China Is Not Ten Feet Tall
How Alarmism Undermines American Strategy
Today, there are as many mobile phone subscriptions as people in the world, and close to 40 percent of the planet has Internet access. Digital connectivity is thus the defining force of our age: It fosters a more engaged civil society; gives consumers access to real-time information and a greater variety of products; opens opportunities for businesses to understand their markets, innovate, and compete; and streamlines government services and promotes transparency. The data on digital connectivity speak to its power and future economic potential. By 2016, the Internet economy in the G-20 nations will increase to $4.2 trillion, up from $2.3 trillion in 2010, according to Boston Consulting Group. If it were its own national economy, the Internet would be the fifth largest in the world. In developing countries, every ten percentage-point increase in Internet speed yields 1.3 percentage points in economic growth, according to the World Bank. In Africa alone, the Internet is slated to transform a number of sectors, such as agriculture and healthcare, and could account for $300 billion of the continent’s GDP by 2025.
The innovation driving that growth is now no longer limited to Silicon Valley. Atomico, an international investment firm, tracked 156 software companies founded in 2003 that are now valued at one billion dollars or more—what is considered a mark of start-up success. Over 50 percent of the 22 e-commerce companies on the list are in Asia. Two of the only three European e-commerce companies are based in Germany. One of them, the Berlin-based Rocket Internet, caters only minimally to consumers in Germany or the West. Its more significant operations are in incubating e-commerce companies in the developing world. It has a presence in over 100 countries and a formidable footprint in the nascent digital economies of Africa. In India, nearly 200 digital commerce start-ups are flush with private equity and venture capital funding. The country holds the dubious distinction, according to a recent UN study, of having greater cell phone accessibility than toilets. And tiny Estonia has set a gold standard—it has reached “digital nirvana,” if you will—in its electronic enhancement of government and business functions, as well as democracy. Estonians enjoy roughly 4,000 digitized services—from banking to accessing medical records and obtaining fishing licenses. About 98 percent of Estonians pay income taxes online and a third even use the Internet to cast their ballots during an election. The government itself utilizes an e-Cabinet system, which enables ministers to conduct meetings, sign-off on decisions, and write policy—all online. This digitization is incredibly efficient—saving ministers up to 30 hours a week of work. Similarly, entrepreneurs use a unique e-Business Register that allows them to enroll their new company, view annual reports, monitor key data, send inquiries, and conduct background checks on partners. Much of this digital push was led by the government, which had the foresight to innovate in a country that had begun its post-Soviet independent rule with large institutional voids.
But there are also troubling aspects to the rising rate of digital activity. Take China, for example. Last fall, the Chinese e-commerce giant, Alibaba, became the world’s largest-ever stock market offering with an initial public offering of $25 billion; Singles Day, a Chinese alternative to Valentine’s, was the biggest electronic shopping day in the world for a third year in a row; Chinese consumers spent 2.5 times more than U.S. consumers did on Black Friday and Cyber Monday combined. Yet, some of the most commonly used sites used around the world, such as Gmail, Facebook, and Wikipedia are severely restricted or banned outright in China. In the United States, recent revelations that the National Security Agency had access to digital communication metadata have angered not only Americans, but also leaders and citizens from around the world. In Hungary, an ill-conceived tax on Internet usage by the administration of Prime Minister Viktor Orban was hastily put on hold after it brought tens of thousands of protestors onto the streets of Budapest. More bad news: 2014 saw the emergence of such bugs as the Heartbleed virus, which exposed the vulnerability of the security software used to store passwords at popular sites. We also witnessed targeted attacks against Home Depot, Target, JP Morgan, and even Snapchat; then there were the hacks on Sony and threats against the release of Seth Rogen’s film, The Interview.
In other words, the increase in the “good” of a digitally evolved society comes also with the “bad,” in the form of digital vulnerabilities. The question that remains, then, is how the world can get the benefits of connectivity without the adverse side effects. That is, how can nations succeed in “getting to Estonia”?
MEASURING DIGITAL EVOLUTION
We can’t get to Estonia if we don’t improve. And we can’t improve what hasn’t been measured. And so, the first step is to come up with some way to quantify the pace and nature of digital transformation. Toward this end, we, and our research team at The Fletcher School, have developed a Digital Evolution Index to identify how 50 of the most prominent countries—half industrialized and half developing—stack up against each other in terms of their migration toward a more sophisticated digital future.
