I. INTERNET AND THE DIGITAL ECONOMY

The past few years have seen an explosion of attention to the role played by information and communications technology (ICT) in shaping the global economic landscape (OECD, 2000a)1. On the supply side, contributing factors include the development and introduction of new and improved products through firm-level investments in R&D and innovation, the ready availability of venture capital funds for investments in ICT, the development and rapid growth of new products/services segments, and the general shift towards services. Stimulating demand are the rapidly declining costs and prices for ICT equipment and telecommunications services and the liberalisation of the trade and regulatory framework. While caution must be exercised concerning the existence and significance of a New Economy (OECD, 2000b), the spread and pervasiveness of ICT may indeed be boosting sustainable growth rates.

The Internet — a, or the, network of networks — is becoming a core feature of the contribution of ICTs to the economy, affecting the way in which people communicate with each other, acquire information, learn, do business, and interact culturally. The World Wide Web, a key component of the Internet, has provided the graphical interface and hypertext linking protocols to enable people to share text, sound, and images. In historical perspective, the Internet has diffused at a far faster rate than earlier generations of communications technology (see Figure 1). From 1990 to early 2000, the estimated number of users grew from around one million to around 300 million2. One particularly promising application of the Internet is in the area of e-commerce, i.e. trade that actually takes place over the Internet, usually through a buyer visiting the seller’s website and making a transaction there, or through an online auction3.

There is a risk that a “digital divide” will emerge, reinforcing existing income and wealth inequalities within and between countries. Figure 2 shows the currently uneven rate of diffusion of Internet use across the world. While ICT markets in some large non1OECD countries, Brazil and China in particular, have recorded faster growth than in the OECD (OECD, 2000a), corporate spending on ICT is considerably higher as a share of GDP in OECD than in non-OECD countries, and the proportion of households with Internet access is many times higher. Some analyses also reckon that the success of the United States in exploiting ICT partly reflects its flexible, competitive markets (e.g. Cohen et al., 2000 and OECD, 2000c). The Internet may yield smaller benefits in more tightly regulated economies with rigid labour and product markets and inefficient capital markets, which prevent labour and capital shifting in response to new opportunities.

Yet, a major potential benefit of globalisation is the freer movement of technology — including ICT — across borders, from areas of abundance to those of scarcity. Potentially, then, ICT can have a levelling effect, giving poor countries and poor people access to markets, information, and other resources that would otherwise have been inaccessible.

As the Internet reduces transaction costs, it also reduces the advantages of vertical integration and the optimal size of firms. Small firms can buy in services from outside more cheaply. Thus, in overall terms, barriers to entry should fall. If business-to-business (B2B) and business-to-consumer (B2C) e-commerce can ease poor countries’ access to global markets and increase their trade, it makes it possible for them to reap benefits from specialisation and economies of scale and scope, thereby reinforcing the benefits of trade liberalisation. Moreover, the Internet, by increasing price transparency and competition, should directly attack the inefficiencies in those economies with high distribution margins, which are likely to see the biggest price reductions and efficiency gains4. By exposing firms to more intense global competition, the Internet should force governments and businesses to rethink their old, inefficient habits and seek new ways to get around or eliminate market rigidities5. For governments, the cost of muddling through and not acting to reform markets may therefore become higher.

This paper examines some of the possibilities that ICT, notably wireless telephony and the Internet, offer to low-income countries and poor people in those countries to benefit more fully from integration into the world economy. While recognising the broad range of applicability of the Internet — e.g. in health care, education, government administration, etc. — we limit our focus to those applications most closely related to the information and decision sets of small-scale entrepreneurs in developing countries. This does not represent a judgement about the relative importance of different applications, but rather a desire to understand the specific implications of this set of technologies for the income-generating activities of this large class of individuals (including in our definition farmers, livestock raisers, fishermen, artisans, and owners/managers of small- and mediumsized enterprises, or SMEs) who make up the backbone of many developing economies.

How significant is the potential that ICT holds for entrepreneurs in poor countries and what do developing country governments need to do to encourage its realisation, keeping in mind the severe resource constraints under which they labour? What facilitating conditions — physical and financial infrastructure, legal and regulatory frameworks, skills, etc. — are required and how can they most expeditiously be put in place? What role is there for development assistance in this regard, again considering tradeoffs between competing demands for scarce resources? The remainder of the paper offers some reflections on these questions, in full recognition of the need for further research.

OECD DEVELOPMENT CENTRE Working Paper No. 164 E-COMMERCE FOR DEVELOPMENT: PROSPECTS AND POLICY ISSUES by Andrea Goldstein and David O’Connor To learn more about this author, visit OECD Development Centre's Website.

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