Economist: Technology in Emerging Economies. Of Internet Cafés and Power Cuts.

Feb 7th 2008. From The Economist print edition

Emerging economies are better at adopting new technologies than at putting them into widespread use

Panos

WITHIN a few months China will overtake America as the country with the world's largest number of internet users. Even when you factor in China's size and its astonishing rate of GDP growth, this will be a remarkable achievement for what remains a poor economy. For the past three years China has also been the world's largest exporter of information and communications technology (ICT). It already has the same number of mobile-phone users (500m) as the whole of Europe.

China is by no means the only emerging economy in which new technology is being eagerly embraced. In frenetic Mumbai, everyone seems to be jabbering non-stop on their mobile phones: according to India's telecoms regulator, half of all urban dwellers have mobile- or fixed-telephone subscriptions and the number is growing by 8m a month. The India of internet cafés and internet tycoons produces more engineering graduates than America, makes software for racing cars and jet engines and is one of the top four pharmaceutical producers in the world. In a different manifestation of technological progress, the country's largest private enterprise, Tata, recently unveiled the “one lakh car”; priced at the equivalent of $2,500, it is the world's cheapest. Meanwhile, in Africa, people who live in mud huts use mobile phones to pay bills or to check fish prices and find the best market for their catch.

Yet this picture of emerging-market technarcadia is belied by parallel accounts of misery and incompetence. Last year ants ate the hard drive of a photographer in Thailand. Last week internet usage from Cairo to Kolkata was disrupted after something—probably an earthquake—sliced through two undersea cables. Personal computers have spread slowly in most emerging economies: three-quarters of low-income countries have fewer than 15 PCs per 1,000 people—and many of those computers are gathering dust.

And the feting of prominent technology projects in emerging economies is sometimes premature. Nicholas Negroponte, of the Massachusetts Institute of Technology, has long been championing a $100 laptop computer, presented with most fanfare at the World Economic Forum in Davos two years ago. The laptop was supposed to sweep through poor countries, scattering knowledge and connectivity all around. But the project is behind schedule, the computer does not work properly and one prominent backer, Intel, a chipmaker, has pulled out.

So how well are emerging economies using new technology, really? Hitherto, judgments have had to be based largely on anecdotes. Now the World Bank has supplemented the snapshot evidence with more comprehensive measures.

Take-off to tomorrow, and to yesterday

The bank has drawn up indices based on the usual array of numbers: computers and mobile phones per head, patents and scientific papers published; imports of high-tech and capital goods. In addition, it uses things such as the number of hours of electricity per day and airline take-offs to capture the absorption of 19th- and 20th-century technologies. It tops this off with measures of educational standards and financial structure, which show whether technology companies can get qualified workers and enough capital. The results, laid out last month in the bank's annual Global Economic Prospects report, measure technological progress in its broadest sense: as the spread of ideas, techniques and new forms of business organisation.

Technology so defined is fundamental to economic advance. Without it, growth would be limited to the contributions of increases in the size of the labour force and the capital stock. With it, labour and capital can be used and combined far more effectively. So it is good news that the bank finds that the use of modern technology in emerging economies is coming on in leaps and bounds.

Between the early 1990s and the early 2000s, the index that summarises the indicators rose by 160% in poor countries (with incomes per person of less than about $900 a year at current exchange rates) and by 100% in middle-income ones ($900-11,000). The index went up by only 77% in industrialised countries (with average incomes above $11,000), where technology was more advanced to start with. Poor and middle-income nations, the bank concludes, are catching up with the West.

The main channels through which technology is diffused in emerging economies are foreign trade (buying equipment and new ideas directly); foreign investment (having foreign firms bring them to you); and emigrants in the West, who keep families and firms in their countries of origin abreast of new ideas. All are going great guns.

To me, to you, to me, to you

Start with trade. In the past ten years the ratio of poor countries' imports of high-tech products to their GDPs has risen by more than 50%. The ratio in middle-income countries has increased by over 70%. Capital goods (mainly industrial machinery) often embody new technology, and imports of these have increased faster in middle-income countries than in rich ones.

