An increasing share of commercial transactions are moving online, while digital technology continues to expand its reach into every facet of the traditional economy. This has provided businesses with new channels through which to reach existing clients, as well as new opportunities to expand their market share by developing a competitive digital offering. For consumers, the ever-expanding digital economy promises not only greater access to goods and services, but also to information regarding these products. This in turn encourages more competitive pricing among providers. In emerging economies, the development of digital channels has, in some cases, allowed sectors to essentially skip stages in development, moving directly to digital solutions, thereby circumventing the need to first invest in certain kinds of hard infrastructure.
While the digital economy has opened up many growth opportunities, there remains a so-called global digital divide. The capacity and quality of internet and mobile phone network coverage in many emerging and frontier markets still lags behind that in more advanced economies. While there is no country of any income level in which access to digital networks is universal, the digital divide is nevertheless more acute among lower- and middle-income states. Closing this gap can be challenging in countries with lower rates of urbanisation or difficult terrain, which complicates the extension of physical network infrastructure.
However, the example of companies such as M-Pesa, which has dramatically extended digital financial services in both urban and rural Kenya, highlights that these challenges are far from insurmountable. What is clear moving forward is that, alongside the requisite investment in hard infrastructure, there is also a need for policymakers to put in place soft infrastructure; the legislative and institutional frameworks necessary to sustain growth in the digital economy. The Gulf states have been among the most forward-looking in this regard. In countries such as the UAE the digitisation of state services, coupled with the implementation of a favourable regulatory environment, is driving the transition while also helping to foster and support digital innovation across the economy.
One example that highlights the manifold opportunities that digital technologies present for developing states is M-Pesa. Building on the success of earlier pilot projects in Africa and elsewhere, Kenyan mobile network operator Safaricom brought M-Pesa to market in 2007, in partnership with Vodafone. This service allows anyone with a basic mobile phone to use it as an electronic wallet with which they can transfer money to others, pay utilities bills, deposit and withdraw funds via agents, and even access microcredit. This mobile money system has thereby brought financial services to large swathes of the previously unbanked population. The launch of this platform coincided with a surge in mobile phone subscriptions in the country. Having already risen from fewer than five subscriptions per 100 people in 2003 to 30 by 2007, the total increased three-fold over the following decade, reaching 86 by 2017, according to the UN’s International Telecommunication Union (ITU).
In early 2019 the service had garnered 21m users in Kenya alone, and was processing over 1.7bn transactions per year in the country. Furthermore, in early 2019 M-Pesa was making preparations to enter Ethiopia, a country twice the size of Kenya and one of the fastest-growing economies of the past decade. This follows its earlier success in neighbouring Tanzania, as well as in countries like Egypt, Afghanistan and India. The M-Pesa model has since spread to other countries as well.
In developing economies with relatively poor fixed telephony infrastructure and a limited number and distribution of bank branches, the rapid improvement in mobile network coverage and the increasing ubiquity of mobiles and smartphones is allowing financial services providers to reach more new clients than ever before. Moreover, once the initial investment is made in establishing a digital platform, the cost of each new client is minimal, compared to the marginal cost of attracting clients through physical infrastructure.
Many emerging and frontier markets lag behind advanced economies in terms of digital trends. However, the generally higher economic and population growth rates in the developing world ensure these countries are likely to be among the most important drivers of growth. Uber, for example, is tailoring its app to lower-income markets, developing Uber Lite in India so that riders can get the same service with lower data intensity. This is important in markets where network infrastructure has not yet reached the most advanced levels, but where consumer demand for the service is strong.
In some cases ride-sharing apps such as Uber are filling a gap in the market which stems from the fact that the public transport system is poorly developed and inefficient. For example, in late 2018 Uber executives hailed Argentina as its fastest-growing market, despite the fact that the platform is only operating in the capital, Buenos Aires, and notwithstanding the economic challenges currently facing the country. Uber executive Andrew Macdonald cited the city’s lack of public transport options as the main driver affecting demand. This success likely highlights a growth opportunity in many other emerging and frontier markets where public transport is underdeveloped.
Meanwhile, India has become the fastest-growing geographic market for Amazon, as well as the fastest-growing subscriber base for its Prime service. However, although the biggest names in global digital technology are profiting from surging growth in emerging markets, they are by no means alone in looking to capitalise, with these countries also giving rise to a range of internationally competitive domestic firms.
Alibaba, for example, is the dominant player in China’s online retail market and is rapidly expanding its footprint throughout Asia and beyond. These growth markets include India, where it is competing directly with Amazon. In fact, since 2015 Alibaba’s global online sales have surpassed those of Amazon, eBay and Walmart combined. While the high and rising population density in Alibaba’s primary target markets clearly puts it at an advantage in this regard, digital firms from the region are by no means relying solely on regional demographics to fuel expansion.
Between 2004 and 2017 the average number of mobile phone subscriptions per 100 people rose from five to 75, according to the ITU. The average number of broadband mobile phone connections per 100 people in the region stood at 36 in the final quarter of 2018, according to the global telecoms industry association GSMA Intelligence. At 32 and 34 mobile broadband connections per 100 people, Tanzania and Gabon fell slightly behind the regional average, while Nigeria and Kenya were slightly ahead with 40 and 41, respectively. Meanwhile, Djibouti was behind with 16. Other countries in region fared significantly better: Côte d’Ivoire (74), Ghana (80) and South Africa (105), compared to a global average of 104.
