Information and development: The information path to development
Phuah Eng Chye (31 August 2019)
Different development models chart different paths. The export-led industrialisation model has been the most successful but along the way, new barriers to growth can emerge. Successful developing economies can come across a “middle income trap”.
Rabah Arezki, Rachel Yuting Fan and Ha Nguyen observe “countries commonly climb to middle-income status, only to get stuck there – suddenly experiencing the low pervasive growth…refer to as the middle-income trap”. Based on their research on the Middle East and North Africa (MENA) region, they argue one reason why countries are caught in the middle income trap is “the slow pace of adoption of general-purpose technologies (GPTs) – both older GPTs such as electricity and their applications, and newer ones like broadband and the internet”.
Rabah Arezki, Rachel Yuting Fan and Ha Nguyen suggest “barriers to GPT adoption could be an important channel of transmission for the middle-income trap. Pervasive lack of contestability in many key MENA countries – and the slow pace of technology adoption that results – can help explain why more economies get stuck in low growth…the lack of availability of frontier GPT may have forced firms into low-productivity activities and limit their trade and economic growth. Further research on the interplay between the causes and consequences of lack of government-induced GPT adoption would shed light on the upstream factors that have impeded productivity gains and growth”. They suggest policymakers “embrace a moonshot” approach to the adoption of information technology and communications…level of access to the internet, bandwidth, and number of financial transactions carried out electronically. This would unleash the potential of the young, educated MENA population – which has high levels of unemployment – and spur growth”.
Whether for a developing or developed nation, the insight is that economies need eventually to shift onto the information path to development. S.Y. Lau points out it is “commonly accepted that the development of a nation has a strong correlation to how much a country has invested in building a digital ecosystem and infrastructure. For example, the United Kingdom, Germany, China, South Korea and Japan are seen as leading the world in their level of digitalisation…Today, 32% of China’s GDP is attributed to the digital economy…The first component is the direct contribution from the conventional ICT industry…the second component, which results from the empowerment, via digitalisation, of conventional industries such as agricultural, pharmaceutical, transportation, services, etc. This part contributed almost 75% of the digital economy components.” The view of the glowing prospects of relying on information-driven growth is affirmed by the rapidly expanding share of information in global trade.
In mapping out an information path to development, many are inspired by the shining example of Silicon Valley. Generally, most countries focus on developing technology-based clusters in advanced areas such as AI, robotics, big data, IOT, smart technology, green technology, bio technology and fintech. These efforts are supported by investments in infrastructure; venture capital funding and research centers and campuses.
The closest rival to Silicon Valley is China. The Chinese government launched Made in China 2025, a “state-led industrial policy that seeks to make China dominant in global high-tech manufacturing. The program aims to use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with – and then surpass – Western technological prowess in advanced industries”. The policy has drawn criticisms and reactions from developed economies – particularly in relation to the role of the state (and subsidies) and forced or illegal transfers of technology.
These criticisms however belie the competitive intensity that contributed to China’s success. Kai-Fu Lee notes China’s internet players display “willingness to go heavy – to spend the money, manage the workforce, do the legwork, and build economies of scale – has reshaped the relationship between the digital and real-world economies. China’s internet is penetrating far deeper into the economic lives of ordinary people and is affecting both consumption trends and labour markets”. In particular, Kai-Fu Lee believes China is well positioned to be an AI superpower as the building blocks – abundant data, tenacious entrepreneurs, well-trained AI scientists and a supportive policy environment – are in place.
However, development strategies need to be adjusted to suit local conditions. For example, other countries are unlikely be able to replicate the success of US and China as they are the largest economies in the world. Their large domestic markets and abundant supply of technical expertise are critical to achieving scale. For countries with scale constraints, success is likely to be sporadic with the risk that either their firms and talent will be poached by the global giants eventually.
Another variation is the role of the government. Silicon Valley evolved on the back of a highly sophisticated private sector with the requisite technical, financial and managerial capabilities. In contrast, developing economies lack a knowledgeable entrepreneur and investor base and are handicapped by underdeveloped infrastructure and markets. The China model is interesting because it was able to grow global-sized technology firms in a state-dominated economy and escape domination by the global (US) giants. This suggests the state model is a viable option where state support and subsidies are need to fill in the vacuum left by the lack of investor support and subsidies. The smaller economies are thus constrained on two fronts. They lack scale to support aspirations to be a global player and they are dependent on government intervention.
