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The Promise of Digitization in Fostering Inclusive Growth in Emerging Markets

By Anil K. Gupta & Haiyan Wang

The rise of emerging markets is widely known as one of the most important developments in the global economy over the last twenty five years. Emerging markets accounted for 21% of world GDP in 1990. As per IMF projections, they will have an over 40% share in 2018 and likely account for half of world GDP by 2025. Beyond 2025, global numbers will almost certainly be driven more by what happens in the emerging rather than developed markets.

Growing Inequality

Few people know, however, that economic growth in emerging markets has been anything but inclusive. Given a vast gulf between the haves and have-nots, income inequality within most emerging markets has long been greater than within developed markets. Despite rapid economic growth over the last twenty five years, most emerging markets have become even more unequal.

IMF data show that, for the developed economies, the Gini Index of income inequality (range 0-1, with 0.4 and above suggesting severe inequality) averaged slightly over 0.3 in 2014. In contrast, for every emerging region – Asia, Latin America, and Africa – the Gini Index was above 0.4. In fact, on a population-weighted basis, Asia’s average Gini Index rose from 0.37 in 1990 to an alarming 0.48 in 2014.

While income inequality is a natural outcome of capitalism, severe inequality can be highly problematic. As the rich get richer, their consumption rises much more slowly than their income. Thus, high levels of inequality result in lower growth in consumption for the population as a whole. Eventually, this pattern acts as a brake on future economic growth. High and rising inequality also increases the odds of social instability and political polarization.

Some of the explanatory factors behind the high and growing inequality are unique to specific emerging markets e.g., the caste system in India which reduces socio-economic mobility and the “hukou” household registration system in China which reduces people’s ability to relocate from slower growing regions to faster growing ones. Many of the most important factors, however, cut across almost all emerging markets: highly unequal access to education, to health care, to financial services, to national markets, and widespread corruption.

The New Digital Era

The digital revolution, now sweeping every corner of earth, holds the promise to arrest, perhaps even reverse, further worsening of income inequality within emerging markets.

The key drivers of this revolution are extremely low-cost smartphones and the rapidly declining cost of mobile broadband data services. Active mobile-broadband subscriptions in emerging markets started at near zero in 2007, crossed the 1 billion mark in 2013, the 2 billion mark in 2015, and the 3 billion mark in 2017. By 2020, almost every inhabitant of emerging markets will likely have an active mobile-broadband subscription.

Once these foundations are in place, it becomes possible for governments, companies, and nonprofits to build other enabling platforms. India’s Finance Minister recently announced that the country is within reach of making good on the government’s “1-billion, 1-billion, 1-billion” vision i.e., 1 billion people with biometric identity numbers linked to 1 billion bank accounts and 1 billion mobile phones. As he noted, the government’s goal is to “end the financial, and hence economic, digital and social exclusion faced by India’s poor.”

Digitization’s Promise

So, what is the promise of the new digital era in fostering a more equitable growth in emerging markets? The answer lies in the multiple ways in which digitization reduces unequal access to the key factors which determine a person’s ability to generate income. It also lies in digitization’s effect in taming corruption which has a disproportionately negative impact on the poor.

A More Skilled Workforce. Despite widespread adoption of policies which mandate schooling until a certain age, in most emerging markets, the education system fails the poor. Cash-strapped governments often do not have the budgets to build schools and hire teachers. Even if they do, class sizes are often too large, many teachers do not show up, and they do not know how to teach well.

Given ubiquitous connectivity and cheap devices, EdTech startups, as well as nonprofits, are springing up to help redress the situation. Examples include Eneza in Kenya, BYJU’s and EkStep in India, and many others. EkStep, a nonprofit funded by the Indian IT billionaire Nandan Nilekani, is particularly ambitious. EkStep is a digital platform that enables pupils to access crowd-sourced, curated, and assembled learning content in multiple local languages. EkStep’s goal is to reach 200 million pupils in five years. The EkStep Foundation is now partnering with the Gates Foundation to take this approach global.

