Overselling the Web: Development and the Internet

Overselling the Web? Development and the Internet is being published in September 2006.  The book discusses the role of the Internet in development, and policies designed to increase its impact.  The widespread and rapid adoption of the Internet in the developing world suggests that there are real opportunities presented by the new technology.  At the same time, Overselling the Web suggests that the overall impact may be smaller than commonly thought and that policymakers should be wary of large-scale subsidies, tax breaks and rollout programs.

Here are the preface and Chapter One.  Here's the publisher's blurb, a couple of reviews and a link to the Library Journal's 50 best business books of 2006, where it appears.  And here is a short summary article in ITID based on the book.  Chapter summaries are available in the Overselling the Web category page (look to your left).

Overselling the Web Chapter One: Will the Internet Change the World?

Chapter One of Overselling the Web? looks at some predictions regarding the impact of the Internet on development.  George Gilder chose December 31st, 1999 most suitably to suggest the change might be millenarian:

With any technology that will change the world so radically as the Internet… religious wars are important and inescapable….The twentieth century has been an era when an atheistic belief in the ultimacy of matter and the triviality of man led to the horrors of Nazism, Communism, and an epoch of total war. Now sweeping through the global economy, the overthrow of matter will unleash an undertow of religious belief that will make the new millennium a time of awakening to the oceanic grandeur and goodness of the universe...

Thomas Friedman hasn't gone quite as far, but he, too, has been pretty optimistic:   “We are now in a period of radical change, possibly more sweeping and complex than any period since 1776-1789.”  Technology, he argues, “is shrinking the world from a size medium to a size small.”  At the same time, it “turns out that the real secret of success in the information age is what it always was: fundamentals -- reading, writing and arithmetic, church, synagogue and mosque, the rule of law and good governance.”  Indeed, these basics have got even more important.  “Just when the developing world is coming to really grasp that it has no choice but to get itself ready to climb aboard this train… the train is going to get faster -- not slower -- as the developing world moves toward Internet-based commerce, communication and learning systems. What's worse, no one can slow the train down, because the world economy today is just like that Internet: everybody is connected but nobody is in charge.”

The potential of the Internet as a force for development was the focus of a G-8 meeting as well as a UN Summit (in two parts).  It has catalyzed aid programs and any number of "e-readiness assessments."  All of this activity is based on what might be termed the "Okinawa Consensus":

The Internet and related technologies present a significant opportunity for developing countries to improve their growth prospects.  Indeed, the Internet may be a ‘leapfrog’ technology –one that creates an opportunity for developing countries to catch up economically with the industrial world.  The technology is a powerful tool to improve government service delivery, education, and income-earning opportunities even for the world’s poorest people.  Given that, poor country governments (in partnership with the private sector and with the help of donors) need to dedicate significant resources to expanding the use of the Internet, especially in government and education and especially to reach the poor.  There is also a role to promote Internet industries through technology parks, and Internet use through public access programs such as putting computers in libraries and building stand-alone Internet access points. 

Overselling the Web? is about the policies suggested, the rationale behind them, and which ones might make sense.   

Overselling the Web Chapter Two: The Link Between Technology and Growth

Chapter Two of Overselling the Web? discusses the role of technology in growth.  It begins by defining technology in economic terms.  Technology is everything that isn't capital and labor.  As such, it covers new inventions such as the steam engine or the transistor, but also includes ‘business technology’ (management techniques and systems) ‘political technology’ (forms of government and institutions) and ‘social technology’ (modes of human interaction). 

Given such a broad definition, it is perhaps unsurprising that technology is the key to economic growth.  But that, in turn, means that rich countries must have more technology than poor countries and that technology is hard to move around.  One reason for this might be that the nature of institutions is key to determining technology adoption:

Jared Diamond, in Guns, Germs and Steel, points out that the history of invention suggests that the use, if any, to which a new technology is put does indeed depend very much on the nature of a society into which it emerges.  Ancient native Mexicans never used the wheel for anything but toys because they had no suitable animals to draw carts, the Japanese continue to use the (cumbersome) kanji in addition to the (far simpler) kana alphabet because of prestige, QWERTY dominates global keyboards because everyone (bar this author) has already learned how to type on them.  The ‘nature of a society’, in economic terms, is in fact a set of technologies itself.  How great an impact an impact a technology has, then, might depend crucially on what technology is already there.

This suggests that the broader environment is likely to be a key determinant of the impact of the Internet on economic growth in developing countries, a conclusion strongly supported by later chapters.

