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ANALYSIS

Bahjat El-Darwiche

Digitization in emerging markets – a $4.4trn potential

Dubai, October 1, 2012

Doubling the digitization level in emerging economies could produce $4.4 trillion in additional nominal GDP and a staggering 64 million new jobs over the next 10 years, said a report.

In order to catch up with mature economies the emerging markets must focus on doubling the level of digitization among their poorest citizens – the 3.9 billion at the bottom of the wealth pyramid, according to analyses from management consulting firm Booz & Company.

These 3.9 billion people represent 95 per cent the population in South Asia, 86 per cent in Africa, 68 per cent in the Mena region, 58 per cent in East Asia and Pacific, 27 per cent in Latin America, 20 per cent in the CIS, and 14 per cent in Eastern Europe.

Digitization – a major dividend

To date, digitization has already made a significant impact on the ability of emerging countries to create jobs and grow their economies. Between 2009 and 2011, it created 17 million jobs in such economies and contributed $350 billion to their overall nominal GDP. Furthermore, Booz & Company’s analysis indicates that a 10-point increase in the digitization level of a developing market would produce a 0.70 per cent rise in its GDP per capita and a 1.09 per cent reduction in its absolute unemployment rate.

The truth is, emerging economies enjoy greater reductions in unemployment from digitization than developed economies, said Bahjat El-Darwiche, a partner with Booz & Company.

“This is linked to the application of digitization,” he explained.

“In developing economies, digitization supports the continued acquisition of tradable, often labor-intensive jobs in sectors such as manufacturing. In developed economies, digitization enhances productivity in non-tradable jobs, which yields fewer new jobs but has a greater effect on GDP.”

The bottom of the pyramid represents the greatest opportunity for capturing the gains in job creation and GDP growth associated with digitization. In total, in emerging countries, this fraction of society represents 70 per cent of the total population and generates 27 per cent of their total household income.

This means that any emerging market striving to leverage digitization should seek to push up the digitization score of these citizens.

“Our analysis reveals that in the healthcare and education sectors alone this could represent a $700 billion opportunity,” added El-Darwiche. “Digitization would also enable government services to more effectively reach these citizens, thus creating a platform for greater civic engagement.”

Obstacles to overcome

Although raising the digitization level of the poorest is a worthy endeavor, capturing the digital return on investment will not be easy. On the financial front alone, Booz & Company’s study shows that an investment of $1.4 trillion over 10 years would be needed to bring digital products and services to the entire addressable population at the bottom of the pyramid.

These investments will center on the four pillars of digital systems: reliable network coverage, affordable devices, a cost-effective go-to-market approach, and relevant applications and content.

“Based on industry economics at current levels, we estimate the annual cost of digitizing the bottom of the pyramid at $47 per person,” said Singh. “This cost is more than eight times the annual digital spend propensity of a person at that level of the pyramid. Closing this financial gap is a major part of the challenge facing governments and companies and the first step is to understand its causes.”
Increasing the digitization levels will require a fundamental shift in thinking, he added.

An effective approach to driving digitization in these highly challenging markets must address and alter both demand- and supply-side economics to bridge the digital divide within emerging markets. Also, it will require high levels of collaboration among a variety of stakeholders.

To conclude, bringing the bottom of the pyramid into the digital era will reap immense benefits for this demographic within developing economies – both in terms of employments rates and economic development.

However, given the limited propensity of this population, this promising vision will undoubtedly be paved with difficulties.

After all, taking advantage of this opportunity will necessitate a paradigm shift that addresses current digitization supply and demand economics as well as joint initiatives by both public and private sector partners. – TradeArabia News Service




Tags: Jobs | GDP | Booz | Emerging economies |

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