The index is derived from the quantification of the four main drivers of digital change: supply conditions, demand conditions, innovation, and institutions. For example, measuring a country’s supply conditions might involve measuring the level of infrastructure to support the Internet—such as quality of bandwidth and servers. Demand can be gauged through the depth of consumer savviness with digital payment or social media. Calculating the degree of innovation and change would involve, for instance, the extent of disruption new technology brings or the availability of venture capital. And finally, determining the quality of institutional environment might involve the level of political stability or the sophistication of e- governance.
The index reveals that we are indeed moving toward a digital planet, but not quite at an even speed. Some countries are moving briskly, some choppily, and some are struggling, while others are effectively standing still. Based on their current state of evolution and the performance of countries on the index during the years 2008 to 2013, we assigned them to one of four trajectory zones: stand out, stall out, break out, and watch out.
Stand out countries, such as Singapore, the United States, and New Zealand have shown high levels of digital development in the past and continue to remain on an upward trajectory. But sustaining this extraordinary rate of growth is difficult without accelerating innovation and exploring new markets abroad.
Stall out countries, such as most of Western and Northern Europe, Australia, and Japan, have achieved a high level of evolution in the past, but are losing momentum and risk falling behind. Most developed countries with aging demographics have been stalling out. The only way they can jumpstart their recovery is to follow what stand out countries do best: redouble on innovation, simplify regulations that might stifle entrepreneurship, and continue to seek markets beyond domestic borders. Attracting highly talented young immigrants could help revive innovation and digital activity.
Break out countries, such as Brazil, China, India, the Philippines, and Vietnam are improving their digital readiness quite rapidly. If they sustain that level of improvement, they will emerge as strong digital economies. However, the next phase of growth is harder to achieve and requires a concerted effort across drivers by all actors concerned, whether it’s government, business, or civil society. In the medium term, the greatest challenges to growth and opportunities for improvement in these markets lie in fortifying supply infrastructure, ushering in greater Internet freedom, nurturing sophisticated domestic consumers, and in implementing policies that foster innovation.
Watch out countries, including Egypt, Indonesia, Kenya, Nigeria, and Russia face significant opportunities and challenges, with low scores on both current level and upward motion of their digital evolution. Some may be able to overcome limitations with clever innovations designed to bypass specific constraints, such as mobile payments that leapfrog infrastructural barriers to banking, whereas others seem to be stuck. These “watch out” countries have a few critical things in common, such as institutional uncertainty and a low commitment to reform, which make them less able to remain on a sustainable, upward growth trajectory. They possess, however, one or two outstanding qualities—predominantly demographics—that make them attractive to businesses and investors. These countries expend a lot of energy innovating around institutional and infrastructural constraints. Unclogging these bottlenecks would enable these countries to direct their innovations where they matter most.
The index reveals several opportunities for entrepreneurs, investors, and governments. Entrepreneurs and investors should use the index to gauge the risk and opportunities in underserved markets. Consider, for example, the number of countries that are in the “break out” category—such as Indonesia, Thailand, Malaysia, Colombia and Chile—and have relatively low levels of private equity investment in their digital ecosystems. This gap represents an opportunity for investors and start-ups to pursue a fast growing market that is still far from being saturated. Governments and policymakers keen to see their countries reap economic gains from digital prospects ought to benchmark themselves against the index’ best performers or their neighbors, which often become de facto comparison points. For example, the ASEAN countries, which have a certain level of digital momentum, can compare themselves amongst each other and set Singapore as the archetype. Even a country like India can use the ASEAN average as a more realistic benchmark, as opposed to a potentially impractical comparison with China. Most of all, they need to create enabling environments for their digital ecosystems to thrive, including: investing in communication infrastructure, ensuring Internet access, easing regulations, and promoting financial inclusion by tapping the potential of mobile services. With any luck, 2015 will see greater public-private collaboration—such as filling the gaps in inadequate digital infrastructure and unclogging bottlenecks—which will take the world a step closer in “getting to Estonia.”