Even countries whose ICT infrastructure compares favourably with the regional and international average are finding ways to improve their internet penetration and network coverage. Côte d’Ivoire is a case in point, with its National Agency for Universal Telecommunications Services in the process of deploying a 7000-km fibre-optic network to rural areas. “On multiple levels, the government-led fibre optic project is a tremendous opportunity for digital transformation,” Serge Kouakou, general manager of Orange Business Côte d’Ivoire, told OBG. “Optical fibre allows more bandwidth than copper and is a more stable technology, considering the country’s climate. As such, service reliability should increase and rural populations gradually gain access to better internet and telecommunications services.”
Of the countries covered by OBG, Thailand and Malaysia led the way in terms of mobile broadband connections, with 127 and 112 per 100 people in late 2018, respectively. This placed them well ahead of the regional average of 82. At 78 mobile broadband connections per 100 people, Myanmar fell slightly behind this average, though ahead of both Vietnam (66) and Papua New Guinea (14). However, all other countries covered by OBG in the region ranked above the regional average: Sri Lanka (87), Brunei Darussalam (95), Philippines (106) and Indonesia (108). Having only opened its mobile telephony segment to foreign investment in 2013, Myanmar is currently catching up in developing its ICT infrastructure and has been making great strides in recent years. “Telecommunications is a textbook example of great development in Myanmar, where companies can now receive their licence, connect to the network and start operations within a year,” Lin Roye, deputy managing director at Myanmar Fibre Optic Communication Network, told OBG. “It has become a little more challenging recently, however, since the permit system for extending the fibre-optic network has been decentralised to regional governments, which do not always fully understand its importance.” As such, mobile connectivity continues to be important even as fibre optic networks expand. “Mobile internet is cheaper and more widely available because more towers are being installed, resulting in better connectivity,” U Myo Ohn, CEO of Campana Group, told OBG. “Mobile internet reaches users faster, but only when fibre optics arrive do you truly have broadband.”
Myanmar demonstrates the role new entrants can play in improving services on offer and driving down prices. This is highlighted by the arrival of Mytel in 2018, backed by Vietnam’s Viettel Group, the fourth entrant into the country’s market. In January 2019 – after only eight months of operating in Myanmar – the firm had already reached an 8% market share, having achieved a competitive edge by offering bundled internet services.
Middle East & North Africa
At 85, the average number of mobile broadband connections per 100 people in the Middle East and North Africa is above the global average. However, there is divergence inside the region, with Jordan at 64 and the UAE at 163 in late 2018, one of the highest in the world. The North African states covered by OBG stood at or above the global average, with Morocco at 70, Egypt (71), Tunisia (74) and Algeria (77). Meanwhile, Turkey stood at 74 per 100 persons. All remaining Gulf states covered by OBG stood above the global average: Bahrain (105), Saudi Arabia (110), Oman (112), Qatar (135) and Kuwait (159).
Countries in the Gulf were among the earliest to recognise the potential of digitalisation for all areas of the economy. These states have also pioneered the implementation of legislation to support the development of the digital economy. Bahrain introduced the region’s first 4G LTE network in 2013 and also issued a law on the protection of personal data in 2018. In another initiative, Abu Dhabi Global Market – the emirate’s international financial centre – announced in September 2018 the creation of a digital sandbox to accelerate financial services innovation and boost financial inclusion. This will provide a regulatory environment for financial technology (fintech) players to experiment on new products and services. As part of a drive to develop their digital economies and close the gap with their peers in the Gulf, the Maghreb countries have introduced important institutional initiatives in recent years. Building on its significant investments in ICT, Algeria has been trying to foster ICT start-up clusters. Furthermore, through the Algiers Smart City initiative the country is seeking to harness digital solutions to improve urban living standards.
“Just as large portions of the developing world used mobile phones to leapfrog landline technology, artificial intelligence, drones, 3D printing, biotech and other exponential digital technologies are set to provide the world’s least-developed regions with the opportunity to apply these innovations at a faster and more scaleable rate than the developing world,” Cameron MacLeod, founder of the Global Civic Innovation Centre, told OBG.
This is the logic underpinning the Algiers Smart City. “The project has been developed as an answer to three fundamental challenges: a fairly isolated technology ecosystem, limited technology transfer and low confidence in growing tech giants,” Riad Hartani, strategic technology advisor to the Algiers Smart City project, told OBG. Not to be outdone, in late 2017 Morocco launched the Agency for Digital Development. The aim of the body is to establish the kingdom as a regional centre for digital products and help achieve the goals of the Digital Morocco Plan 2020, the kingdom’s strategic programme for the development of the sector.
Latin America & The Caribbean
As of late 2018 only one country covered by OBG, Argentina, had an average number of mobile broadband connections per 100 people on par with advanced economies, with 102. Only Mexico, with 66 mobile broadband connections per 100 people, stood below the global average, with all remaining states covered by OBG exceeding this figure, Panama (77), Trinidad and Tobago (77), Colombia (83) and Peru (87).
Nevertheless, while some countries in the region have lagged behind in terms of mobile broadband penetration, several have led the way in terms of policies to foster, regulate and tax the digital economy.
In 2018, Mexico became one of only a few countries in the world to have promulgated a fintech law. The new legislation governs firms operating in the crowdfunding, online payments and cryptocurrency segments, and includes measures to guard against money laundering. Among other elements, the law introduced an accelerated process for the registration and approval of fintech firms, allowing them to set up operations within six to 12 months. The legal framework also includes a regulatory sandbox that allows fintech firms to operate with temporary authorisation in order to test their product with a limited number of clients.
The combination of catch-up growth and infrastructure investment should ensure that developing countries remain important drivers of growth in the sector for years to come. While innovation and market dynamics in higher-income countries will ensure that these states continue to play a leading role, digital firms from emerging markets appear set to rival those from more advanced economies, even on their home turf. The success of these new competitors will likely be shaped by the ability of their host countries to implement an appropriate regulatory framework.
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