Overselling the Web Chapter Three: ICT in the Industrialized World

Chapter Three of Overselling the Web? looks at the impact of ICTs in wealthy countries, with a focus on the US.  It opens with a discussion of the evidence regarding the total factor productivity (TFP) impact of ICTs.  ICT using sectors have seen considerable investments in computing and communications --they accounted for as much as 25 percent of total investment by the end of the 1990s.  This investment produced solid returns.  At the same time, ICT investment did not produce especially high returns of the type that would show up in TFP statistics.  The only sector to see particularly dramatic TFP growth was the ICT producing sector.  And this was in large part connected to a new way of calculating output in the sector based on 'hedonic measures.'  These measures adjusted industry output statistics to account for the rapid increase in quality for price in the sector.  Such measures assume that if a computer had twice the power, it was worth twice as much even if it sells for the same price.  That is a questionable assumption, and the chapter demonstrates why with the example of word processing:

        In 1964, IBM brought out the MT/ST (Magnetic Tape/Selectric Typewriter) which allowed entered material to be edited without being typed onto paper, and provided electronic storage and replay, correction, and multiple re-printing… By the mid-1980s, the standard word processor already featured justification, alignment, insertion/overstrike, search and replace, copy/cutting, pagination, headers and footers, footnoting, table of contents and index generation, form letter merging and automatic spell check.  Progress did not stop there, however…   In 1995, Microsoft introduced what was already the eighth version of its world-processing software, Word 95. It had considerably higher requirements than its forebears.  A 386 processor, six megabytes of RAM, 8 megabytes of hard drive and a 3.5 inch disk drive.  But for this extra capacity, users were given a range of new features including an ‘answer wizard’ help system, auto-formatting and designer templates. 

        It should be noted that a study of 16 people using one version of this software found that of 642 commands available on the program, just 20 accounted for 90 percent of use.  The average person used just 57 commands in six months, and all of the users together used only 152 commands in eighteen months –or less than one quarter of all those available.

        Nonetheless, this did not stop Microsoft issuing new versions with more commands.  Within two years, the company had issued Word 97 –it required a faster processor (a 486, with nearly 1,000,000 transistors on the chip), more memory (eight megabytes), a larger hard drive (20 megabytes) and a CD-ROM.  In return, users now had access to a letter wizard with layouts and styles, 3-D effects and animated text, and the animated smiling paper-clip office assistant. 

        Word 2000 came next.  Again, system requirements increased –a Pentium 75 processor, 20 megabytes of memory, 147 megabytes of hard drive.  But users now had access to WYSIWYG (‘what you see is what you get’) font menus and improved hyper-link functions.  This was also the version that replaced the animated paper clip office assistant with an animated Einstein office assistant.

        The next version –Word 2002 (or Word 11.0) required a Pentium 133, 32 megabytes of memory and 375 megabytes on the hard drive.  For which users were rewarded with content-sensitive smart keys, faster organization of mass-mailings (for which we can all be grateful), “a new auto-correct smart tag” that “lets you control how Word corrects text” –presumably allowing you to un-correct all of the mis-auto-corrected text from the Word 2000 version— and an auto save function that activates when the excessively baroque program crashes the computer.   

Since then, we have had Word 2003, and Word 2007 is just around the corner.  The latest version will use 42 times more RAM and 250 times more disk-space than Word 95.  Assuming that the retail price of the computer on which Word 2007 runs is similar to Word 95, it might be arguable that the 'real' value of the computer is 250 times larger because it can run software with auto-correct smart tags and other unused features.  Indeed, the excessively baroque nature of the programs that it runs might actually have reduced its value to the average user.

Worse, Word is in fact part of a 'baroque network.'  The value of the program is in large part attached to the fact that everyone uses it.  The utility of my word-processing software is considerably reduced if I cannot share files with collaborators.  And if they have Word 2010 while I have Word Jurassic, I will not be able to read their files.  Even if I am happy with the dancing paper clip mis-auto-correcting my text, if my collaborators will settle for nothing less than the dancing Einstein, I had better upgrade.  This might be a particularly significant drain on the productivity of ICT investments in the developing world, where use of advanced applications requiring significant computing power is rare.   But, along with the high failure rates associated with IT projects, the impact of baroque networks may help to account for no-more-than-normal returns to ICT investment in rich countries as well.