An UNCTAD report highlights that while “moving towards a digital economy may hold greater potential for industrialization in developing countries than often thought”, “the rapid pace of digitalization risks leaving many policymakers unprepared. Depending on a country’s level of development, unpreparedness can take several forms – from skills and infrastructure deficits to inexistent or fragmented policy adjustment – and can have numerous consequences, including wider digital divides, growing concentration of the benefits of digitalization among a few large firms, and stalled economic catch-up or even marginalization of developing countries from the global economy. Policymakers from all countries need to be aware about the key importance of data in a digital world”.
In this context, UNCTAD points out that while “engaging in digital trade is a promising first step and will spur institution building and the provision of hard and soft digital infrastructure, which are basic requirements for people and enterprises to engage successfully in the digital economy. But digital trade should not be an end itself… merely increasing connectivity might empower already more productive firms and sharpen the exclusion of other firms. And providing customer data to international platforms tends to result in concentration of corporate power that may make it difficult for developing countries to control and use data from their economies for their own economic development. This means that policy changes in a wide range of areas should accompany increased digital connectivity. Access to, control over and capabilities to analyse and transform data into economically meaningful knowledge will be central to reaping the benefits from a digital world. While ensuring that data governance frameworks appropriately address privacy and digital security considerations, policies should also encourage investment in data that have synergies both within and across industries. Regarding competition and antitrust policies, exploring what policies on standards, public participation in long-term finance, public procurement, etc. may be necessary to increase the benefit of developing countries in a digital world. Also required are bold demand policies, as developing countries can make such benefits sustainable only if their firms and consumers have the income required to turn their preferences into effective demand without incurring debt. In this sense, establishing a virtuous circle between the new digital technologies’ greater emphasis on customized demand on the one hand, and greater involvement of developing countries in manufacturing processes that satisfy such demand on the other, will require the adoption of more expansionary macroeconomic policies and reconnecting wage and productivity growth”.
A number of East European countries have enjoyed success with information-focused development strategies but, at the same time, face constraints to further inroads. Dmitrijs Kravcenko notes Latvia invested in a high-speed internet and telecommunications infrastructure and changed its laws to foster innovative start ups. Despite Latvia being “a liberal market economy with weak labour representation, a skilled and educated workforce, a strong service sector, and a world-class telecommunications infrastructure”, “economic activity in digital markets is rudimentary and at best peripheral to traditional marketplaces; high-speed internet is used predominantly for recreation, nationwide brain drain is severe, scientific collaboration between the public and private sectors is marginal, and the cornerstone of government policy appears to be built on spawning a blockbuster type of innovation for reasons not wholly pertaining to the goal of stimulating widespread digitalisation of the economy”.
Dmitrijs Kravcenko explains “the fundamental cause is a paradigmatic mismatch between government policy and development agenda vis-à-vis digitalisation, on the one hand, and some essential socioeconomic behaviours necessary for a working digital economy, on the other. In basic terms, government policy is generally focused on the development of infrastructure and support for high-tech ‘blockbuster’ enterprises in small numbers, while most of the working population that could provide a critical mass of activity and resources for a digital economy remains uninvolved in digital markets”.
Hence, Latvia lacks “the industrial and scientific base for a more technologically intensive entry into the digital economy…there are no domestic digital markets worth mentioning, the number of people in part-time work is well below the EU average and use of Latvia’s advanced telecommunications infrastructure is, at best, unrealised”. “Most of the economically active population in Latvia is not motivated and has no incentive to engage in digital marketplaces…businesses are not digitising despite having the available infrastructure to do so. In fact, Latvia ranks near the bottom of the EU on use of cloud services and on use of digital technology”. He adds that “intent on becoming a regional entrepreneurship hub, Latvia is at risk of becoming a place where government policy and labour legislation begin moving into a digital economy with no one in it”.
Dmitrijs Kravcenko points out there is “more than one path to digitalisation”. “Latvia can build on its developed service sector and approach the fourth industrial revolution from the side of automation, algorithms and the sharing economy. In this context, “taking a service-centred approach to the digitalisation of its already heavily service-oriented economy is likely to lead Latvia down the path towards what can be broadly described as a sharing and gig economy”. However, “rapid technological change without an accompanying rise in the skill base of the labour pool, the reconfiguration of the welfare system and a reconsideration of new employment arrangements results in talent shortages, digitalisation-induced unemployment and growing inequality”.
