted business productivity by enabling instant communication, online collaboration and rapid access to resources and data. This contributes to operational efficiency, decision making and allows companies to innovate and develop new products (Smith and Johnson, 2019; López, 2021; García et al., 2020).

Figure 2. Internet users (% of population) in Latin America by country (average for the period 2000-2020).

Source: Own elaboration based on data from Banco Mundial (2023b).

As shown in Figure 3, fixed telephony subscriptions per 100 people on average in Latin America have shown a constant behavior, the maximum level reached occurred in 2008 with 15.0%, and the lowest data is generated in 2020 with 12%. This behavior is associated with the fact that currently fixed telephones are less used so there have been changes in consumer behavior (García, et al., 2017), technological advances (Martínez and López, 2018) cost considerations (Pérez, 2020) and adaptation to demographic and cultural changes (Pérez, 2020).

Figure 3. Fixed and mobile telephony subscriptions per 100 people in Latin America (average 17 countries), period (2000-2020).

Source: Own elaboration based on data from Banco Mundial (2023c); Banco Mundial (2023d).

Mobile cellular subscriptions per 100 inhabitants on average in Latin America have experienced growth throughout the study period. The highest point was recorded in 2013 with 116.1%, while the lowest point was in 2000 with 9.3%. This significant increase is due to factors such as decreasing costs of mobile devices, increasing mobile network coverage and the availability of affordable data plans have contributed to the growth in mobile adoption in Latin America (Barrantes, Galperin, & Mariscal, 2015; World Bank 2021; IDB [Inter-American Development Bank], 2018).

Mobile and fixed telephony has had a positive impact on economic growth in Latin American countries by improving communications infrastructure, fostering financial inclusion (Martínez et al., 2020), stimulating business development, and facilitating access to markets (Guizado Perez, 2019). However, continued efforts are required to address challenges and ensure equitable and sustainable implementation of these technologies (López, 2021).

Figure 4 shows the average GDP per capita during the period 2000-2020, which has maintained a growth until the year 2019 in Latin America, with USD 7684.5 dollars. On the other hand, by 2020 the GDP per capita contracts and reaches USD 6724 dollars, explained by the impact of the COVID 19 pandemic.

Figure 4. GDP per capita by country (USD constant prices) of Latin America (average 17 countries), period (2000-2020).

Source: Prepared by the authors based on data from Banco Mundial (2023a).

The average GDP per capita during the period 2000-2020, is led by Uruguay with an average of USD 12959.56 dollars, its immediate follower is Argentina with 12298.67. The countries with the lowest GDP per capita are: Bolivia with 2548.82, Honduras with 2100.52 and Nicaragua with 1750.29, on average.

Regarding the results of the econometric model, the following results are evident.

After correcting the seasonality problem in the series, the Hausman test is performed. The Hausman test evaluates whether the individual effects of the behavior of the variables are correlated with the explanatory variables, i.e. it helps to determine the best model, whether fixed or random effects. The following hypotheses are used:

H0 = Random effects model → Prob > 5%.

H1 = Fixed effects model → Prob < 5%.

As can be verified in Table 2 by means of the Hausman test and given the probability both in the cross section and in the time section, Prob < 5%, therefore a fixed effects model will be applied.

After performing the unit root tests and the Hausman test, it was found that the fixed effects model was a better fit. The equation derived from the econometric model is shown below.

Dónde: ${\delta }_1$: Fixed effects on individuals ${\lambda }_1$: Fixed effects over time

Thus, as can be seen in Table 3 and in the equation (5), trade openness measured by the trade balance is significant and negatively affects economic growth in Latin America; for every percentage point by which the trade balance increases (% of GDP), GDP per capita decreases by USD 11.49 dollars.

On the other hand, financial development as measured by domestic credit granted by banks is significant and negatively affects economic growth in Latin America; for every percentage point by which domestic credit increases (% of GDP), GDP per capita decreases by USD 19.61.

Foreign investment as a net capital inflow (% of GDP) is significant and positively affects economic growth in Latin America; for each percentage point as a percentage of GDP by which foreign investment increases, GDP increases by USD 29.94 dollars.

Among the variables used to measure the penetration of ICTs in economic growth, the only significant variable was the use of the Internet as a percentage of the population, contributing positively to economic growth; for each percentage point increase in the number of people using the Internet, GDP per capita increases by USD 16.82 dollars.

