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Sunday, October 12, 2003

ICT and Indian Development

RISC group member Atanu Dey had an article on Rediff back in February. If most of you have already seen this, I apologise, but IEW did not exist back then, and the RISC ideas are sufficiently interesting that it may well be worthwhile drawing attention to them again. The essential idea is that the existence of ICT makes an alternative growth path available to India. Atanu is obviously right. IT exporting alone will not give India a sustained development path. But IT exports, and business process outsourcing offer a momentum to the Indian economy which, if creatively used, can facilitate a much more broadly based growth process. He is also right to stress that economic development is a non-linear process. It is not the 'eternal repetition of the same', there is constant novelty and leapfrogging. Coming later to the party need not always be a disadvantage. India has the tremendous opportunity of learning from the experience of the present OECD world - and in particular from its urban-rural configuration - in an effort to come up with a different, and perhaps superior, solution. Leveraging the benefits of ICT enabled activities across the rural landscape is one part of this. Producing IT hardware which will be both cost-effective and feasible in the Indian context (Rajesh's thin clients?) could well be another. (A more extensive (PDF) version of Atanu's ideas can he found here ).

ICT can spur growth, bridge digital divide

The role of information and communications technologies (ICT) is popularly held to be very critical to economic development. But there has to be greater domestic use of ICT as an engine of economic growth, in contrast to the production of products and services for export. The advanced industrialised countries were underdeveloped (by today's standards) once upon a time and their transition from subsistence to a modern exchange economy did not involve ICT.

In my view, the reason is that the already developed economies were sufficiently efficient that the introduction of ICT had only a marginal effect. The production of ICT products and services added to the gross domestic product, but did not have a significant multiplier effect. In contrast to the experience of the advanced industrialised countries, the developing countries find ICT available to them at a much earlier stage of their development. These economies are not very well optimized and the use of ICT has the potential to help them transit from subsistence to an exchange economy relatively rapidly. But for this to happen, ICT must be targeted for domestic use, and not just seen as an avenue for foreign exchange earnings.

ICT is arguably strategically important for economic growth of all less developed countries. However, government policies tend to emphasize the export-led growth potential. The successes of countries like India in the IT-exports sector is often used as an example to be emulated by countries similarly placed along the development spectrum. It is important to recognize that while IT exports-led growth is an attractive goal, it cannot deliver sustainable economic growth to any country.

Indeed, pursued in isolation and without a more broad-based IT-enabled growth strategy, it is unlikely that the goal of IT export led growth can be attained. Only a policy that stresses the use of ICT within the country will lead to the development of an IT industry that can serve as an engine of growth by its direct contribution to job creation and GDP growth. There are a number of reasons why IT exports-led growth can be considered less optimal than alternate strategies. The production of IT related products and services targeted for export markets is generally done in high-technology enclaves.

The benefits of the production and the use of IT is therefore limited to the small number of producers and users in the importing developed countries. The products address the needs of the importing countries and they gain significantly from the use of IT produced at low cost in the less developed countries. While the IT-exports sector may be earning foreign exchange through IT production, there is no benefit from the use of IT products and services to the country as a whole. The vast majority of the people is completely unaffected and does not obtain any gains from the use of IT; only the producers of the IT products increase their human capital. Consequently, the digital-divide within the country itself grows.

IT-exports led growth alone cannot result in broad-based growth because the knowledge-goods produced by the country are targeted not at a domestic market but at an export market. Clearly expanding the market for the IT products and services to include the domestic population will lead to a balanced IT-enabled economic growth that is broad-based. First, the use of IT in the domestic sphere will more efficiently increase human capital. Technology adoption growth models show that economic growth is a result of a rapid diffusion of IT. Second, there is the demand side effect. Domestic demand for IT products and services will spur the domestic production of IT and knowledge-goods. There are important forward and backward linkages in the domestic consumption of IT products and services that go beyond the benefits attained by IT exports alone.

For instance, the use of IT in the education and health sectors will provide a large user base that will not only have access to new technology but also participate in the information economy. The ICT sector is very small compared to the rest of the economy for any developing country. While IT exports will only lead to direct gains only for the IT sector, far more gains can be realised through the use of IT in the non-ICT sector and through the production of IT for domestic consumption.

The use of IT in the non-IT sector will increase productivity leading to higher incomes and greater demand for consumption goods which will increase employment, and so on. Is there any hard evidence that ICT has an effect on growth? Most of us believe that ICT does have a positive effect on growth. My prejudice regarding the question of ICT and economic growth of developing countries is that the use of ICT is critical and not the production of ICT.

I think the question whether ICT contributes to growth or not is akin to the question whether transportation contributes to growth. Both are instrumental and provided they are used appropriately, growth will be enhanced. The operative word is 'appropriately' and that is where the rub is. Investment in ICT for developing countries is not an option anymore than investing in a transportation network is. It is absolutely necessary, although it is far from sufficient to ensure growth.

The two most important functions for ICT are these: first, improving the functioning of markets, and second, is in the area of production and delivery of educational content. When the majority of the population is illiterate, the resources needed for educating them (and not just making them literate) would be formidable. ICT provides the only hope of leveraging limited resources to address this problem.

India has had a reasonable amount of success in the export of ICT products and services. In India the industry generated $5.7 billion in 1999, 15 times the level in 1990, and exports rose from $150 million in 1990 to nearly $4 billion in 1999. One study estimates that this could rise to $50 billion by 2008, leading IT to account for 30 per cent of India's exports and 7.5 per cent of its GDP. Employment in the software industry is projected to rise from 180,000 in 1998 to 2.2 million in 2008, to account for 8 per cent of India's formal employment.

ICT has created new outsourcing opportunities by enabling services to be provided in one country and delivered in another. Delivered by telecommunications data networks, the services include credit card administration, insurance claims, business payrolls and customer, financial and human resource management. The global outsourcing market is worth more than $100 billion, with 185 Fortune 500 companies outsourcing their software requirements in India alone. India now has 1,250 companies exporting software.

By providing education for IT -- India's English language technical colleges turn out more than 73,000 graduates a year -- and investing in infrastructure (especially high-speed links and international gateways with sufficient bandwidth), the government has ensured India's place in the new economy. These efforts will deliver long-term benefits for human development and equitable economic growth. It is important to note that only export-related IT activities show up above. I have yet to find figures about domestic IT use. Casual empiricism would indicate that very little IT is used within the country. Domestic ICT use must be given the attention it deserves because only through broad-based ICT use can the benefits of modern technology be made available to all and bridge the digital divide.

Domestic use will have important linkages to the supply of human capital required for the export of ICT products and services.For a large country such as India, domestic demand for ICT products and services can provide the necessary base for sustaining the industry and to shield it from external shocks. For a small country like Sri Lanka, domestic use of ICT is crucial for developing the human capital required for the export market. Therefore, governments of developing countries must create the institutions that encourage the use of ICT domestically.
Source: Rediff.Com

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