Looking at the impact of Internet use in particular, it appears that wholesale e-commerce enabled by the Internet is only a small improvement over the much older technology of Electronic Data Interchange, while retail e-commerce is not a significant improvement over off-line purchasing.  This might help to explain why it is difficult to pick up any impact of e-commerce on macroeconomic indicators.  Meanwhile, the Internet can be a powerful force for productivity at work, but it is also a powerful tool for wasting time.  Internet use at home and at work looks very similar (eBay is the fifth most popular site at home and sixth at work, for example), and this suggests a lot about the major uses of the web at work (at one point in 2005, the top three search terms were "sex", "porn" and "Paris Hilton").  Perhaps 172 million hours a week are wasted in recreational surfing at work in the US.

What does this mean for developing countries?  If the economic impact of the Internet and ICTs more broadly has been muted in the US, this is likely to be even more the case in countries with far lower usage rates.  It appears that wealthy areas with skilled workforces and strong institutions are garnering most of the benefits from new ICT technologies to date.  Overall, rich country evidence is not reassuring for those hoping for an ICT-enabled economic revolution in the developing World.

Overselling the Web Chapter Four: ICT in the Developing World

Chapter Four of Overselling the Web? reports on the rapidly shrinking digital divide.  Already, access in terms of Internet use per dollar of GDP is higher in the developing than the developed world.  Business use in particular is reaching global ubiquity --even in Kenya, 78 percent of firms use email. This is a strong sign of the significant utility of the new technology to business in the developing world. A gap remains, however, in the use of advanced applications --e-commerce, for example.  Some developing country firms are making good money through e-commerce applications.  Most, however, limit Internet use to email, seeing little benefit in a more aggressive Internet strategy.  The most significant problem isn't infrastructure but the broader climate for exploiting advanced applications, well illustrated by Mike Dertouzos' experience in Nepal:

...a few of us techies got together with a colleague from Nepal, fully expecting to boost his nation's economy by 20 percent through clever use of the information marketplace. Unfortunately, we quickly found out that even if we got the communications, hardware, software and training for free, we would still fall short of our goal: Only 27 percent of the Nepalese are literate. And of these, only a small fraction speak English. When we asked what services that smaller group could offer, we hit a brick wall. Many are not skilled, and those who are are already busy running their nation's businesses. Maybe we were too ambitious when we envisioned a future workforce in Nepal selling office services to New York and London via the Web. What if we focused instead on selling Nepal's famous crafts, like custom-made rugs, on the Web? That got us into all sorts of other concerns about establishing trust among distant buyers and distributing the goods. The potential of the modern information age seemed overshadowed at every turn by the ancient forces that separate the rich from the poor.

These broader concerns raise the possibility that the Internet could be a force for economic divergence.  Developing countries are in a weaker position to garner returns from advanced Internet use than rich countries.  This problem is exacerbated by the spread of baroque networks discussed in Chapter Three.  The need to preserve their computers' capacities to network with developed country client and supplier IT systems requires developing country firms to update computer capital stocks even though they do not themselves need the additional computing power.  Developing country firms are forced into investment decisions which will garner lower returns in poor countries than in rich because of a broader economic environment.

On the plus side, the spread of the Internet may create forces for covergence through the online equivalents of the Spanish Prisoner scam (Mr. Oluwa's strictly confidential email regarding funds hidden by former president Abacha).  In 2004, such emails raised a third of a million or more from US victims alone.  And overall, it is likely that the scale of convergence or divergence produced by the technology of the Internet will be comparatively small either way, with a total economic impact of the Internet estimated at between one to ten percent of developing country GDP, or about 0.1 to 1 percent of the gap between Sudanese and US incomes, for example.

Overselling the Web Chapter Five: Experiments with E-Government

Countries can generate significant returns from incorporating ICTs into government reform programs.  Singapore's government estimates that every dollar it has spent on ICTs has generated $2.70 in returns.  But it isn't easy to do, and for every success there are examples of expensive disappointment.  Richard Heeks suggests that failure rates for IT projects in developing countries may be as high as 80 percent.  Introducing e-government without corresponding institutional reform seems to be a leading cause of breakdown.

E-government applications which involve direct interaction with citizens or widespread access may be particularly ill-suited to success given the broader environment in developing countries.  Take education programs.  Computer labs in developing countries carry annual costs of around $78-$104 per student at the level of one computer per twenty students.   Compare that to annual discretionary budgets (what is left over after paying for salaries, needed to cover items such as chalk, books and buildings) of $5 per student per year for primary schools in low income countries.  Beyond expense, returns don't appear to be dramatic enough to justify diverting resources from alternate, more suitable interventions. 

