Digital Economy: An opportunity for Emerging Markets
A lot has been said about the fourth industrial revolution and the digital economy. I was recently at a roundtable discussion at the IMF that discussed the Digital Economy in Africa and the potential that lies therein. While there has been movement by a good number of emerging and frontier markets investing in this new economy, I believe most will miss the fourth industrial revolution.
Deloitte defines the digital economy as “…the economic activity that results from billions of everyday online connections among people, businesses, devices, data and processes.”* The digital economy covers various aspects including payment solutions, health care, home automation, transportation, advertising, retail, smart cities and so much more. It is estimated that, “half the world's population is online, a third are on a social network, 53% are mobile, and they span all ages, races, geographies and attitudes across the planet.”**
In order to understand the trends and the players in this new digital economy, we need to follow the money. The developed world led by the US private sector is making a significant investment in the digital economy, from Amazon to Uber. While the digital economy is currently valued over $3 trillion, it is heavily dominated by the US, Europe and China. There are however several segments in this new economy that are still available for the taking.
Blockchain and its various implementations has opened up ways for emerging and frontier markets to not only leapfrog but lead in developing innovative solutions. Unfortunately the necessary investment needed to establish a comparative advantage is not taking place. In Africa, where limited private capital is pursuing some investments, government participation is necessary to achieve the required scale. Although popular opinion is that these investments need to be made by the private sector while governments develop enabling policies, I argue that government investment in the private sector is necessary to create the comparative advantage.
At the moment most African governments allocate less than 0.01% of their budget to technology. If most of these countries intend not to miss out on yet another industrial revolution this trend must stop. Countries have to overweight their investments in technology to create that advantage. These investments must also include the human capital development needed to support the sector.
“The US government spent approximately $320 billion (in 1940s money) on World War II, about half of it borrowed from the public through bond sales and the other half raised in taxes. That spending provided a massive boost to the gross national product, which shot up from $88.6 billion in 1939 to $135 billion in 1945.”
This government expenditure went directly to local US manufacturers developing the necessary machinery needed by governments for the war. In no small part, these investments set the foundation for the comparative advantage the US enjoys today in aviation, manufacturing and technology.
Therefore, governments who want to establish a comparative advantage in this new digital economy must disproportionally invest in local companies to drive production and adoption of the new technology in their countries. The likes of Estonia and the Dubai government have adopted this strategy in their drive to create a comparative advantage in Blockchain technology.
Finance ministers of most low-income countries struggle with prioritization of capital because of competing needs of their populace. The question that needs to be answered is which investment will lead to the best return and growth in the long run. It is important that governments see the production side of the digital economy and not just the consumption side.
Investing in the production side of the digital economy is not for people to have access to Facebook, Amazon and WhatsApp. It is however an investment in creating technology products and services that will generate significant revenue from global markets.
Not to undermine the real challenges decision makers face when deciding to invest in infrastructure, power, agriculture and social development for its populace; an investment in technology might seem luxurious in comparison, but a failure to invest and be active participants in the development of this fourth industrial revolution will surely cement the stagnation of growth and underdeveloped position these countries face.
If I was in charge of a budget of a developing economy, with majority of my population under the age of 35, and a billion dollars to invest; I would put it towards the digital economy. Starting by identifying a niche and focusing on human capital development, training, technology solutions development & implementation and then wait for the returns. In my view, that should be the Blockchain ecosystem with its infinite possibilities and impact. With the right investment developing economies can be active players in this digital revolution.
***Waterhouse, Benjamin (2017) The Land of Enterprise: A business history of the United States, Simon & Schuster, New York