More and more commercial transactions are moving online and the so-called digital economy continues to expand its reach into every facet of the traditional analogue economy. For businesses this means they have access to new channels to reach existing clients as well as new opportunities to expand market share with a competitive digital offering. For consumers the ever-expanding digital economy promises greater access to products and services at their fingertips, as well as increased ease in accessing and comparing information about them. This also tends to encourage more competitive pricing among providers. In emerging economies the development of digital channels has, in some cases, allowed sectors to essentially skip stages of development seen in other countries, moving directly to digital solutions rather than having to invest in vast networks of hard infrastructure.
While it is clear that the digital economy has opened up many potential growth opportunities, one of the most important barriers is the so-called digital divide. The quantity and quality of mobile phone network coverage in some emerging and developing economies still lags behind that of more advanced economies. That said, there is no country of any income level in which access to mobile phones and the networks that support their use is universal, although this digital divide is obviously far more acute in lower- and middle-income economies. It can be a particular challenge in countries marked by relatively lower rates of urbanisation or tough terrain, which complicates the extension of physical networks.
However, the example of the success of M-Pesa in extending financial services to rural areas of Kenya, to the great benefit of farmers in particular, show that these challenges are far from insurmountable. What is key moving forward is to recognise that alongside the requisite hard infrastructure investment, 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. Countries in the Gulf have been among the most forward-looking in this regard. While the digitalisation of public services in countries like the UAE is driving the transition towards digital, the favourable regulatory environments in place are helping to foster and support digital innovation in many economic areas.
One example brings home the manifold opportunities that digital can present. Building on the early success of pilot projects in Africa and elsewhere, Kenyan mobile network operator Safaricom brought M-Pesa to market in 2007, in partnership with Vodafone. This revolutionary service allows anyone in Kenya with a mobile phone to use it as an electronic wallet, letting users borrow small amounts, transfer money to others, pay utilities, and deposit and withdraw funds via agents, thereby bringing such services to large swathes of the population not served by the conventional banking system.
This coincided with a surge in cellular 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. By early 2019 the service had garnered over 21m users in Kenya alone and was processing 1.7bn transactions per year in the country. In 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 further afield in countries like Egypt, Afghanistan and India, as well as in Eastern Europe. The M-Pesa model has spread to other countries and given rise to copycat services from traditional banks and mobile network operators worldwide.
In developing economies with relatively poor fixed telephony infrastructure and a sparse network of bank branches, the rapid improvement in mobile network coverage and the increasing ubiquity of mobile smartphones is allowing financial service providers to reach more new clients than ever. 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 those same clients via the rollout of physical infrastructure. Indeed, in Kenya the number of ATMs in operation has dropped by about a third, as more of the population has switched to using mobile money.
Building on the runaway success of mobile money systems, a wider range of more sophisticated financial services is being made available to emerging market consumers. Insurance technology (insurtech), for example, is becoming an increasingly important force in the insurance sector globally. Tellingly, its emerging market share has been rising steadily in recent years. In the second quarter of 2018 China, India, Israel and South Africa together accounted for a third of all insurtech deals globally, and the highest projected growth rates over the coming decades are in large emerging markets.
Digital trends from advanced economies are lagging in many emerging and developing markets. However, the generally higher economic and population growth in the latter ensure they are likely to remain among the most important growth drivers for years to come. Retail and transport are cases in point. Uber, for example, is beginning to tailor 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 which are now nonetheless among the firm’s most important revenue drivers.
In some cases, ride-hailing apps such as Uber are filling a gap in the market which stems from the fact that some countries’ public transport system is poorly developed and inefficient. In late 2018, for example, Uber executives hailed Argentina as the company’s fastest-growing market despite the fact that it 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 of demand. This is likely to represent a growth opportunity in many other emerging and developing markets where public transport is under-developed.
Meanwhile, India has become the fastest-growing geographic market for Amazon, as well as the fastest-growing subscriber base of any country for its Prime service. Although the biggest names in the global tech industry are profiting from surging growth in emerging markets, they are by no means alone in looking to capitalise, with these markets also seeing the birth of behemoth competitor firms.
Alibaba, for example, is the dominant player in China’s online retail space, and it is rapidly expanding its footprint throughout emerging Asia and beyond, including in India, where it is competing directly with Amazon. In fact, since 2015 Alibaba’s online sales have surpassed those of Amazon, eBay and Walmart combined. While the population density in Alibaba’s natural 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. Didi Chuxing, China’s answer to Uber, began aggressively expanding its global footprint in 2018, entering Brazil, Mexico, Taiwan, Japan and Australia, where it is taking on Uber head-to-head.
Sub-Saharan Africa saw a surge to 75 mobile cellular subscriptions per 100 people in 2017. At just under 70 cellular subscriptions per 100 people, Tanzania lagged slightly behind the regional average, while Nigeria tied the average of 75. Other countries in the region in which OBG operates fared even better: Kenya (86), Ghana (127), Côte d’Ivoire (131), Gabon (132) and South Africa (162), compared to the global average of 104.
Even those countries whose ICT infrastructure compares favourably with the regional average are not resting on their laurels, however. In this regard Côte d’Ivoire is a case in point; its National Agency for the Universal Service of Telecommunications is in the process of deploying a 7000-km fibre-optic network to rural areas. Speaking to OBG, Serge Kouakou, general manager of Orange Business Côte d’Ivoire, noted that “on multiple levels the government-led fibre-optic national infrastructure project is a tremendous opportunity for Côte d’Ivoire’s digital transformation. Fibre optics allows more bandwidth than copper infrastructure, and it is a more stable technology to use than copper, considering Côte d’Ivoire’s climate. The service’s reliability should increase and rural populations can gradually gain access to better internet and telecommunication services.”
