Wednesday, Aug 10, 2022
International Finance
Economy Magazine

The relation between global growth and the Internet

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Inspiring advances in the Internet has led to enhanced interconnectedness between sectors and marketplaces, spurring GDP levels

The Internet has not stopped its revolution since the first registered domain way back when. In 2012, the Boston Consulting Group carried out a research on ‘how countries can win in the digital economy’, where scale and speed of Internet-propelling growth has sailed it through a series of recessions and one near collapse—yet it has increased in size and value. The momentum of change is spiralling upward and the nature of the Internet is rapidly changing too. After years of unbridled enthusiasm—leading to urbanisation—it points to the question on what is the real impact of the Internet on the global economy? 

 Asking an expert of his opinion on the matter and how fast he thinks the global economy can grow, Torbjörn Fredriksson, Chief of ICT Policy Section at UNCTAD, told International Finance, “Well, the simple answer is that no one really knows how the Internet has impacted the GDP overall as it is very difficult to single out the precise impact of the Internet.” Last year, UNCTAD published a report stating that measuring the digital economy and related value creation is challenging. However, it estimates the size of the global economy to range anywhere between 4.5 percent to 15.5 percent of world GDP. In terms of value, the United States and China represent a combined 40 percent of the world total. The report notes that by share of GDP, Taiwan province of China, Ireland and Malaysia have the largest ICT sector. 

Building close interactions between sectors and marketplaces

A useful approach for analysing value creation in the Internet economy is the frequent interaction between companies and local markets. For example, China has a range of platforms that provide a diverse set of opportunities for small businesses in the apparel sector, allowing them to transition from generic production to building a brand over time—thanks to the interconnectivity introduced by the Internet. It is for the same reason that digital transaction platforms have disruptive effects across multiple sectors around the world. So the process of platformitisation has immense potential for transactions within sectors and for companies to scale rapidly, evolving the structure of those sectors. 

Internet productivity growth matters to all participants in the economy, and that is how it is impacting the GDP too. “It is most likely contributing to high productivity, but it is difficult to really pinpoint the exact impact, even in productivity or growth from the increased use of the Internet. What research shows is that beyond having access and use of the Internet, you also need to really boost productivity growth. You also need to improve the scale and adapt to how business is done in order to have a big impact, but overall it is difficult to know the exact impact,” he says. 

US and China have the highest concentration of digital economy

The degree of the Internet’s contribution varies in countries—much higher or lesser—depending on the levels of penetration and scales of use. For the American economy, the Internet sector is an important contributing factor to its GDP. In 2018, the Internet Association commissioned a study which extracted data from the US Census, US Bureau of Economic Analysis and US Securities and Exchange Commission, only to find out that the sector accounted for $2.1 trillion of the economy, which translates to 10 percent of the country’s GDP. The study notes that the Internet is the fourth largest sector in the country, put behind real estate, government and manufacturing. The sector is responsible for creating 6 million direct jobs and indirectly supports an additional 13 million jobs in other sectors in the country. 

You know, increased use of the Internet is part of a broader digital transformation of both the economy and the society. Because it is a transformation, it means that it changes the way things are done,” Fredriksson said. “It creates both opportunities in terms of job creation and challenges in terms of job losses or changes in the nature of jobs or the way jobs are done.” According to the association’s findings, the sector grew nine times faster than the American economy as a whole in a span of six years and it has invested more than $60 billion into the economy. That said, the report identifies that the United States accounted for 72 percent of the total market capitalisation of digital platforms valued at more than $1 billion, followed by Asia (mainly China) which demonstrates 25 percent, while the European Union’s share is only 2 percent. 

China and the United States share common factors in terms of market dominance and control of data, and still they are thriving in two very different economic environments. The American government supported early stages of development of the Internet through basic research, but the digital platforms have grown against the background of a free market, sprouting private workforces in the digital economy. In contrast, China’s top digital platforms were significantly backed by government interventions, even providing protection against competitors from foreign marketplaces. 

The Internet fortifies the digital environment 

For the world’s two superpowers, creation in value, lies in their deep transformation of digital data into digital intelligence. Fredriksson explains “the more prepared a country is to adapt to a more digital environment including increased Internet use and the economy, the better prepared they are actually to benefit from it.” Investors are betting on this transformation across sectors, such as retail, transport, healthcare, education and accommodation, while corporate leaders are redefining their core as data-centric companies. The strong influence of the Internet “has led to continuous reorganisation of business activities,” says Fredriksson. On a global scale, America’s Google which is famed for its dominance in the search market, holds 90 percent of the market share, while China’s WeChat has more than 1 billion active users, and combined with Alipay, it accounts virtually for the whole of Chinese market for mobile payments. Many of those global digital platforms are pursuing growth over revenue because gaining full control of data is crucial to underpin their market position.  

Again, data is fundamentally important in the digital economy. According to PwC, seven of the world’s leading eight companies by market capitalisation had data-centric business models, in 2018. Enormous amounts of machine-readable information like digital footprints of individuals form the digital substrata of economic and social activity in every sector. This is intrinsically an economic good, because it is part of the individuals interest and behaviours that are compiled in large volumes, to build competitive advantage in the marketplace, and in turn contributing to the GDP in various forms. For example, cloud platforms like Alibaba Cloud, Amazon Web Services, Google Cloud Platform and Microsoft Azure are specialised in manufacturing, and cloud computing promises flexible and cheaper services compared to on-premise information technology. Developing countries will be the biggest beneficiaries of that because they have worries in reducing barriers in accessing large-scale computing needs. For them, cloud platforms end up providing the basic infrastructure required for the modernised global economy.

