How does internet connectivity impact developing economies?

Read "The Economic Impact of Internet Connectivity in Developing Countries" by Jonas Hjort and Lin Tian.

Approximately 60% of the world uses the internet, and the rapid growth of internet connectivity in low- and middle-income countries has been transformative, but significant disparities remain. In this episode of VoxDevTalks, Lin Tian highlights that only about 30% of people in Sub-Saharan Africa use the internet, compared to over 70% in Latin America. Mobile internet has been a game changer, particularly in rural areas where fixed-line broadband infrastructure is scarce. Despite these advancements, closing the urban-rural gap remains a challenge, requiring substantial government investment.

Researching the impact of the internet on economic development

“Research into the impact of internet technology is growing just as quickly”

Lin Tian's recent review paper with Jonas Hjort analysed 153 studies exploring the internet’s effects on productivity, education, and public sector delivery. Early studies focused on correlations, but recent research employs new methods including RCTs and natural experiments to establish causal links. For instance, the installation of fibre optic cables often depends on geographic constraints, creating quasi-random conditions to study the impact of internet access on local economies.

Supply-side impacts of the internet: Productivity and Employment

The internet’s potential to boost productivity and employment is well-documented. One study across 14 countries, including Rwanda and Brazil, found that a 10-percentage-point increase in 3G coverage raised the fraction of individuals who are employed by 2.1 percentage points (Chiplunkar and Goldberg 2022). Faster internet fosters better collaboration, enables the use of digital tools like cloud platforms, and reduces communication frictions. High-skilled workers, unsurprisingly, gain more from internet access, but even less-skilled workers see benefits. For example, in Nigeria, mobile broadband allowed workers to find jobs outside of their immediate areas, increasing overall employment.

Is the internet complementing or replacing jobs?

While fears of automation loom large in advanced economies, Lin notes that in developing countries, the internet often complements rather than replaces labour, though:

“In Brazil, firms with fast internet reduced reliance on routine tasks, hinting at some degree of automation”

However, most evidence points to new opportunities, especially in sectors where automation isn’t yet economically viable. Policymakers should address potential risks as internet adoption grows.

Internet connectivity has also significantly impacted education and training. In China, remote teaching programs connected students in rural areas with high-quality urban teachers, improving test scores and future earnings. Similar benefits were observed in Peru and Malawi. However, internet access can also distract students, as seen in studies from India. Digital tools have also enabled remote upskilling for workers, a trend particularly impactful in African countries.

Internet connectivity expands markets and trade opportunities, but can businesses capitalise on these opportunities

The internet has opened new markets for firms in low- and middle-income countries, though the benefits are uneven. Studies from Africa show increased exports due to improved access to international buyers. Yet smaller firms, especially those in rural areas, often struggle due to logistical barriers and limited digital skills. Platforms like Alibaba Marketplace help small firms reach global markets, reduce transaction costs, and access credit through digital collateral. However, visibility challenges remain for sellers without strong ratings or marketing capabilities.

Price transparency and public sector efficiency

Improved information access through the internet reduces price dispersion, as demonstrated by Indian farmers using online price platforms to bypass middlemen. In the public sector, digitisation efforts have shown promise. For example, Indonesia’s welfare digitisation made the system more efficient and actually reduced poverty, while India’s e-governance initiatives decreased corruption and sped up service delivery. In Africa, internet-enabled systems have enhanced tax collection and reduced fraud.

The unequal impacts of the internet

The benefits of internet connectivity are most pronounced in regions with robust infrastructure and supportive policies. However, unequal access risks exacerbating existing inequalities. High-skilled workers and larger firms often benefit disproportionately, but there are opportunities to address these gaps. For instance, better internet access in West Bengal enabled women to work remotely, promoting gender equality. Policymakers must focus on digital inclusion, literacy, and infrastructure to ensure broader and more equitable benefits.

Future research directions on the internet's economic impact

Lin identified four key areas for future research:

• Understanding why the internet benefits certain workers more than others.
• Examining how connectivity changes the role of multinationals in low-income countries.
• Investigating the nuanced effects of internet access on education, including both positive impacts and distractions.
• Exploring the potential for sustainable growth in service exports enabled by the internet.

Also, as artificial intelligence (AI) begins to permeate low- and middle-income countries, Lin emphasised its transformative potential, and advocates for proactive policymaking to harness its benefits and mitigate risks

“AI’s impact on productivity, education, and healthcare could be enormous”

The internet’s impact on developing countries is profound but uneven.

"Policy is critical"

As Lin discussed, policy plays a crucial role in amplifying benefits and addressing inequalities. Moving forward, with further research and inclusive policies, the internet can play a pivotal role in driving sustainable development.