The education opportunity goes well-beyond the basics – reading, writing, and math. Even with small farms, agricultural productivity in most emerging markets is much lower than what it could be, if the farmers had better knowledge of smarter farming practices. Young entrepreneurs are already beginning to develop solutions for these needs.

Better Health Care. Better health is a moral right. It is also a key requirement for a more productive workforce. The digital revolution holds the promise of reducing the health care gap between the rich and poor. The immediate payoff lies in better preventive care (an outcome of better information about proper hygiene and nutrition). Longer-term, as technology makes virtual access to nurses, physicians, and health centers feasible, the biggest beneficiaries will be the rural poor, who often have no access to these specialists at present.

Universal Financial Inclusion. McKinsey Global Institute estimates that 2 billion individuals and 200 million businesses in emerging markets lack access to the formal financial sector. They are forced to store their savings in the form of cash. The result – no interest plus the risks of damage and theft. Also, when individuals or businesses need to borrow, they have little choice but to rely on local loan sharks.

Mobile banking is redressing these problems at a break-neck pace. A connected local kiosk or a mobile van can serve as a bank branch. More importantly, digital wallets and mobile-to-mobile payments (such as WeChat Pay in China and Paytm in India) are reducing the need for any form of cash while also slashing transaction costs. Further, some of the more innovative banks have already started scraping transaction histories and social data to make loans to people and businesses who may otherwise have no means to prove their creditworthiness.

Reach Into National Markets. Digitization also increases access to wider markets. The biggest drivers here are e-commerce platforms (such as Taobao in China, Flipkart and Amazon in India) and logistics companies that use Uber-like models to increase last-mile connectivity and reduce logistics costs. E-commerce platforms eliminate intermediaries and enable the small or medium enterprise to reach the national market. Similarly, the new asset-light logistics companies reduce the cost of small-lot shipping.

More Transparency, Less Corruption. The rapid diffusion of smartphones and broadband connectivity is also helping to reduce (though, not altogether eliminate) corruption. Take India. Now that almost every adult Indian has a bank account, the government has started transferring subsidies to over 300 million people directly into their bank accounts. Prior to digitization, an estimated 86% of the subsidies would get siphoned off by middlemen. As government records and services go digital, people are also starting to bypass government staff altogether. The benefits – less time wasted and fewer opportunities for rent-seeking by officials. No less important, digital connectivity is also making it easier for people to expose corrupt officials via social media.

Implications for Policy Makers

Given the multiple ways in which digitization can foster growth with equity, governments must pull out all stops to accelerate the spread of smartphones, lower cost mobile broadband services, self-learning via apps, digital resources for teachers, digital health care, mobile banking, and e-commerce.

Some observers have argued that the digital revolution (especially AI and robotics) may also hurt job prospects for people. In our view, most emerging markets are unlikely to face these risks for quite some time. Labor costs are still extremely low and the opportunities for productivity growth very high.

We should also note that, notwithstanding the power of digitization, fiscal policy will continue to play an important role in fostering inclusive growth. It is easy to imagine how poorly designed fiscal policies could still make the rich richer at a faster pace than their less fortunate compatriots.

 

Anil K. Gupta is the Michael Dingman Chair in Strategy, Globalization & Entrepreneurship at the Smith School of Business, The University of Maryland. Haiyan Wang is Managing Partner, China India Institute. They are the coauthors of The Quest for Global Dominance and Getting China and India Right and have been jointly ranked as #28 in the Thinkers50 list of “the world’s most influential management thinkers.” Anil is also a member of the World Economic Forum’s Stewardship Board for the Initiative on the Future of Consumption. Haiyan is a Deputy to this Board. They are both attending the Forum’s Annual Davos Summit in January 2018.

Anil K. Gupta’s Bio Haiyan Wang’s Bio

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