Estonia’s strategies has garnered wide praise. Elizabeth Schulze notes “when Estonia gained independence from the Soviet Union in 1991, the country embarked on a series of fast-track reforms to modernize the economy. From the start, it took a digital approach…because it was simply cheaper, easy”. Its educational initiatives raised the percentage of Estonians using the internet from 29 percent in 2000 to 91 percent in 2016. “In 2002, Estonia launched a high-tech national ID system. Physical ID cards are paired with digital signatures that Estonians use to pay taxes, vote, do online banking and access their health care records…99 percent of Estonia’s public services are online”.
According to Elizabeth Schulze, recent innovations includes e-Residency, an initiative to allow individuals to start businesses in the country without living there (More than 50,000 applicants) and a digital nomad visa for employees working remotely. The country has also created a conducive environment for start-ups and can boast of successes such as Skype (later bought by Microsoft), payments firm TransferWise and Uber competitor Taxify.
Daniel Vaarik notes challenges lie ahead. “While Estonia has a decent reputation among technology pioneers the scalability of its services remains to be proven”. In this regard, there is a risk of E-Narnia – “a tendency to over-mythologize technology by visionaries, politicians and public servants. E-Narnia can look thrilling to outsiders, but it is not rational nor scalable”. However, he believes “to avoid locking itself into old technologies, Estonia needs to continue digital innovation” particularly in promoting political and civic innovation, citizen-centred solutions, the use of open data and an active startup community.
Rainer Kattel and Ines Mergel point out that there is a “cognitive dissonance” on Estonia’s digital success. “Estonia is ranked high for its digital public service infrastructure, which is universally available and mandatory, and an integral backbone of public service delivery. Estonia’s digital success, however, is not about other digital offerings such as digital democracy, citizen engagement or digitally transforming public services such as the welfare state. The specific nature of Estonia’s digital achievement and at the same time disconnect between technological infrastructure and degree of digital penetration is often overlooked in international coverage. Domestically it has become a crucial political and policy issue over the past few years”.
In this context, most countries do not need to attempt to become the next Silicon Valley or to bid for global leadership in technology. In these instances, the information development path should be aligned with the goal of maximising the use and benefits of technology across society. This approach is largely adopted in Africa.
A recent article from the World Economic Forum suggested “African policymakers must therefore strike a balance between managing the impact of new technologies in order to benefit as much as possible from traditional manufacturing-based development models, and embracing the new opportunities that stem from technological advances. Identifying the right mix of policies for each country will be critical, particularly in view of Africa’s economic, political, and demographic diversity”.
This would require “making government more adaptive” which “requires firms, entrepreneurs, subnational administrative bodies, public officials, and civil society to develop a shared national vision for inclusive growth. This process should gather the best policy ideas, regardless of their origin, and aim to ensure that key economic actors are pulling in the same direction”. In addition, “African governments should also encourage experimentation” and “develop systems to monitor which policies are working well and which are not, so that successes can be scaled up”.
The article noted “some African countries have already employed elements of an adaptive approach. Liberia’s government, for example, recently experimented with outsourcing school management to a number of different non-state entities…the Ethiopian government is developing a portfolio of industrial parks as the centerpiece of its plan to make the country an African manufacturing hub”.
“The Fourth Industrial Revolution does not mean the end of traditional manufacturing-based development models in Africa, but it will require governments and policymakers to become more innovative and experimental. They will have to rely less on detailed planning, and be increasingly prepared to try things, learn, and scale up what works. Africa can find a path to the economy of the future if its governments are ready and willing to adapt.” It added that “because African countries cannot shoulder the necessary investment alone, traditional donors and global tech giants alike should explore innovative financing arrangements and experiment with new technologies that can increase access.
A major benefit of the new technologies is that it provides developing countries an opportunity to leapfrog into the new infrastructures organised around distributed networks, mobility and big data. The mobile phone lies at the heart of this technological revolution to bring information into play. Critically, mobile phones give individuals identities, allow them to accumulate assets safely and provides them with efficient access to the government and payments system.
