October 8, 2012

Digitization in Emerging Economies: The Key to Spurring Job Creation and Economic Growth

Recent analyses by Booz & Company reveal that digitization in emerging nations could deliver up to US$6.3 trillion in additional nominal GDP and a staggering 77 million new jobs over the next 10 years.

Today, the digital divide within developing economies is as important as the gap separating emerging markets from the developed world. In effect, these countries, which represent 85 percent of the world’s population, are lagging behind as a result of inadequate digitization among their poor populations. And, according to Management consulting firm Booz & Company, in order to catch up with mature economies they must focus on doubling the level of digitization among their poorest citizens – the 3.9 billion at the bottom of the wealth pyramid. These 3.9 billion people represent 95 percent the population in South Asia, 86 percent in Africa, 68 percent in the MENA region, 58 percent in East Asia and Pacific, 27 percent in Latin America, 20 percent in the CIS, and 14 percent in Eastern Europe.  Doing so will considerably advance the national level of digitization as well as create jobs, increase output, and unlock new market opportunities. This, however, marks a challenging feat as it requires rendering digital applications affordable, accessible and relevant to this underprivileged demographic.

Digitization – A Major Dividend

Digitization is characterized by the mass adoption of connected digital technologies and applications by consumers, enterprises, and governments. Most importantly, according to econometric analyses by Booz & Company, the benefits of digitization in developing economies – derived from the innovative business models, products, and services that invariably accompany technological transformation – could lift more than a half-billion people out of poverty in the next decade.

To date, digitization has already made a significant impact on the ability of emerging countries to create jobs and grow their economies. Between 2009 and 2011, it created 17 million jobs in such economies and contributed $350 billion to their overall nominal GDP. Furthermore, Booz & Company’s analysis indicates that a 10-point increase in the digitization level of a developing market would produce a 0.70 percent rise in its GDP per capita and a 1.09 percent reduction in its absolute unemployment rate.

The truth is, emerging economies enjoy greater reductions in unemployment from digitization than developed economies. “This is linked to the application of digitization,” explains Bahjat El-Darwiche, a Partner with Booz & Company. “In developing economies, digitization supports the continued acquisition of tradable, often labor-intensive jobs in sectors such as manufacturing. In developed economies, digitization enhances productivity in non-tradable jobs, which yields fewer new jobs but has a greater effect on GDP.”

Measuring Digitization: The Digitization Index was developed by Booz & Company to measure the global adoption of digital technology and to better understand its implications; it is a composite score that calculates the level of a country’s digitization using 23 indicators to measure six key attributes, which include ubiquity, affordability, reliability, speed, usability and skill. A country’s level of digitization is measured on a scale of 0 to 100, with 100 signifying the most advanced.

The average Booz & Company Digitization Index score of developing countries is 27, and most of these countries are in the constrained or emerging stages of digitization. “The average Digitization Index score among the poorest people in these nations is 17.5,”said Milind Singh, a Principal with Booz & Company. “The main factor in the low digitization level is extreme poverty, along with social, and often economic, exclusion. The people in this demographic segment earn less than $4 per diem per capita.”

A $4.4 Trillion Opportunity: Despite such low income levels, the bottom of the pyramid represents the greatest opportunity for capturing the gains in job creation and GDP growth associated with digitization. In total, in emerging countries, this fraction of society represents 70 percent of the total population and generates 27 percent of their total household income. This means that any emerging market striving to leverage digitization should seek to push up the digitization score of these citizens.

In actuality, the Booz & Company study also reveals that doubling the digitization level for this demographic in emerging economies could produce $4.4 trillion in additional nominal GDP and 64 million new jobs – over the next 10 years.  Moreover, it would expand the overall ICT market at the bottom of the pyramid by $300 billion over the same period and would also help to target untapped markets for industries such as financial services, education, and healthcare.

