The Trickle‐down Effect of Fintech Development: From the Perspective of Urbanization

• Author: Guanghua Wan,Xun Zhang,Ying Tan,Chen Wang,Zonghui Hu
• Date: 01 January 2020
• Published date: 01 January 2020
• DOI: http://doi.org/10.1111/cwe.12310

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 23–40, Vol. 28, No. 1, 2020

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*Xun Zhang, Associate Professor, Beijing Normal University; Institute of Digital Finance, Peking University,

China. Email: zhangxun@bnu.edu.cn; Ying Tan, PhD Candidate, Beijing Normal University, China. Email:

yingtan@mail.bnu.edu.cn; Zonghui Hu, Master Candidate, Beijing Normal University, China. Email:

huzonghui1874@126.com; Chen Wang (corresponding author), Associate Professor, Shanghai University of

Finance and Economics, China. Email: wang.chen@mail.shufe.edu.cn; Guanghua Wan, Professor, Institute of

World Economy, Fudan University, China. Email: guanghuawan@yahoo.com. This paper was funded by the

National Natural Science Foundation of China (Nos. 71703088, 71833003 and 71973014).

The Trickle-down Effect of Fintech Development:

From the Perspective of Urbanization

Xun Zhang, Ying Tan, Zonghui Hu, Chen Wang, Guanghua Wan*

Abstract

The emergence of a digital divide or a lack of internet access may hinder urbanization

and adversely affect growth. However, fintech development can help to improve the

accessibility and affordability of financial services, particularly for sections of the

population formerly excluded from such services. Improved access is expected to

stimulate the growth essential for promoting urbanization, possibly alleviating the

negative impacts of a digital divide and creating a trickle-down effect. This paper is

among the first to investigate the effect of fintech development on urbanization, as

indicated by labor transfer from agricultural to non-agricultural sectors in China. It

is found that: (i) the digital divide hindered, while fintech development contributed

to urbanization; (ii) the positive effect of fintech development on urbanization affects

individuals both with and without access to the internet, yielding the so-called trickle-

down effect and thus helping to alleviate the negative consequences of a digital divide;

and (iii) regarding transmission mechanisms, fintech development helps to generate

additional jobs and raise income in non-agricultural sectors, stimulating urbanization

even for those without access to the internet.

Key words: digital divide, ntech, labor transfer, urbanization

JEL codes: D14, D31, R58

I. Introduction

The advance of information and communication technology (ICT), especially the

internet of things, is generating a profound impact on every fabric of human life.

Xun Zhang et al. / 23–40, Vol. 28, No. 1, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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A clear example is Alipay in China, which allows users to shop using their mobile

phones, without the need to carry cash or a credit card. While indeed making life more

convenient in general, ICT affects different population groups in different ways. In

particular, the digital divide, dened as the differing amount of information available

to those with and without access to the internet, is expected to aggravate the universal

challenge of worsening income distribution. For example, in the past, job seekers had

similar avenues to obtain information on employment opportunities, but the emergence

of the digital divide has disadvantaged those without access to the internet. Similarly,

the digital divide has created or enhanced inequalities in training, education, borrowing

and many other services and opportunities.1

The digital divide could adversely affect urbanization and economic development

when a signicant proportion of the population is deprived of access to such services and

opportunities. In particular, the resultant inaccessibility to job market information could

delay or slow down urbanization or industrialization in developing economies as such

information has become increasingly important for driving rural–urban migration (Wan

and Zhang, 2019). In fact, the digital divide in China is quite serious. The latest statistics

indicate that 40.4 percent of the population has no access to the internet (China Internet

Society, 2019). In 2018, this percentage was 56.2 in South Africa and 65.5 in India and even

higher in poor African countries, according to World Bank World Development Indicators.

How do we bridge the digital divide or alleviate its detrimental impact? One option

is to allocate public resources to help the disadvantaged. Another is to continue to let

the market drive resource allocation and economic activities. This second option is not

feasible unless development of the digital economy produces what is called a trickle-down

effect to ensure that the disadvantaged also gain.2 This is analogous to the controversial

trickle-down effects in the context of poverty reduction – poverty can be reduced through

growth, not just redistribution (Dollor and Kraay, 2002; Wan et al., 2018).

On the other hand, one of the most prominent areas of the digital economy is the

emergence and fast growth of financial technology (fintech, a new tech that seeks

to improve and automate the delivery and use of financial services). Heavily reliant

on the internet, the development of fintech may help to mitigate the negative impact

of the digital divide. Fintech offers cheaper, more transparent and more inclusive

nancial services than the traditional nancial sector and has changed the way in which

people engage in economic activity (Philippon, 2016; Bazot, 2018). Such engagement

1Please see a critical review on China’s internet nance by Xu (2017).

2The trickle-down effect refers to the phenomenon of gains from economic development owing from the

upper classes to the lower classes in a society.