Janine Aron and John Muellbauer note mobile money is transforming “the landscape of financial inclusion in developing and emerging market countries, leapfrogging the provision of formal banking services. Mobile money is available in two-thirds of low-to-middle-income countries”. The benefits of mobile money include lower transactions costs, improved transparency, facilitation of savings and risk sharing, empowerment of females, and its expansion of network and labour market opportunities. I would add that an efficient transactions and payment system can overcome information asymmetry, increase trust, stimulate entrepreneurships, broaden participation and address risks from robbery, extortion, corruption and bad debts.
Acha LekeTawanda Sibanda notes the impact of e-commerce on Africa. “Africa already has 122 million active users of mobile financial services, more than half the global total. Its number of smartphone connections is forecast to double from 315 million in 2015 to 636 million in 2022 – twice the projected number in North America. Over the same period, mobile data traffic across Africa is expected to increase sevenfold”. He adds that in a continent where “consumers are still woefully underserved…digital technologies allow forward-looking businesses to recast Africa’s challenges as an opportunity to innovate and address massive unmet demand”.
The thriving e-commerce sector has also stimulated start-ups. Acha LekeTawanda Sibanda notes investment in African tech start-ups is estimated to have reached a record $1.2 billion in 2018, double the previous year. The list of well-known start-ups include NYSE-listed Jumia (an e-commerce platform with over 4 million customers in 14 African countries), Nigerian start-up Interswitch, African Leadership University (ALU) (which empowers students to manage their own education using technology, peer-to-peer learning and four-month internships with partner companies), Andela (which trains software engineers and staff in Nigeria, Kenya, and Uganda).
Overall, the information path to development can be analysed purely from an information perspective. Developing economies start off as low-information environments. Low information means they operate under conditions of scarcity rather than abundance. Scarcity constraints are dominant because there is insufficient information to identify individuals and assets and limited knowledge and capabilities to organise. Developing economies are thus subject to high levels of information asymmetry and rely on non-information interventions (e.g. violence, corruption) and substitutes (e.g. institutions, rules) to facilitate transactions. Income from the monetisation of activities and assets generate low value and the financial industry and markets are under-developed.
When information capabilities are limited, countries evolve laissez faire institutions and rely on reputations and relationships as a substitute for detailed and accurate information. The romance of and need for laissez faire fades as information capabilities improve. As a matter of comparison, laissez faire resembles haggling at a bazaar to establish prices. It is a blunt negotiation tool and is suitable only for a limited quantity and value of transactions. The markets and platforms of today are able to support high value and voluminous transactions with anonymous parties because it is supported by a constant feed of information and extensive regulations to ensure reliable information disclosures and commitments.
Therefore, the information roadmap to development should be based on improving an economy’s ability to use information. The error is to focus on the physical elements (ICT, infrastructure) or on the e-service aspects. Improvements in infrastructure improve connectivity but it is the use of information and changing organisational structure and process to broaden and intensify participation that is crucial to unlocking the value of individuals, activities and assets.
The use of information needs to be at the core of the plan. Better use of information enables economies to overcome scarcity constraints to become abundant. Information (e.g. identity, legal definitions) is needed to underpin monetising the value of individuals, activities and assets. This needs to be supported by substantial policy and rule changes to enable the necessary changes. In this regard, the information society is underpinned by an extensive regulatory framework that promotes transparency and reliability, and provides a non-physical (legal) channel to settle disputes.
The industrial revolution has been succeeded by the information revolution. Information is opening up new paths to development. For developing economies, the information path provides the possibility of bypassing industrialisation, using the latest technologies such as AI to overcome knowledge and skill scarcities and to address information asymmetries. Matured economies face a different challenge; namely managing an exit from an industrial and physical economy to enable a successful transition to the information society.