Discussion

Within the instruments used to measure the penetration of ICTs in economic growth, the only significant variable was Internet use, contributing positively to economic growth with a coefficient value of (16.82). That is, for each percentage point increase in people using the internet as a percentage of the population, GDP per capita increases by USD 16.82 dollars, being one of the most used variables worldwide, while fixed telephone subscriptions and mobile cellular subscriptions are not significant variables since the value of the t-statistic is less than 2. These findings are in line with the research of Hofman et al. (2016) and Cardona (2013) who for the panel data set reveal that Foreign Direct Investment and ICT expansion positively and significantly impact economic growth, and in addition to that, ICT expansion also has a positive effect on FDI inflows. On the other hand these findings contrast with the study of Bollou (2006) in which fixed telephone subscriptions is a significant variable and in the research of Siddiqui and Singh (2019) in which mobile cellular subscriptions is also a significant variable with a coefficient value of (0.279).

In this sense, the slow progress of ICT’s in Latin America is justified by the insufficient existing technological infrastructure and the lack of knowledge of the institutions and governments of these countries, regarding the importance of these cross-cutting digital technologies (Quiroga-Parra et al., 2017).

Regarding the trade balance, this variable has a negative influence on economic growth with a coefficient of -11.49 being this variable not significant, this finding has been contrary to the results of Toader et al. (2018) that in EU countries their coefficient of (0.14) has been significant. For the Latin American context this behavior is due to the impact on the balance of payments restriction, trade liberalization has not relaxed this restriction, which may limit the economic growth of Latin American countries (Pacheco López, 2009). In addition, the region faces a complex external scenario, marked by low growth in economic activity and world trade, which affects macroeconomic performance (CEPAL, 2023). Dependence on commodity exports has also been a relevant factor in the historical evolution of the region (Ocampo et al., 2017).

Regarding domestic credit, this variable negatively influences economic growth with -19.61096, this finding is in contrast to the results of the EU study by Toader et al. (2018) where the value of the coefficient (0.59) and is a significant variable. Domestic credit in Latin American countries can have a negative impact on economic growth due to debt accumulation, volatility in financial markets, reduced private consumption and limited investment.

Foreign investment positively affects economic growth in Latin America with a coefficient of 29.949 due to the improved openness of FDI in these countries. Meanwhile, Stanley, Doucouliagos and Steel (2018) also found a similar result in their study conducted in developed and developing countries. An expansion of ICT’s allows multinational companies to take advantage of cheap labor and capital, easy access to local and international markets, and regular and continuous communication with the respective headquarters. This influences multinational companies to invest in countries that have a good ICT base (Majeed and Ayub, 2018).

Conclusions

The literature supports the positive effects of ICT penetration on the economic growth of nations. ICTs are an important driver for providing access to information, which stimulates faster growth due to better investment. ICTs impact economic growth in both direct and indirect ways. They influence economic growth directly because they increase capital endowment and indirectly through total factor productivity.

In terms of access to and use of ICTs, the countries that use the Internet the most as a percentage of the population are: Chile, Uruguay and Argentina with 52.43% 45.41% and 43.58% respectively. On the other hand, the countries with the lowest rates of Internet access and use are Guatemala, Honduras and Nicaragua with 16.69%, 16.68% and 13.94% respectively.

The region experienced per capita gross domestic product growth through 2019, reaching an average of USD 7684.5 dollars. However, the disruptive impact of the COVID-19 pandemic in 2020 generated a significant contraction, reducing GDP per capita to USD 6724 dollars. This phenomenon highlights the region’s economic vulnerability to unexpected events and underscores the need for resilience and adaptation strategies. The implementation of policies focused on economic diversification, investment in education and technology, and the promotion of economic stability could be essential to foster sustainable and inclusive growth in the region.

ICTs have a positive impact on Latin America; according to this study, for every percentage point increase in the number of people using the Internet as a percentage of the population, GDP per capita increases by US$16.82. In this sense, it highlights the significant influence of Internet use on economic growth in Latin America, showing that widespread access to ICTs, particularly through Internet connectivity, can be a crucial driver of economic development in the region. Although fixed and mobile telephony subscriptions were not significant, the importance of the Internet as a catalyst for growth is in line with the global trend and underscores the importance of policies and strategies that encourage the expansion of digital infrastructure.

The study also highlights the persistent challenges facing the region in terms of trade balance and domestic credit. The trade balance, although not significant, continues to be a factor to be taken into account due to its impact on the balance of payments constraint. Likewise, the negative influence of domestic credit suggests the need to proactively address volatility in financial markets. Policies that encourage economic diversification, improve technological infrastructure and promote financial stability could be key to overcoming these challenges and fostering sustainable economic growth in Latin America in the digital era.