“Our analysis reveals that in the healthcare and education sectors alone this could represent a $700 billion opportunity,” added El-Darwiche. “Digitization would also enable government services to more effectively reach these citizens, thus creating a platform for greater civic engagement.”

Obstacles to Overcome

Although raising the digitization level of the poorest is a worthy endeavor, capturing the digital return on investment will not be easy. On the financial front alone, Booz & Company’s study shows that an investment of $1.4 trillion over 10 years would be needed to bring digital products and services to the entire addressable population at the bottom of the pyramid. These investments will center on the four pillars of digital systems: reliable network coverage, affordable devices, a cost-effective go-to-market approach, and relevant applications and content.

“Based on industry economics at current levels, we estimate the annual cost of digitizing the bottom of the pyramid at $47 per person,” said Singh. “This cost is more than eight times the annual digital spend propensity of a person at that level of the pyramid. Closing this financial gap is a major part of the challenge facing governments and companies and the first step is to understand its causes.”

On the demand side, reasons include a consumer base that suffers from high unemployment levels, volatile monthly income, a dearth of affordable credit, and low digital awareness, as well as a digital value proposition that is hampered by a lack of relevant content and a low-quality customer experience. On the supply side, the business case for investing in access infrastructure and fiber backhaul deployment in rural areas is less than robust. Additionally, existing network providers are already burdened by outsized capital requirements, high operating expenses and low ARPU.

A New Paradigm

Increasing the Digitization Index scores will require a fundamental shift in thinking. An effective approach to driving digitization in these highly challenging markets must address and alter both demand- and supply-side economics to bridge the digital divide within emerging markets. Also, it will require high levels of collaboration among a variety of stakeholders.

On the supply side, measures to be taken include:

  • Innovating: ICT companies will need to develop disruptive network and device technologies, cost-effective service delivery models, and innovative business models to serve the bottom of the pyramid profitably. These innovations will enable the industry to minimize its costs.

  • Co-Investing: The challenge of resolving the unbalanced investment and return among industry players, the high up-front investments required, and the long payback periods associated with network infrastructure at the bottom of the pyramid can solely be addressed through co-investment by private and public players.

  • Standardizing: Standardized technologies, processes, and practices support the development of bottom of the pyramid markets by reducing fragmentation and maximizing the opportunity to capture scale.

On the demand side, the necessary strategies comprise:

  • Expanding the ability to spend: Higher levels of disposable income and greater access to credit at the bottom of the pyramid are the two principal levers that can increase the ability of consumers to spend on digital services, without compromising their need to spend on essential products and services.

  • Enhancing the willingness to spend: The poorest sectors of society are wary of spending scarce income on digital technologies for a variety of reasons. Overcoming these obstacles requires creating community awareness and increasing the availability of relevant content and applications that address the basic needs of this population.

The Collaboration Imperative: Digitizing the bottom of the pyramid will require the combined efforts of multiple stakeholders.

Such determinations can be successful only if policymakers promote the technology at the national policy level, devise appropriate regulatory frameworks, and potentially co-invest in commercializing it. Private ICT players should, in turn, invest, develop, and commercialize the technology; they must also boost demand for the technology within its target market by creating income-generating applications, financing access, and raising awareness. For their part, private, non-ICT constituents must ensure that digital applications in their respective industries are supported by the technology. In parallel, industry associations should promote the technology and develop standards so that it can be effectively scaled. And lastly, civil society organizations must raise awareness about the benefits of the new technology among industry players and consumers.

The breadth of the collaborative effort is wide, and the investment may seem daunting at first, but the returns could reach 300 percent – enough to offset the effort and the investment required for success.

To conclude, bringing the bottom of the pyramid into the digital era will reap immense benefits for this demographic within developing economies – both in terms of employments rates and economic development. However, given the limited propensity of this population, this promising vision will undoubtedly be paved with difficulties. After all, taking advantage of this opportunity will necessitate a paradigm shift that addresses current digitization supply and demand economics as well as joint initiatives by both public and private sector partners.