A New Way to Estimate the Size of the Digital Economy

In recent years, many governments around the world have been setting targets for the digital economy as a share of their nation’s gross domestic product (GDP), as part of their overall national digitalization planning. 

Viet Nam, for example, has a goal of having the digital economy account for 30 per cent of its GDP by 2030. The United Arab Emirates’ (UAE) Digital Economy Strategy aims to double the contribution of the digital economy to the UAE's GDP from an estimated 9.7 per cent in 2022 to 19.4 per cent within 10 years. There are many other examples. 

As I highlighted in Measuring the Digital Economy - It's Harder & More Important than You Think, however, a major problem remains that there is still no universally accepted methodology to calculate the size of the digital economy. And if we are systematically under-reporting or certainly mis-measuring the economic contribution and impacts of digitalization, those decisions are being made with a poor understanding of what’s really happening in our economies.

It is widely agreed that the digital economy transitions through three phases as it develops in maturity. We are most familiar historically with the initial ‘Core’ phase – this involves the traditional ICT sectors such as hardware manufacturing and software services (and are already mostly included in the national accounts for GDP calculation). But as digitization leads to digitalization, a country’s digital economy expands to the ‘Narrow’ definition.

High-quality broadband networks can provide better online experiences, which has led to new Internet businesses focused around e-commerce, social media, streaming videos, and other online enabled activities. This creates the many new business models we are familiar with today. But the smart scenarios as outlined in the ‘Intelligent Economy’ takes us from digitalization to the full digital transformation of our economies and societies. The so-called ‘Broad’ definition of the digital economy and final phase.  

Source: OECD, 2020. A Roadmap toward a common framework for measuring the digital economy. Report for the G20 Digital Economy Task Force, Saudi Arabia 2020. https://www.oecd.org/sti/roadmap-toward-a-common-framework-for-measuring-the-digital-economy.pdf 

Accurately measuring the Narrow and Broad definitions of the digital economy across countries is challenging due to several factors. First, there are a lack of standardized digital input definitions, making it difficult to compare data consistently. Countries may also classify digital activities differently, from e-commerce to digital services. Second, digital activities often cross borders, complicating the tracking of transactions. Third, many digital services, such as cloud computing or data storage, are intangible, making them challenging to quantify. Additionally, informal digital markets and the gig economy are frequently underreported. Many Internet services (for example mapping and email) are in the first instance, consumed for free. Lastly, data collection methods and technological infrastructures vary widely across nations, leading to inconsistent and incomplete reporting.

In 2020, the OECD began to lead the way in formulating a best-practice approach to measuring the Narrow and Broad definitions of the digital economy. By late 2023, the OECD’s Informal Advisory Group on Measuring GDP in a Digitalised Economy published the OECD Handbook on Compiling Digital Supply and Use Tables (SUTs) as a guide to governments on how to best start consistently measuring the digital economy.

But we are still a long way from detailed, cross-country comparable estimates of the digital economy as a share of GDP published in a systematic way by national statistical offices.

Back in 2019, UNCTAD tried to provide such values in their Digital Economy Report. But their estimates were mostly based on the Core definition of the digital economy, with only limited aspects of the Narrow definition included.

Table 1 – UNCTAD estimates of the size of the digital economy as a percentage of GDP 2019

Source: UNCTAD, 2019. Digital Economy Report. https://unctad.org/publication/digital-economy-report-2019

So far it seems, the China Academy of Information and Communications Technology (CAICT) is the only organisation to have produced consistent estimates of the Broad digital economy as a share of GDP for China (annually) as well as for a range of other countries.

Table 2 – CAICT estimates of the size of the digital economy (broad) as a percentage of GDP

One can see from table (2) that CAICT’s estimates for the digital economy as a share of national GDP are much higher than those of UNCTAD’s (and other national estimates) as they explicitly aim to measure all economic activities significantly enhanced by digital inputs, as with the Broad definition for the digital economy.

A problem with the CAICT estimates, however, is that they are for a limited range of countries that publish sufficient underlying data for CAICT’s estimation methodology.

Chart 1 – Plotting CAICT’s digital economy per capita (US$) against the NRI

This is admittedly a rough-and-ready approach to estimating the true value of the digital economy (Broad definition) as a share of GDP. These estimates are also based on 2021 data and so are likely to have shifted up a little to 2024. But until we get a widely adopted methodology from the likes of the OECD, this approach may serve as a guide to more easily estimating the true impact of digitalization away from more narrowly constricted measures such as those based on the Core and even Narrow definitions.

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.