Digitalization: Curse or Blessing for Developing Economies?

Digital technologies are becoming increasingly important for the economic prosperity and international competitiveness of individual economies. On the one hand, for developing countries they represent a potential source with which can increase material prosperity and combat poverty. On the other hand, there is the danger that some of these countries will be technologically left behind and will no longer be competitive at international level.

Progressing digitalization can improve the supply of goods and services in a number of ways:

• The optimization of production and business processes increases productivity. As a result, consumers can purchase more goods and services at lower prices.
• If prices fall, the purchasing power of a given income increases – and consumers’ consumption opportunities increase.
• Finally, Big Data analysis allows products to be better adapted to individual customer needs.

For people, all this means an increase in their material prosperity.

Digitalization as a decisive factor in competition

The decisive factor for this positive prosperity effect is that an economy is – and remains – internationally competitive. Only then there will be jobs in the country with which people can earn the money they need to buy goods and services.

But how can international competitiveness be secured? An important point is that the economy is expanding its digital infrastructure. This requires, above all, private investment by companies that have to adapt their production facilities to digital technologies. In addition, further training opportunities and organizational restructuring are important. The government also has to increase its investment – materially in efficient information and communication networks and a secure electricity supply. And immaterially in the digital skills of citizens (education expenditure).

It is precisely here that many developing countries, particularly in Africa, still have major prioritization and investment gaps. Accordingly, 40 of the 50 African countries surveyed in the transformation index BTI only score 4 or less on a scale of 1 to 10 in the “Education/R&D policy” indicator. Only Botswana, Mauritius, Rwanda and Tunisia have solid education systems. While the Rwandan government has established a National Research and Innovation Fund (NRIF) among these top four, almost all African countries and most developing countries have a situation similar to Tunisia as described in the country report of the BTI 2020: „Tunisia invested 0.6% of GDP in research and development, [which …] is likely too modest an investment for the country’s long-term economic development and a consequence of the government’s high expenditure on consumption (e.g. public sector wages and subsidies), which leaves few resources for investment.“

Digitalization puts developing countries under pressure

For newly industrializing and developing countries, the worldwide advance of the digitalization process is a double-edged sword. On the one hand, it offers technological advances in productivity that can improve the economic situation for people and reduce poverty. On the other hand, these countries also lose a decisive competitive advantage: cheap labor. Because of this, high-income countries like Germany and the U.S. have long shifted production processes to low-income countries. If, however, more and more capital and technologies are used for the production of goods, the importance of low wages will decline. It can become more attractive for companies in high-income countries to bring production sites back into their own countries. Boeing, Bosch, General Electric and Philips have already done so. For emerging and developing countries, however, this means the loss of many jobs.

Digitalization allows technological leaps forward

At the same time, digitalization offers developing countries the opportunity to make significant technological leaps. Economists call this phenomenon leapfrogging. This means that less developed economies can skip a technological development stage and thus catch up more quickly with highly developed economies. A good example of this is developing countries that are setting up a mobile communications network for their communications without previously having a wired telephone network for landline connections. However, this technological leap can only take place if the necessary infrastructure is in place. In addition to a high-performance mobile network, this also includes a secure electricity supply (https://www.bundestag.de/resource/blob/525938/488ea79620fb0b4c452b42519f2afb37/wd-2-051-17-pdf-data.pdf, p. 5).

If the necessary infrastructure is successfully established, the international competitiveness of emerging and developing countries, which until then had been underdeveloped, will improve significantly – and at the same time facilitate their integration into the world economy. The effect is that they can participate in the economic benefits of the international division of labor and the associated increases in income. In this way, the economic catching-up process of emerging and developing countries could be accelerated.

Financing options for digitalization are crucial

With regard to the financing possibilities of governments and companies, it can be assumed that rich economies will tend to find it easier than less developed countries to drive the digital transformation forward through corresponding investments.

Emerging economies with relatively strong economic growth and low government and corporate indebtedness are also better placed to make the investments necessary for digital transformation. Emerging countries that can expect above-average investment in digital technologies over the next ten years include South Korea, Indonesia, Taiwan and Thailand (http://media-publications.bcg.com/BCG-Inside-OPS-Jul-2016.pdf, p. 19).

The situation is poor in developing countries with a low level of prosperity and high foreign debt. As a result of the low income level, citizens can hardly make any savings. Combined with poor economic prospects, this blocks access to international capital markets and makes it virtually impossible to finance the digital infrastructure. Numerous African countries are particularly affected by this.

Industrialized nations in duty

Without support from the developed industrialized countries for the development of the digital infrastructure, the weakest developing countries risk losing further ground in the global economy. This would affect above all those countries that are at the bottom of the BTI’s Economy Index, i.e. many African states. In countries which are economically left behind, an increase in social conflicts and political polarization could be expected – which in turn would inevitably increase the pressure of migration. These are developments that could also impair economic and social stability in the developed and industrialized nations. It is therefore in the well-understood self-interest of the developed economies that developing and emerging countries succeed in the digital transformation.