In terms of mobile cellular subscriptions per 100 people, Thailand and Indonesia are the standout performers in the Asia-Pacific region, with 176 and 174 respectively, well ahead of the regional average of 119. Myanmar, at 90 subscriptions per 100 people, is on a similar level to India (87). At 105, China is around the global average and not far behind the Philippines (110). All of the other countries in the region in which OBG operates rank above the regional average, as follows: Mongolia (126), Vietnam (126), Brunei Darussalam (127), Malaysia (134) and Sri Lanka (135).
Having only opened its mobile telephony segment to foreign investment in 2013, Myanmar is currently catching up in terms of developing its infrastructure, making great strides in recent years. “Telecommunications is a textbook example of great development in Myanmar, where companies can receive their licence, connect to the network and start operations within a year. 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,” Lin Roye, deputy managing director at Myanmar Fibre Optic Communication Network, told OBG. In a similar vein, U Myo Ohn, CEO of Campana Group, underlined the continued importance of mobile connectivity, even as the fibre-optic network expands, noting that “mobile internet is cheaper and more widely available because more telecom towers are being installed, resulting in better connectivity. Mobile reaches users faster, but only when fibre optics arrives do you truly have broadband”.
Myanmar demonstrates very well the difficulty of extending fixed-line infrastructure to remote areas in challenging terrain, underlining the continued importance of mobile internet connectivity. The country also demonstrates the key role new entrants can play in improving the service on offer and driving down prices through market competition. This was highlighted by the arrival of Mytel in 2018, backed by Vietnam’s Viettel Group, as the fourth player to enter the local telecoms arena, aiming to capture market share by offering bundled internet services. In January 2019, within eight months of operating in Myanmar, Mytel had already achieved 8% market share, and was exploring options to offer mobile money services to its clients there in the future.
Middle East & North Africa
At 112, the average number of mobile cellular subscriptions per 100 people in the MENA region is slightly above that of the global average. There is significant divergence across the region, however, with Turkey lagging at 96 and the UAE far ahead at 211. The North African countries, for their part, are somewhat above the global average, with Egypt at 106 and the Maghreb countries clustered in the low 120s. Saudi Arabia (122) and Kuwait (124) are at similar levels, while others in the Gulf have made more progress, notably Qatar (148), Oman (150) and Bahrain (158).
Countries in the GCC were among the earliest to recognise the potential of increased digitalisation across all areas of the economy, as well as the importance of implementing the necessary legislation. For example, in 2018 Bahrain introduced a nationwide Law on the Protection of Personal Data. In fact, the island nation has long been a digital pioneer, introducing the region’s first 4G-LTE network in 2013.
In another important initiative, in September 2018 Abu Dhabi Global Market – the emirate’s international financial centre – announced the creation of a “digital sandbox” to accelerate financial services innovation, and boost financial inclusion in the UAE and across the region. This will provide a regulatory environment for financial institutions and financial technology (fintech) players to experiment on new products and services through digital platforms. A number of GCC countries have also been at the forefront in trying to bring the digital economy within the tax net.
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 infrastructure, Algeria has been trying to foster ICT start-up clusters and, through the Algiers Smart City initiative, improve urban living standards in its capital using digital solutions. Speaking to OBG, Cameron MacLeod, founder of the Global Civic Innovation Centre, explained that “just as large portions of the developing world used mobile phones to leapfrog landline technology, artificial intelligence, drones, 3D printing, biotech and other exponential 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 in the developed world with its entrenched legacy infrastructure.” 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 adviser to the Algiers Smart City project, told OBG.
Not to be outdone, in late 2017 Morocco established the legal framework underpinning a new Agency for Digital Development, the aim of which is to establish the kingdom as a regional centre for digital products and help deliver on the country’s overarching digital strategy, called Maroc Digital 2020.
Latin America & Caribbean
Some countries in this region have mobile cellular subscriptions per 100 people on a par with advanced economies, with Argentina, Panama and Trinidad and Tobago all above 140 in 2017. Colombia was not far behind at 127, with Peru at 121. At 113, Brazil was just ahead of the regional average of 107, while Mexico stood at 89.
Even though some countries in the region may have lagged behind in terms of mobile phone penetration rates, several have been leading the charge in soft infrastructure: policy experimentation to foster, regulate and tax the digital economy. In 2018, for example, Mexico became one of the few countries in the world to have promulgated a dedicated 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, which is expected to allow them to operate in Mexico within six to 12 months of beginning the process. The legal framework also includes a regulatory sandbox, which allows fintech firms to operate on the basis of a temporary authorisation so that they can test their product with a limited number of clients.
The combination of catch-up economic growth and development in hard ICT infrastructure in emerging markets should ensure that they are important growth drivers for the global digital economy for years to come. While the dissemination of technology and market trends from higher-income countries will continue to drive digital growth, tech firms from emerging markets will increasingly rival those of more advanced economies, even on their home turf.
At the same time, some emerging economies are already at the forefront of developing soft ICT infrastructure. This is evidenced in the field of digital economy taxation, where developing countries have been more willing to move ahead of their higher-income counterparts. The trend thus looks set to continue.
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