Economic Recovery: Go Digital or Go Under?

The COVID-19 pandemic has accentuated the need for reliable, affordable broadband. Of that there seems to be little doubt. For many households during lockdowns and social distancing mandates, it has been the only way that many people could continue to work, study, shop, bank, be entertained and access government healthcare information.

The data since early 2020 also point to a step-change in our increased reliance on digital infrastructure and the digital economy. According to the Global Entertainment and Media Outlook 2021-2025 for example, some telecom operators are reportedly carrying up to 60% more data on their networks than they did before the pandemic.

In Latin America, the number of consumers shopping on the online marketplace Mercado Libre increased by 49% between late February and late May last year. UNCTAD report that in Thailand downloads of shopping apps increased by 60% in just one week during March 2020.

In Indonesia, based on a BVA BDRC survey 14% of consumers used online shopping for the first time in 2020, 47% increased their level of online shopping and 35% used home delivery from eating outlets. Digital payment systems were rapidly adopted and banks moved teller services online.

According to a 2021 study by Vodafone, SMEs that digitalized since early 2020 are more likely to have found new business opportunities during the pandemic, double the rate of the least digitalized.

Digitalization Is Crucial

For many businesses then, it was go digital or go dark. Digital infrastructure and the digital economy have arguably cushioned many of the detrimental economic shocks of the pandemic. And digitalization will prove crucial in driving the nascent economic recovery based on the market growth in many digital sectors we have seen so far.

It is surprising to learn then, that until very recently there was little in the way of empirical evidence on the role of digitalization in mitigating the economic losses resulting from crises. And next to nothing on pandemics. Based on ITU research, that which exists refers mostly to natural disasters with a focus on digitalization providing superior information for decision-making or for allowing critical services to continue.

In the spirit of investigation therefore, I set out to study the relationship between national digitalization, efforts to mitigate and control COVID-19 and the economic recovery.

My dependent variable were forecasts for real GDP growth in 2021 across a wide range of advanced and developing countries (latest available from the Economist Intelligence Unit). For the independent variable set, I used Huawei’s Global Connectivity Index 2020 for scores and rankings on the holistic state of a country’s digital development.

Digitalization alone would not be enough, so I also included a measure of the stringency of COVID-19 measures of mitigation (a composite measure based on nine response indicators including school closures, workplace closures, and travel bans) from Oxford University as an important factor in additionally controlling the impacts of COVID-19 and government efficacy. I also used a trend real GDP growth value from 2019 as an anchor to 2021 growth recovery numbers.

The research also tested a myriad of other cross-country comparable indicators including fiscal balance for 2021 (% of GDP); population density; urban population %; government effectiveness (from World Bank); openness to trade; and inequality. Interestingly, the latter as measured by a country’s gini coefficient (World Bank data) came closest to statistical significance alongside the original three indicators, but not close enough.

The best results from these simple cross-sectional regressions are shown below.

Just three variables as outlined above explain almost 50% of the variation in the bounce-back forecast GDP growth rates for 2021. Most importantly, digitalization as measured by Huawei’s Global Connectivity Index is strongly significant controlling for the other two indicators.

Many other factors of course determine a country’s economic recovery. This is illustrated in the chart above which shows predicted GDP growth for 2021 (based on the three variable model above) and the actual forecast growth rates from the Economist Intelligence Unit.

Lebanon’s dire economic slump is understood to be caused by many other factors beyond digitalization. The model does not do well either for predicting India (where the bounce-back this year of 10.4% growth is expected to be especially strong) and countries like Argentina and Mexico because of other, stronger factors impacting their economic recoveries. However, the prediction is noticeably closer for countries like the USA and China.

A much more sophisticated study published by the ITU in June 2021 across 139 countries provides similar empirical evidence of economic impacts being cushioned by the extent of national digital infrastructure. The authors find that after controlling for a range of variables, the countries with better broadband infrastructure were able to mitigate part of the negative economic impact of the pandemic.

Their econometric model suggests that in countries with unique mobile broadband subscriber penetration rates below 50%, an increase of 1% in COVID-19-induced deaths per 100 population generated a contraction of GDP per capita of -0.023 %. In countries with penetration levels between 50% and 75% of unique mobile subscribers, an increase of 1% in deaths per 100 population resulted in a contraction of GDP per capita of -0.019%: in other words, 15% of the economic damage faced by less-connected economies is mitigated. For countries with mobile penetration over 75%, the mitigation effect increased to 19%.

Similar results were established for fixed broadband penetration rates.

Digitalization cannot solve all problems resulting from the pandemic, but there is increasing awareness of the need to try and put numbers on how it has helped soften the economic shocks during this crisis and potentially future ones. More research will hopefully follow but the current empirical evidence for the importance of digitalization is compelling.

Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.