India expects to grow exponentially due to deep Internet penetration

Other than China, India’s Internet economy is projected to reach $250 billion on the back of a strong addition in online users and exponential growth in data consumption. By the numbers, the economy is expected to grow from between $100 billion to $130 billion (which is 5 percent of its GDP) to between $215 billion and $265 billion (which is 7.5 percent of the GDP) by the end of this year. For the country, ecommerce and financial services are expected to comprise $40 billion to $50 billion and digital media at anywhere between $5 billion and $8 billion. A big chunk of this development is anticipated to come from private and government spending, followed by internet penetration and use of devices. That said, average data consumption in the country is expected to reach between 7 GB to 10 GB per user per month this year. Much of the growth is triggered by an increase in the Internet and smartphone penetration. 

For countries behind years of access barriers 

There are some countries today hidden behind decades of access barriers and the need to feed digitisation into their cultures is a slow-moving process. “If you look at the least developed countries, only about 20 percent of the population are using the internet, which is a very small share compared to more developed countries,” he says. Statista in its recent report illustrates the countries having the lowest Internet penetration rate as of January, and it points to Somalia as well as North Korea. In Somalia,  only 10 percent of the population had access to the Internet, while North Korea ranked first with virtually zero percent of Internet penetration. That said, Etira has 1.08 percent and Niger stands at 2.22 percent. 

The physical manifestation of high Internet penetration in those countries can be seen when there are changes introduced at a fundamental level. “What is very important is that countries do not look at the aspect of Internet access and connectivity issues alone, but it is fundamentally important to have affordable connectivity and sufficient speed quality,” Fredriksson explains. However, “an improvement in the supply of cash connectivity alone will not lead to anticipated positive effects from improved connectivity, but it is important that you look at the demand side of such connectivity. From that perspective, I would primarily focus on the area we work in.”

The Internet economy is the venue for ecommerce growth

For a sector, “Improved connectivity across the world means that growing numbers of production and distribution activities can be done digitally, of course the location depending on what kind of production we are talking about can easily be relocated,” Fredriksson said.“But that means it will go to the places where it can be produced more cost effectively where you have the right scales and right infrastructure. In some cases, digitalisation can facilitate 3D printing, for instance, where it makes it possible to produce some goods at a lot smaller scale and closer to the market which may be a challenge to a traditional mass production paradise.” 

Fredriksson in an example explains that “the spurring growth in ecommerce companies buying and selling goods as opposed to only brick and mortar” will make a difference in building up the Internet ecosystem. Some countries have 100 percent coverage of mobile and broadband, but only 20 percent of the population are Internet users and only 5 percent make online purchases. “So, if you have improved internet connectivity but very few people are using it, it becomes very difficult to maintain that infrastructure. So its very important to work on both the demand and supply side for the internet ecosystem to work properly,” he says. 

How Internet shutdown weighs on economic GDP

A series of events that took place last year point to an interesting assessment in the real significance of the Internet to the economy. Last November, the Iranian government shutdown the Internet across the country in an effort to triple fuel prices overnight. The five-day black out came as a surprise to the world and stoke fear among locals that it could happen again. The contagion effects of the shutdown was experienced across all economic sectors, resulting in unfavourable disruptions. It was in the same year that Top 10 VPN carried out a research study only to find out that governments around the world are swiftly cutting down on Internet access for their citizens. This kind of move to quash social media unrest, hike fuel prices, or anything else, can have a distasteful impact on the economy. 

A total of 122 major Internet shutdowns took place around the world, excluding a further 90 regional shutdowns in India alone. The cost that countries have faced in the absence of the Internet is unbearable. Citing examples: In Iraq, the 263 hours of Internet shutdown led to $2.3 billion in losses. In Sudan, the 1,560 hours of Internet shutdown led to $1.9 billion in losses. In India, the 4,196 hours of Internet shutdown led to $1.3 billion in losses. In Venezuela, the 171 hours of Internet shutdown led to $1.1 billion in losses. 

Governments’ call to action on national and global levels

With looming digital divide, a key component of the revolution is that “governments across the world should take the process seriously, and they need to address it at the highest level,” Fredriksson says. It is not sufficient to have the Ministry of Information and Communications to take care of the digital transformation. “You really need to address a large number of policy areas in parallel, and it has to do with connectivity, change in scales, curriculum and education.” 

He reiterates that “trading policies, legal and regulatory framework to protect users, data of individuals and companies, addressing cybercrime concerns” and of the sort should definitely be directed well. “The biggest challenge here is not just to speed up digital transformation for the sake of it, but to do it in a way that really enables people, enterprises and ultimately the whole economy to take advantage of,” Fredriksson said. “That is why it is important to look at a broad spectrum of policy areas from change in the scale profile of people, helping businesses to transform into a more digital environment, and establish what kind of sectors are more positively affected than negatively affected.”

“It is not just about having access to the Internet, but it is also about how we can make sure that we create value in the Internet ecosystem across each country,” Fredriksson explains. So that necessitates a broad agenda to be addressed, and the “United Nations and most governments are acutely aware of these challenges.” There is urgency in the matter because technological changes are accelerating and it is important that governments at national and global levels address that to ensure that “we really bring out more inclusive development gains rather than widening the inequality—where only a few corporations are able to take advantage of a full digital transformation.”

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