Acha LekeTawanda Sibanda (22 April 2019) “The rapid growth of digital business in Africa”. Harvard Business Review. https://hbr.org/2019/04/the-rapid-growth-of-digital-business-in-africa
Daniel Vaarik “Where stuff happens first”. White Paper on Estonia’s Digital Ideology. BDA/Think tank of the President of Estonia. https://www.mkm.ee/sites/default/files/digitalideology_final.pdf
Dmitrijs Kravcenko (2018) “Latvia: A case of paradigmatic misalignment”. Edited by Max Neufeind, Jacqueline O’Reilly, Florian Ranft. Work in the digital age: Challenges of the fourth industrial revolution. Policy Network, Das Progressive Zentrum. Published by Rowman & Littlefield International Ltd. http://bruegel.org/wp-content/uploads/2018/07/Work-in-the-Digital-Age.pdf
Elizabeth Schulze (8 Feb 2019) “How a tiny country bordering Russia became one of the most tech-savvy societies in the world”. CNBC. https://www.cnbc.com/2019/02/08/how-estonia-became-a-digital-society.html
James McBride, Andrew Chatzky (updated 13 May 2019) “Is Made in China 2025 a threat to global trade?” Council on Foreign Relations (CFR). https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade
Janine Aron, John Muellbauer (7 May 2019) “The economics of mobile money: Harnessing the transformative power of technology to benefit the global poor”. https://voxeu.org/article/economics-mobile-money
Kai-Fu Lee (2018) AI Superpowers: China, Silicon Valley and the new world order. Houghton Mifflin Harcourt.
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Ministry of Economic Affairs and Communications (2006) “Estonian information society strategy 2013”. http://unpan1.un.org/intradoc/groups/public/documents/unpan/unpan033997.pdf
Phuah Eng Chye (3 August 2019) “Information and development: Globalisation in transition”. http://economicsofinformationsociety.com/information-and-development-globalisation-in-transition/
Phuah Eng Chye (20 July 2019) “Information and development: Development models and landscape change”. http://economicsofinformationsociety.com/information-and-development-development-models-and-landscape-change/
Phuah Eng Chye (6 July 2019) “Information and development: Are new technologies disrupting the path to development?”
Phuah Eng Chye (27 April 2019) “Defining the information society”.
Phuah Eng Chye (5 January 2019) “Future of work: Redefining work (Part 6: Monetising participation)”. http://economicsofinformationsociety.com/future-of-work-re-defining-work-part-6-monetising-participation/
Phuah Eng Chye (22 December 2018) “Future of work: Redefining work (Part 5: The economic paradigm of participation)”.
Phuah Eng Chye (8 December 2018) “Future of work: Redefining work (Part 4: Creating jobs from information and its ecosystem)”.
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
Rabah Arezki, Rachel Yuting Fan, Ha Nguyen (29 June 2019) “Technology adoption and the middle-income trap: Lessons from the Middle East and East Asia”. Voxeu. https://voxeu.org/article/technology-adoption-and-middle-income-trap
Rainer Kattel, Ines Mergel (2018) “Estonia’s digital transformation: Mission mystique and the hiding hand”. UCL Institute for Innovation and Public Purpose Working Paper Series (IIPP WP 2018-09). https://www.ucl.ac.uk/bartlett/public-purpose/sites/public-purpose/files/iipp-wp-2018-09_estonias_digital_transformation.pdf
S.Y. Lau (13 April 2019) “Why Malaysia must focus on building our economy based on digital competency”. Letter to The Star.
United Nations Conference on Trade and Development (UNCTAD) (October 2018) “Digitalization and industrialization: Friends or foes?” UNCTAD Research Paper No. 25. https://unctad.org/en/PublicationsLibrary/ser-rp-2018d7_en.pdf
World Economic Forum (19 August 2019) “The Fourth Industrial Revolution could mean the end of traditional manufacturing in Africa”. Published in collaboration with Project Syndicate. https://www.weforum.org/agenda/2019/08/how-africa-can-adapt-to-the-digital-revolution
 “Information and development: Globalization in transition”.
 James McBride and Andrew Chatzky.
 The term laissez-faire originated in 1681 when a French merchant M. Le Gendre advised the government could help most by Laissez-nous faire (“Leave it to us” or “Let us do [it]”). Laissez-faire is now commonly associated with the philosophy that individuals having the liberty to pursue their selfish interests will contribute to the general good. Based on this, states should restrict themselves to upholding the rights of private property and individual liberty, to removing all artificial barriers to trade, and to abolishing all useless laws. https://en.wikipedia.org/wiki/Laissez-faire.
 “Future of work: Redefining work (Part 5: The economic paradigm of participation)”.
 “Future of work: Redefining work (Part 6: Monetising participation)”.
 For example, the fragmentation of property ownership into small transactable lots and supported by financial regulation makes the property market accessible and liquid and enhances their value.