The Paradox of ICT’s Impact on Growth and Inequality

Thirty years ago a UN commission published the Maitland Report, proposing that by the early 21st century, every individual on the planet should “be within easy reach of a telephone” given the economic benefits. That was interpreted as being within a one day walk of a phone. Anyone suggesting back then that over 90% of the global population would be covered by mobile cellular signals, and over half of the world’s population would have a phone in their pocket, would have been labeled a crazy optimist. Yet, today it’s all about high-speed broadband connections, which total over 3.4 billion as of 2014 – nearly half of the world’s population.

This year’s Global Information Technology Report, and chapter 1.2 in particular, details this history of ICTs as a powerful driver of economic growth, and discusses the remaining barriers to more inclusive prosperity. While ICTs have a multiplying effect on income and growth, unconnected countries and people are being left behind. To address a widening income gap, particularly within countries, more needs to be done to increase broadband adoption, particularly through policies that focus on universal access, affordability, digital skills and the gender gap.

Evidence from the last two decades demonstrates that ICTs, particularly broadband Internet, are an income multipliers. At the country level, macroeconomic data links fixed telephony, mobile telephony, Internet use, and broadband use to gross domestic product (GDP) growth in a causal relationship across developed and developing countries. , And increasing the intensity of data use also drives per capita income growth. This growing body of evidence highlights the fact that we are long past the days of the “Solow paradox,” when, in 1987, Nobel Prize–winning economist Robert Solow noted, “you can see the computer age everywhere but in the productivity statistics.”

At the microeconomic level, emerging analysis highlights the impact that ICTs can have on driving income growth at the bottom of the economic pyramid. Mobile phones in particular, have spread across the developing world and this ‘mobile miracle’ is contributing to income growth as handsets act not only as a communications device for sharing public and private information, but also as educational tools delivering learning content, and as a financial transfer and savings device.

A direct result of ICT adoption is the steady decline in absolute poverty across developing regions. The global extreme poverty rate (those individuals surviving on less than US$1.25 per day) dropped from 1.9 billion people in 1981 to 1.3 billion in 2010 according to the World Bank: extreme poverty rates in developing countries dropped from more than 50 percent to 21 percent. This decline in extreme poverty has been driven by long-run economic growth in China and India, recent growth across Africa, and the impact of social programs in Latin America.

The picture is more mixed, however, when looking at ICTs’ impact on income inequality. At the global level, the latest available data from the World Bank show income inequality (the distribution of income across all people in the world) to be on the decline. The most recent analysis finds that global income inequality has fallen steadily from a Gini coefficient of 72.2 in 1988 to 70.5 in 2008 with the decrease attributed to the large overall income gains of the global median (around the 50th percentile) of the population.

However, the decrease in global income inequality masks the income inequality increases observed within individual countries. With-in country income inequality appears to be rising in many countries (developed and developing) and one analysis by the International Monetary Fund suggests that technological progress, measured as the share of ICT capital stock, has a statistically significant impact on inequality. The available evidence presents a paradox where ICTs are driving economic growth and decreasing global inequality while at the same time contributing to rising within-country income inequality.

While this paradox appears, the full benefit of ICTs has yet to accrue to lower income groups. For example, network effects and externalities that multiply the impacts of ICTs require minimum adoption thresholds before those impacts begin to materialize. One analysis finds a positive impact of a 2.8% increase on GDP resulting from a 10% increase in telecommunications infrastructure, but only once a minimum threshold density is reached. In this case, the threshold was at 24% of the population. In other words, countries will only experience the full growth impacts of ICTs once penetration passes that point. Similarly, a 2009 analysis determined that increasing returns to broadband investment occurs when a critical mass of penetration—above 20% (20 subscriptions per 100 people)—is reached. Greater access and adoption of ICTs in lower-income groups will further accelerate income gains at the base of the economic pyramid.

To counter the disparity in the utilization of ICTs between lower- and higher-income groups, immediate actions should focus on closing the disparity in ICT adoption/penetration. To ensure that benefits of ICT accrue to lower income populations, more needs to be done to increase broadband availability and adoption, particularly through policies that achieve universal access, increase affordability, increases digital skills and close the gender gap. These include:

1) Focusing public resources and incentives for building broadband Internet access out to rural and underserved communities
2) Connecting schools and libraries to broadband Internet service and ensure widespread connectivity within schools
3) Removing excessive taxation on devices and access, and consider targeted subsidies for certain populations
4) Developing robust ICT training curricula and programs
5) Focusing on closing the gender gap in ICTs

The data in this year’s Global Information Technology Report leave no question that the adoption and use of ICTs has a positive effect on income and growth on lower-income countries and populations. However, the challenge to accelerate ICT adoption, particularly among lower-income groups, remains. Combining the positive economic growth impact of ICTs with targeted interventions focusing on alleviating poverty, will improve the well-being of citizens everywhere, especially those in absolute poverty at the bottom of the pyramid.

 

On Wednesday, April 15, at 10am US EDT, please join me and colleagues from the World Economic Forum to discuss the findings of the 2015 Global Information Technology Report.