TWN Info Service on WTO and Trade Issues (Oct09/07)
28 October 2009
Third World Network

Widening North-South broadband divide
Published in SUNS #6799 dated 23 October 2009

Geneva, 22 Oct (Riaz K. Tayob) -- While the rapid spread of information and communication technologies (ICTs) around the world, especially mobile phones, is beating the expectations of most experts, there is a widening gap between the developed and developing worlds in the availability of broadband Internet access, and greater efforts are needed to narrow the divide, according to the UN Conference on Trade and Development (UNCTAD).

A person in a developed country is eight times more likely to be a broadband user than someone in a developing country, UNCTAD said in its "Information Economy Report 2009" released Thursday.

In a preface to the report, UN Secretary-General Ban Ki-Moon said: "There is still a long way to go before we can claim to have significantly narrowed the digital divide' to achieve an information society for all. Wide gaps in ICT infrastructure remain, not least in the case of broadband networks."

While the digital inequality is shrinking, the gap varies by type of information and communication technology. Comparing the diffusion of the different ICTs with the distribution of income in the world shows that mobile telephony (cellular phones) has become the most equitably distributed ICT. At the end of 2008, there were about 4 billion mobile subscriptions worldwide.

(According to data released recently by the International Telecommunications Union, the number of mobile subscriptions is estimated to rise to 4.6 billion subscriptions globally by the end of 2009.)

On average, there are 60 subscriptions per 100 inhabitants, the UNCTAD report states. Developing countries account for two-thirds of all subscriptions, corresponding to a mobile penetration rate of about 50.

In many countries, including developing and transition economies, mobile penetration exceeds 100 subscriptions per 100 inhabitants. The LDCs raised their mobile penetration from 2 per 100 inhabitants in 2003 to 20 in 2008. The penetration in developing countries is now eight times higher than it was at the turn of the century. Growth in subscriptions was lower but remained close to the 20% of 2008.

According to the report, the share of population covered by a mobile signal stood at 76% in developing countries in 2006, including 61% in rural areas. Mobile coverage was about 90% in East Asia and the Pacific, Europe, the Commonwealth of Independent States, Latin America and the Caribbean; and around 80% in the Middle East and North Africa. In sub-Saharan Africa, over half the population was covered, including 42% in rural areas.

The report makes a case for greater liberalization to promote mobile penetration. "A glance at countries with the lowest mobile penetration reveals supply constraints caused by market restrictions. Countries with similar economic circumstances but with a liberalized market generally show higher penetration rates."

Taxes can also act as a barrier, particularly import duties on handsets or special mobile communications surcharges, says the report, adding that "a common feature among top performers is liberalization."

The number of fixed telecommunications (such as land-line phones) subscriptions has been flat at around 1.2 billion since 2006 and even declining somewhat in the most recent years. In countries where there has been growth in main lines, this has often been the result of so-called "limited mobility" telephone subscriptions using Wireless Local Loop (WLL) technology. The WLL is an alternative configuration of full mobility technology. The service is "limited" because users are restricted from moving beyond their cell range with their handset due to regulatory restrictions. Fixed wireless systems are less costly to install than copper-based fixed lines, notes the report.

There were an estimated 1.4 billion Internet users around the world in 2008, says the report, adding that the growth rate of 15% was slightly lower than in 2007. More than half of the developed world population is online (using the Internet), compared to only 15% in developing economies and 17% in transition economies. However, the report notes that "there is some uncertainty regarding the measurement, scope and analysis of Internet usage in developing nations." Since official surveys are seldom carried out, most available data are rough estimates generally based on the number of subscribers or international bandwidth.

The digital divide between developed and developing economies is particularly wide in the case of broadband, the report stresses. Australia, with a population of 21 million, has more broadband subscribers than the whole of Africa. The report also points to the "broadband price divide" - the cost of using fixed broadband tends to be highest in low-income countries. Of the twenty countries with the most expensive broadband access fees, 14 are in sub-Saharan Africa. In addition, in 2008, the average fixed broadband price at purchasing power parity was $27.60 for developed countries and $289 for developing countries.

The fastest growing broadband markets are in large emerging economies, with China emerging as the largest broadband market, and the US coming in second, says the report. But no developing or transition economy reached the top twenty list for broadband penetration. "The promise of wireless broadband for developing countries is still far from being realized."

The report states that policies and regulations to facilitate broadband roll-out range from taxation and fiscal incentives to market liberalization. Suggestions include: (1) universal access, including funds for this purpose; (2) market stimulation; (3) operators should be encouraged to share backbone infrastructure, to avoid duplicative and fragmented low bandwidth networks; (4) competition, to ensure sufficient supply at reasonable prices; and (5) promote public Internet access points.

The report stresses that government policies should be technologically neutral, and they should not champion any specific broadband technologies. More specifically, the report states, in these turbulent times, governments can help by: (1) enhancing competition; (2) reducing taxes and other fees on operators; (3) increase emphasis on universal service obligations; (4) speeding up allocation of wireless spectrum; and (5) to encourage infrastructure sharing - for example, through issuing licenses for providers of turnkey mobile masts that can be shared by multiple operators.

The report also suggests government intervention to encourage adoption of ICTs, including by making it a core element in national ICT strategy; improving ICT infrastructure in under-served areas (typically "reform and liberalize the sector and expose incumbent operators to competition"); promoting the development of local content; and strengthening the legal and regulatory framework.

The impact of the crisis on ICTs is mixed, and projections in the report are tentative given the evolving crisis and its impact.

The production of various ICT goods and services has been seriously affected by the global recession, says the report. The volatile semiconductor industry has been among the worst hit. Revenue growth turned negative for the largest makers of IT equipment (computers and consumer electronic devices). The same is found in top manufacturers of communication equipment. "Over the medium to long term, however, companies will continue to upgrade their ICT systems, as this is essential for competitiveness."

