Can access to the Internet drive economic development?

Over the past twenty years, the Internet has increasingly been considered an economic development indicator. GDP growth in the developing world has coincided, along with other factors, with the rapid expansion of Internet connectivity. Roughly half the global population uses the Internet today, with access accelerating in low-income countries.

In this context, policymakers and academics consider the reverse question: can Internet access drive economic development? Theoretically speaking, Internet access may drive economic development both through supply-side and demand-side forces. For example, Internet connectivity can allow workers to carry out tasks more rapidly and to higher standards of quality. It may allow greater access to markets and services through e-commerce, especially in rural or remote regions.

There is growing empirical support for the notion that Internet access can improve the productivity of workers and firms. The expansion of Internet infrastructure is linked to workers being more likely to find employment and gain higher wages. Studies that consider Vietnam, Brazil and Nigeria suggest that this may especially be the case for female workers.

The productivity gains of Internet accessibility can arise through many underlying channels. Studies show that the implementation of the Internet into business practices can facilitate on the job training, but studies tracking educational attainment in students with Internet access find less promising results. As for firms, Internet access often allows companies to better leverage intangible technologies – i.e., organisational practices or management – to increase performance.

Studies suggest that firms with better Internet access sell more of their products and services (including rural-based firms that can expand their exporting operations), but there are also growing concerns in the literature that the rise of e-commerce platforms may be increasing consumption inequality.

A handful of studies have found evidence that the build-out of Internet infrastructure in Africa increased welfare as captured by incomes or consumption. But the evidence on policies targeting Internet use is less clear. An experiment in Kenya found that offering data packages to individuals who already had a phone contract did not augment their consumption or employment prospects. By contrast, a subsidising program in the United States did increase earnings and employment among low-income families: we may speculate that the value of the Internet depends on the broader social and economic context.

The research into economic benefits of Internet access in the developing world will pursue exciting research avenues as we understand more about the contextual determinants of the skill bias of internet technology; as we learn how the impact of multinationals changes with Internet connectivity; how the technology influences firms’ organisational choices, and thereby the type and extent of production that will take place in these countries; as we isolate the channels through which the Internet affects firms’ productivity; and when Internet connectivity helps students learning in school and when it does not.

We know today that Internet access tends to lead to greater economic activity and other beneficial impacts in many developing country contexts, though not all. Policymakers should complement their understanding of the broader research into the economic benefits of Internet connectivity with local and practical knowledge of the regional context when considering their reform agendas.

The evidence tends toward the suggestion that it is better for policymakers in developing countries to focus on building and expanding Internet infrastructure across a country rather than subsidising its use in areas that already have accessibility.

References to all mentioned studies and further analysis can be found here.

Dr Jonas Hjort is Professor of Economics.