What happens when the economics of everything meet the internet of things? by Miles Mckenna
When we think of eradicating extreme poverty, most of us associate this idea with the provision of basic needs. Food. Water. Shelter. Some argue to include clean air, security, even access to basic healthcare and primary education. But what about access to the internet? Where does the internet fit into development?
This is one of the overarching questions put to the authors of the upcoming 2016 World Development Report: Internet for Development. It was also the topic of a recent roundtable discussion entitled Digital Trade: Benefits and Impediments here at the World Bank Group, where economists and development professionals, including representatives from the public and private sectors, sat down to discuss some of these issues in detail.
The conversation hinged on what the internet meant for trade, especially for online entrepreneurs in developing countries. The internet, in many ways, signifies innovation. How then can we ensure that individuals seeking to introduce their ideas to the world and tap into the global marketplace can best do so? Is this a question of infrastructure? Is it a question of regulation?
Here’s what the numbers tell us.
The World Development Report (WDR) uses the term “internet” as shorthand for digital technologies. And this much we know, the pace of diffusion of digital technologies has been unprecedented by historical standards (figure 1). There are an estimated 3 billion people online today, with 40 percent participating in online commerce.
Perhaps at the most basic level, the internet has helped reduce communication and information costs between firms and customers. Firms have a better understanding of what consumers want, and consumers have a better idea of what firms offer, at what price, and where they can buy it.
The internet offers new ways to buy goods, through online payment systems.
Beyond that, the internet has also allowed firms to increase efficiency and productivity through better supply chain management and improved logistics. Companies can communicate in real-time to ensure intermediate inputs and final products are always delivered just-in-time.
And then, of course, you have online marketplaces and entirely digital products and services. These, too, can help reduce information asymmetry problems and increase trust between buyers and sellers.
Recent research has shown that higher internet use in a country is correlated with higher bilateral exports. In fact, for exporters, there may be a very powerful effect. A 10 percent increase in the use of the internet within a country can lead to a 1.9 percent increase in trade.
Other research shows that small firms, or sellers, make up a larger proportion of online trade than traditional offline trade. These sellers also often offer a wider range of products and reach destinations that traditionally they may not have. While only initial research with limited data, these findings suggest potentially major implications (and potential benefits) for both entrepreneurship and small- and medium-sized firms in developing economies.
The question, then, becomes: what can be done to seize the opportunities of digital trade?
In many instances, there are systemic barriers to trade. There can be a lack of physical telecommunications infrastructure and reliable transport and delivery networks. Developing or accessing reliable and trusted online payment systems is another common challenge. Human capital—programs to foster talented entrepreneurs and the skilled staff to manage and operate online programs—is another area that requires attention.
Legal and regulatory systems and regulations can play a pivotal role in facilitating or constraining digital trade. This is especially true when it comes to setting up e-payment systems, which are not only critical to many online marketplaces, but are also lacking in key developing regions around the world.
And finally, cultural barriers also impact and shape the potential of the internet. This can be as simple as language barriers, or more complex issues of awareness of and trust in online retail.
WDR 2016 will dive deeper into these issues. But before its release, the Bank Group’s Trade and Competitiveness Global Practice will be hosting an all-day seminar on May 19th focused entirely on issues related to digital trade—from policy, to innovation, to entrepreneurship, to last-mile delivery, and more. The day will be divided into panels of experts from across the globe, spanning academia, think tanks, international organizations, and private sector innovators on the cutting edge of digital trade in emerging markets.
For those interested in learning more on the topic and/or attending the seminar, please contact Michael Ferrantino by e-mail at email@example.com.