The report however notes that IT organizations worldwide are trimming their budgets and cutting back on discretionary spending. It adds that "the speed and severity of the response by business and consumers alike to these economic circumstances should result in a market slowdown in 2009 that will be worse than the 2.1% decline in IT spending in 2001 when the 'dot com' bubble ended."

Between 1998 and 2007, the value of ICT goods rose from $813 billion to $1.73 trillion, 13% of merchandise trade. The share of developing countries in this trade jumped from 38% to 57%, which is almost entirely attributable to developing Asia. China emerged as the world's largest exporter and has more than twice the share of the second largest exporter, the US. Hong Kong-China and Republic of Korea saw the second- and third-largest increases in market share. The US and Japan experienced the greatest declines, 7% and 5% respectively.

Concentration of ICT goods exports increased in 2007 to half from the 46% share between the five lead exporters (China, the US, Hong Kong-China, Japan and Singapore) in 2003. The top twenty exporters account for 90%. Both imports and exports are dominated by the same geographic areas, with large parts of the world accounting for a marginal role in trade in ICT goods. While there is an increasingly integrated global production system for ICT goods, there is also increased specialization and fragmentation spurring intense intra-industry and intra-firm trade.

Product composition of ICT goods has also changed through the years between
1998 and 2007. Increases were recorded in telecommunications equipment (4.3%), audio and video equipment (2.6%), electronic components (1%) and other ICT goods (0.9%). Computer and related equipment declined 8.8%.

According to UNCTAD, it is possible that the crisis will accelerate further the shift in geographic composition of ICT goods trade, with developing Asia reinforcing its market share.

Market surveys suggest that it may take a while before spending on ICT picks up significantly. It is expected that even as the recovery begins, it is likely that ICT goods exports will remain below their pre-crisis levels for an extended period of time. Most IT departments of large companies lowered their budgets in the first quarter of 2009 and only a few signaled increases, says the report.

IT and ICT-enabled services have been more resilient during the crisis, says the report, adding however that measuring and understanding offshoring (of services) are no easy tasks. There is a lack of agreed definitions and there are many data limitations, and the phenomenon is rapidly evolving.

The report's analysis and findings on offshoring are based on proxy data derived from balance-of-payments (BOP) data, data related to FDI projects, company information and market surveys. It states that "the lack of reliable and credible information increases the risk that the offshoring phenomenon is either exaggerated or underestimated, leading to misinformed policy decisions."

According to BOP data, world trade in ICT and ICT-enabled services amounted to $1.6 trillion in 2007, or 48% of total services trade. According to market analysts' derivations, global spending on IT services in 2008 is estimated to be worth about $557 billion, and spending on business process outsourcing some $115 billion. The global market for offshoring of IT and ICT-enabled services was estimated to be worth about $90 billion in 2008, of which IT services accounted for 60%.

A closer examination of the data confirms the trend towards geographical diversification of ICT-enabled services, with the top five countries (Canada, China, India, Ireland and the Philippines) still accounting for four-fifths of exports related to offshoring (down from 95% in 2004). In IT services, India remains the dominant exporter with an estimated market share of about 55%.

According to the report, concerning ICT-enabled services, most FDI projects related to customer contact and shared service centres are undertaken by companies based in developed countries. During 2003 to 2008, the US and the UK accounted for more than half the 847 FDI-related contact centre projects and more than two-thirds of the 481 known shared services centre projects. Less than 8% of the projects were undertaken by companies from the South.

"Contrary to common perceptions, however," the report notes, these facilities, "are not only set up in the South." In the same period (2003-2008), the majority of known contact centre FDI projects, and almost half of all shared service centre FDI projects were implemented in developed countries.

According to the report, the effect of the crisis is having a mixed impact. It also varies between industries. The financial services industry accounts for the largest share of services sourced offshore. Consequently, the strategic responses by banks, insurance companies and other financial services significantly influence the overall impact. In 2008, the total value of outsourcing deals dropped by 28% to its lowest level since 2001.

Some observers believe that US and European institutions reduced their volume of newly awarded outsourcing contracts by nearly 30% in 2008, compared with 2007. "Those with relatively high exposure to the US market may be the most vulnerable in the short term," says the report. The report also includes the UK in its concerns.

The report also states that there appears to be a tendency among transnational corporations to diversify their customer contact and shared services projects into new locations. Long-term growth prospects for offshoring of IT and ICT-enabled services are promising for early starters, such as India, as well as for many other emerging nations.

In the medium to long term, the greatest potential for more offshoring is expected to be in the health care, retail, retail banking, ICT and insurance industries.

Where countries choose to offer financial or fiscal incentives to lure investors to ICT-enabled services production, adaptation of the incentives to the projects is important, with more emphasis on costs related to human resources than on capital investments. Countries should be cautious not to be too generous when offering incentives as it may fuel a race to the bottom among potential destinations, says the report.

Different ICT applications influence companies' performance in different ways but the use of computers, Internet and broadband all point to beneficial effects, states the report. The extent to which improvements in ICT infrastructure translates into economic growth and development is greatly affected by the way such technologies are used, and only when ICTs are effectively applied can there be a significant positive effect on corporate turnover and productivity.

Countries are increasingly interested in measuring how ICTs are used as well as the related impacts. The economic crisis accentuates the need for such information, the report stresses, noting however that in many countries, impact assessments are constrained by lack of reliable and useful data.

For governments to be able to design and implement appropriate policies, access to reliable and internationally comparable information is essential.

UNCTAD says that it seeks to address this through the "Partnership on Measuring ICT for Development", which has defined internationally comparable ICT indicators. +