The gain in high-tech exports has been more striking still: emerging economies' share of global trade in such goods rose by 140% between the mid-1990s and the mid-2000s. Some of the world's fastest-growing multinationals have sprung from such countries. These include Brazil's Petrobras, owner of some of the world's best deep-sea oil-drilling technology, and Mittal, a company of Indian origin that is now the world's largest steelmaker.

Relative to GDP, inflows of foreign direct investment to developing economies have increased sevenfold since the 1980s. In some countries, such as Hungary and Brazil, foreign firms account for half or more of all R&D spending by companies. This has had dramatic demonstration effects. Local French-language call centres in Morocco and Tunisia got going only after French operators began outsourcing to the Maghreb. A quarter of Czech managers said they learned about new technologies by watching foreign companies in the Czech Republic.

Emigrants are arguably the most important source of new ideas and capital. Granted, emigration can be costly: computer engineers, scientists and doctors, trained at public expense at home, go to work abroad. But money and skills flow back. Nearly half the $40 billion-worth of foreign direct investment in China in 2000 came from Chinese abroad. Remittances have doubled in the past ten years and now account for roughly 2% of developing countries'GDPs—more than foreign aid. An émigré banker returned to set up Bangladesh's Grameenphone banking network last year; it now has 15m customers. Bata, a Czech shoemaker, has been saved twice by foreign connections. Facing bankruptcy in the early 1900s, Tomas Bata went to America to learn about mass production. He came back and established branches from India to Poland. After the second world war his son fled to Canada to escape the communists. He returned in 1989 and used late-20th-century know-how to expand in eastern Europe and open factories in China and India.

The upshot is that technology is spreading to emerging markets faster than it has ever done anywhere. The World Bank looked at how much time elapsed between the invention of something and its widespread adoption (defined as when 80% of countries that use a technology first report it; see chart 1). For 19th-century technologies the gap was long: 120 years for trains and open-hearth steel furnaces, 100 years for the telephone. For aviation and radio, invented in the early 20th century, the lag was 60 years. But for the PC and CAT scans the gap was around 20 years and for mobile phones just 16. In most countries, most technologies are available in some degree.

But the degree varies widely. In almost all industrialised countries, once a technology is adopted it goes on to achieve mass-market scale, reaching 25% of the market for that particular device. Usually it hits 50%. In the World Bank's (admittedly incomplete) database, there are 28 examples of a new technology reaching 5% of the market in a rich country; of those, 23 went on to achieve over 50%. In other words, if something gets a foothold in a rich country, it usually spreads widely.

In emerging markets this is not necessarily so. The bank has 67 examples of a technology reaching 5% of the market in developing countries—but only six went on to capture half the national market. Where it did catch on, it usually spread as quickly as in the West. But the more striking finding is that the spread was so rare. Developing countries have been good at getting access to technology—and much less good at putting it to widespread use.

As a result, technology use in developing countries is highly concentrated. Almost three-quarters of China's high-tech trade comes from just four regions on the coast. More than two-thirds of the stock of foreign investment in Russia in 2000 was in Moscow and its surroundings. Whereas half of India's city-dwellers have telephones, little more than one-twentieth of people in the countryside do.

Not only is there a technology gap between emerging economies and the West, and another within emerging economies: there are also surprising differences between apparently comparable emerging economies. For example, China imports and exports far more high-tech goods than India does and its exports are as technologically advanced as a country three times as rich. India and Bangladesh are neighbours with comparable levels of GDP per head. But electricity losses in India are about 30% of output; in Bangladesh, they are below 10%. And although Africa as a whole has low levels of mobile-phone use, in six countries (Botswana, Gabon, Mauritius, the Seychelles, Sierra Leone and South Africa) more than 30% of the population uses them.

The question is how much this unevenness matters. It is tempting to say, not much. What really counts, say techno-optimists, is that technology should get a toehold. Once it does, its grip will strengthen. So although only 6% of India's rural poor have phones, urban folk were at the same stage in 1998—and look what happened (see chart 2). Optimism about diffusion seems all the more plausible because of leapfrogging. Technologies such as mobile phones can be dropped into developing countries without the slog of building expensive infrastructure (such as land lines) and can circumvent the failings of old 19th- and 20th-technology. Poor countries will leapfrog into the next generation.

