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I. INTERNET AND THE DIGITAL ECONOMY

Written by: OECD Development Centre

Article Overview: 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

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 non-
OECD 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

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Article Tags: communications technology, core feature, e trade, economic landscape, graphical interface, historical perspective, icts, improved products, income and wealth, liberalisation, new economy, oecd, pervasiveness, promising application, ready availability, regulatory framework, share text, sustainable growth, telecommunications services, venture capital funds



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