How ICT Can Drive Growth in Emerging Economies

I had the honor of giving a keynote presentation on August 6 at the Fifth Ministerial Conference on the Information Society in Latin America and the Caribbean in Mexico City (video here). Hosted by the United Nation’s Economic Commission for Latin America and the Caribbean and the Government of Mexico, the conference was attended by government officials and others involved in information and communications technology (ICT) policy in the region. The focus was on how the region can coordinate more effectively on ICT policy and how Latin American and Caribbean countries can learn from each other. Three main things struck me during the conference: there was a distinct focus on trying to create the next Silicon Valley, an emphasis on fostering small businesses, and competing visions of opportunity versus growth. Although I have to say these were not surprises, as I have found that many policymakers around the world hold similar views on these topics.

Discussion turned repeatedly to the question of how to create “the next Silicon Valley,” rather than how to create the next ICT-enabled economy. In other words, too many policymakers focus on trying to develop their own tech companies—often domestically owned ones—instead of spurring organizations in all sectors of the economy to make better use of ICT. As one official stated, the goal should be not just to “eat” the technology, but to “cook” it. I argued to the contrary: In most nations, ICT production accounts for less than 10 percent of growth, while ICT use accounts for more than 90 percent. This problem compounds itself when you realize that many of the policies nations put in place to help create their own Silicon Valleys actually end up hurting domestic ICT adoption. These include policies such as ICT tariffs, data center localization requirements, local content requirements, and procurement preferences for domestic companies. Even worse is how many nations adopt policies that end up hurting the goal of domestic innovation, too. Examples of these types of policies include limiting cross-border data flows, imposing strict privacy regulations, stifling on foreign direct investment, and my least favorite of all: small business preferences.

This gets to my second observation: Policymakers around the world, but particularly in Latin America and Europe, are too inclined to worship at the altar of small business. The problem, as ITIF has written before, is that most small businesses are less productive, less innovative, and pay lower wages than larger businesses. For example, in Latin America, small businesses account for half the jobs, but just 10 percent of the output. Given that productivity in most Latin American nations is less than 40 percent of U.S. productivity—which is why their per-capita incomes are so much lower—why favor small business, in ICT or any economic policy? All it does is keep you poor. (To be clear, this is different than helping startups, which can be a key driver of growth if they expand rapidly.)

But this of course borders on heresy, for the small business view is so deeply entrenched in policymakers’ minds. As one official put it, SMEs (small and medium-sized enterprises) are keys to the social fabric of the region. We see this, for example, in many of the WSIS+10 documents (an ongoing review process, taking place 10 years after the World Summit on the Information Society, to help guide digital ICT policy in developing nations around the world)). To the extent they talk about helping enterprises with ICT at all, it is always in the context of small firms.

So why the SME fetish around the world? Some of it comes from the view that large firms are untrustworthy and often in bed with governments to make corrupt deals (i.e., crony capitalism). But I believe a more important motivation is the false view that they need SMEs for jobs. Because small firms employ so many people (because most are less productive), there is a rampant view that there would not be enough jobs without them. This reminds me of the government official in Asia who Milton Friedman took to task for having workers build a road with shovels instead of earth movers. When the official explained they were using shovels because they needed the jobs, Friedman quipped, “Why not use spoons?” As ITIF has shown, the evidence is clear, including in emerging markets, that high productivity is not associated with fewer jobs.

Another reason for this view is the belief that helping SMEs supports an opportunity agenda. In other worlds, small business owners, like workers and low-income citizens, generally need our help. Big business does not. We see this view reflected in left-of-center parties around the world, including in the Democratic Party in America. But protecting small businesses, regardless of how vulnerable and needy they are, hurts consumers, many of whom are just as vulnerable and needy. Case in point is Argentina, which, through a slew of policies targeted against big grocery store companies and in favor of small ones, was able to accomplish what few countries could do in the 2000s: reduce grocery store productivity. So while a few thousand small shop owners were helped, tens of millions of low-income Argentinians paid more for food.

This gets to my final observation. There are two competing Internet policy frameworks and goals. The first could be called the fairness or opportunity agenda, which we see largely expressed in the United Nations and WSIS+10 documents. Here, the goal is principally to craft ICT policy to boost opportunity for those needing it most. Under this framework, the Internet is chiefly a tool for communications by individuals, so the priority is digital adoption by individuals. Within this framework, it is important to enact regulation to protect consumers. This includes weak digital content protection so content is more affordable to those who need it most. Also within this framework, to the extent the focus is on enterprises, as discussed above, it’s on SMEs. With regard to telecom policy, the goal is to spur more competition in order to limit profits to keep prices low.

But there is an alternative digital growth agenda, focused first and foremost on spurring higher per-capita incomes in the nation as a whole. In this case, the focus is principally on ICT as a tool for commerce. As such, the priority is on digital adoption by enterprises, with regulation tempered by the need to enable, not stifle, support for enterprise innovation. In this regard, policy supports stronger content protection to support an incentive to produce digital content. When it comes to enterprises, the focus is not on SMEs per-se, but on supporting ICT use by the most productive enterprises, regardless of size. Finally, the goal of telecom policy in this framework is to enable robust telecom capital investment in newer and more networks, not to limit price.

To be sure, these frameworks are not 100 percent orthogonal. In some cases, such as with digital training of workers, they can be complementary. But it’s frankly hard to see how low- and middle- income nations can achieve their equity goals of 100 percent Internet use without growth. Incomes are simply too low, even in many middle-income nations, to enable this goal to be achieved, and the ability to generate the needed subsidies too limited. In this sense, growth is all about achieving equity and opportunity.

But the reality is that policy is about choices, and a nation’s ICT policies are either tilted toward an equity agenda or a growth agenda. What continues to amaze me is how so many nations with significantly lower per-capita incomes than America continue to embrace equity agendas, rather than growth agendas, given that their most important economic goal is growth.

Regardless of the choices of individual nations, it is troubling that the UN-WSIS+10 process largely reflects the equity camp, not the growth camp. It gives short shrift to enterprise use of ICT, for example. One reason for this is because the WSIS+10 process is dominated by nations who have this orientation, but also because virtually all of the civil society groups that engage with WSIS+10, such as the Association for Progressive Communications, are focused first and foremost on equity, not growth.

As a democratic process, the WSIS+10 clearly can advance whatever policies its stakeholders support. But it should make choices they are making clear. In other words, the WSIS+10 documents should explain that if you embrace the equity goal first and foremost for ICT policy, rather than the growth goal, here’s a set of policies for you. Then at least nations can know what they are getting or not. And then perhaps an alternative process could be established to provide nations with an ICT growth agenda for those that decide to prioritize growth.