Indeed, public Internet access programs for kids in the developing World like the 'Hole in the Wall' in India get plenty of media attention, what is less clear is that such programs generate significant returns in terms of educational outcomes.  As one parent of a child using the hole in the wall kiosk complained:

My son used to be doing very well in school, he used to concentrate on his homework, but now he spends all of his free time playing computer games at the kiosk and his schoolwork is suffering... 

Adults, meanwhile, often don't see the need to use the Internet at all --in contrast to other ICTs.  There are a number of rural areas in poor developing countries that are under the mobile footprint or have a public phone box and are also near public Internet access points.  A survey of three such areas in Gujarat, Mozambique and Tanzania found that seventy percent of people had used the telephone at least five times a year.  In contrast, and in spite of the availability of Internet facilities in local towns, less that two percent of people had ever used them.  This suggests perhaps questionable returns to public subsidy or provision of Internet access points in such communities.  The big problem isn't access, it is finding useful things to do on line in the face of educational, language, financial and institutional barriers.

Overselling the Web Chapter Six: Sustainable Policies for E-Development

Chapter Six of Overselling the Web? opens with an analysis of the technological divide separating India from the US:

Already, there is more than a seventy-fold difference in access rates between US and Indian households. That gap is far larger than the income divide between the two countries.  Worse, the divide is linked to productivity, suggesting this differential access will promote ever-widening divergence in income.  The divide I am talking about is, of course, the air conditioner divide. 

Policies towards the Internet need to be designed with the recognition that it isn't the only technology where access is significantly lower in developing countries.  Furthermore, and unlike some other technologies vital to development, ICT provision is an area where private, competitive operators have sparked an ongoing revolution in access.  One of the best policies governments can follow if they wish to overcome the 'digital divide' is to get out of the way of the market.  There may remain a government role to extend telecoms infrastructure access to remote communities.  Sometimes, there may also be a role for support to pilot projects evaluating new approaches to Internet access, but such approaches need to incorporate innovation, sustainability and replicability as well as intensive monitoring and evaluation if they are not to be white elephants.

Policy makers also need to recognize that the enabling environment to attract ICT industries or the advanced ICT use extends far beyond sector-specific policies:

Malaysia’s multimedia supercorridor is a particularly powerful case study here.  The $10 billion-plus investment by the government was matched by just $475 million of private investment and 7,300 jobs (that works out at more than $1 million per job).  Reasons that companies cited for not moving to the corridor included concerns about government monitoring of Internet traffic, capital controls, red tape, slow visa approval, weak intellectual property rights and the absence of an appropriate skills base.

Subsidies and tax breaks for ICT industries are common the world over.  The justification for such incentives based on 'cluster economies' is weak.  This is particularly the case in developing countries, where it is likely that foreign consumers will be the biggest beneficiaries of any TFP gains from the ICT industry.  Competition based on the size of subsidy paid will only reduce economic returns.  And subsidies won't work at all if the broader environment is unattractive to firms.

Overselling the Web Chapter Seven: Confronting the Costs

Chapter Seven of Overselling the Web? notes the long tradition of linking technological advance to dramatic social change --stretching back to the Communist Manifesto which suggested that railways were catalysts to revolution.  And it is hard to argue with the fact there have been significant social changes as a result of the Internet.  But you only have to read Mike Daisey's description of working at Amazon.com to realize they aren't all good:

On weekends I loved Amazon and I would speak at great and windy length …’God, I love my company, I love working, it’s so great, we’re making history’… But when I came into work I flipped –while there I hated the place, hated the phone and the email and the endless tracking... 

Similarly, there are arguments on both sides regarding the impact of the Internet on political advance.  Perhaps the Internet will spawn a technological dystopia rather than universal liberalism. 

Regardless, these arguments largely apply to rich countries, where intensive Internet use is ubiquitous.  For good or ill, most people in poor countries are some distance from hours in front of the interactive telescreen.  For poor countries it is likely that the most significant impact of the Internet will be economic.  And we have seen that even this impact is likely to be comparatively muted.  There are important roles for the Internet in developing countries, both in the private and public sector, and some applications will have considerable rates of return, but the enabling environment is not such as to make it a revolutionary technology in either a social or economic sense.  The book concludes by quoting Bill Gates (wearing his philanthropy hat):

I am suggesting that if somebody is interested in equity that you wouldn't spend more than 20 percent of your time talking about access to computers, that you'd get back to literacy and health and things like that. So the balance that makes sense is that more money should be spent on malaria...