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Information Technology for Development

Author ORCID Identifier

Juan Martinez Alvarez: https://orcid.org/0000-0002-6262-8069

Paula María Almonacid: https://orcid.org/0000-0001-6008-1728

Simon Fernandez-Vazquez: https://orcid.org/0000-0003-0223-4065

Abstract

This study investigates how digitalization is reshaping financial development in Latin America and the Caribbean (LAC), a region where persistent challenges, including macroeconomic volatility, institutional weaknesses, and high levels of inequality, hinder its potential to close financial development gaps. We analyze the impact of digitalization (digital depth), measured by the Mobile Connectivity Index (MCI), on financial development across 23 countries from 2000 to 2021. To address reverse causality and strong dynamic persistence, we first estimate a dynamic panel model using System-GMM, which provides a causally identified within-country effect. The results show that digitalization exerts a positive and statistically significant impact on financial development, even after correcting for endogeneity. While the short-run causal effect is moderate, high persistence implies sizable long-run gains. We then employ structural equation modelling (SEM) to uncover the transmission mechanisms underlying this relationship. SEM reveals both direct effects and indirect pathways operating through institutional quality and human capital, with mediated channels accounting for approximately one-third of the total structural association. Finally, panel quantile regressions show that the positive effect of digitalization is present across the entire distribution of financial development, but its complementarity with institutional quality becomes stronger in more financially advanced countries. The findings suggest that digitalization is a robust driver of financial development in LAC, though its impact depends critically on institutional strength and human capital. Digitalization acts as a catalyst rather than a standalone solution: its long-run effectiveness is amplified when accompanied by governance reforms and investments in education and digital capabilities.

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