Fast or forget it

But this view—essentially, that technological diffusion is a problem that will take care of itself—may be too sanguine. The evidence from successful emerging markets is that if they absorb a new technology they usually do so fairly quickly. The corollary is that if a technology is not diffused promptly, it may at best be diffused only slowly and incompletely.

Judging by the World Bank's index, that is what seems to be happening in some places. As a general rule, technological achievement rises fastest in poor and middle-income countries and then levels off as these countries approach Western living standards (see chart 3). But now compare Latin America and Europe. Eastern Europe is following the path taken by America and western Europe a few years before. But in Latin America the slope flattens at lower levels than elsewhere.

The region has less installed bandwidth and fewer broadband subscribers than poorer East Asia, and not many more internet users or PCs. High-tech exports account for less than 7% of the total in Argentina and Colombia, against one-third in East Asia. In Chile and Brazil less than 2% of the business workforce is in ICT. This relative technophobia probably reflects years of inward-looking economic policies, import substitution and disappointing education systems. Here, slow technological dispersal may not be just the result of a time lag. It may be evidence of more fundamental problems.

Broadly, two sets of obstacles stand in the way of technological progress in emerging economies. The first is their technological inheritance. Most advances are based on the labours of previous generations: you need electricity to run computers and reliable communications for modern health care, for instance. So countries that failed to adopt old technologies are at a disadvantage when it comes to new ones. Mobile phones, which require no wires, are a prominent exception.

The adoption of older technologies varies widely among countries at apparently similar stages of development. Soviet central planners loved to build electricity lines everywhere; the result is that ex-communist countries enjoy near-universal access to electricity (an extremely rare example of a beneficial legacy from communism). Latin American countries had no such background and as a result consume only about half as much electricity per person as eastern Europe and central Asia.

This partly explains the patchiness in countries' technological achievements overall. Call centres in Kenya, for example, pay more than ten times as much per unit of bandwidth as do rivals in India, because India's fibre-optic cable system is far better and cheaper. So sometimes you cannot leapfrog. As countries get richer, older technology constraints do not always fall away. It depends in part on how governments organise basic infrastructure like transport and communications.

The other set of problems has to do with the intangible things that affect a country's capacity to absorb technology: education; R&D; financial systems; the quality of government. In general, developing countries' educational levels have soared in the past decade or so. Middle-income countries have achieved universal primary-school enrolment and poor countries have increased the number of children completing primary school dramatically. Even so, illiteracy still bedevils some middle-income countries and many poor ones.

A similar pattern can be seen with R&D. Emerging economies spend less on R&D than rich ones: rich countries spend 2.3% of GDP on R&D, East Asians 1.4%, and Latin America 0.6%. Also important, though, is who spends the money; and this also varies considerably. East Asia's pattern is similar to the West's: companies spend most of the money and do most of the research. In eastern Europe and Latin America, by contrast, the government is the largest source of finance, and in Latin America universities do the largest share of the work. Sometimes government-supported research is fine: it triggered South Korea's technology boom in the 1980s. But in general, companies tend to be the most efficient and effective promoters of technology (mobile phones are a case in point).

And in rich countries, high-tech-firms get money from banks, stockmarkets and venture capitalists in ways that emerging-market entrepreneurs can only dream of. Here, and in government policy towards technology firms—meaning everything from trade openness to product standards—there has been little catch-up with the West. In Kenya, flower-growing counts as a technology-improving activity because it requires fertilisers, irrigation, greenhouses and just-in-time delivery. The damage wrought by political chaos (see article) is a reminder that technology is far more fragile in poor countries than in the West.

Yet it would be wrong to be gloomy about the technological outlook of emerging economies. The channels of technology transfer have widened enormously over the past ten years. Technological literacy has risen, especially among the young. But all this has helped emerging economies mainly in the first stage: absorption. The second stage—diffusion—has so far proved much more testing.

Source: Economist.com