Digital Economy

Defining, Conceptualising and Measuring the Digital Economy

It is generally understood that the digital economy in developing countries is growing, and growing fast.  But what is the digital economy, and how large is it?

A newly-released working paper from the University of Manchester’s Centre for Development Informatics – “Defining, Conceptualising and Measuring the Digital Economy” – addresses this question.  It was developed as part of the DIODE strategic network, which is funded by the UK’s Economic and Social Research Council as part of the Global Challenges Research Fund initiative.

“Digital economy” is typically dated back to Don Tapscott’s 1996 book of the same name.  It has been in fairly continuous use since, with a particular growth in interest in the past two-three years linked to resurgence of “digital” as a terminology.

Looking across the definitions, one can identify three scopes of definition as summarised in the figure below:

  • The core of the digital economy is the “digital sector”: more often called the “IT sector” or “ICT sector”, and based on the OECD definition of specific ICT-related manufacturing and services sub-sectors.
  • The “digital economy” as we define it is “that part of economic output derived solely or primarily from digital technologies with a business model based on digital goods or services”. It means the digital sector plus ICT-enabled business that extends the boundaries of economic activity.  The latter covers new digital business models such as platform-based firms.
  • A much wider scope encompasses all economic activity based on digital technologies; thus also including application of ICTs to intensify existing economic activity in manufacturing, services and primary production. We refer to this as the “digitalised economy”.

Digital Economy Three Scopes

Measuring the digital economy faces challenges of fuzzy boundaries, poor data quality, pricing problems, and invisibility of much digital activity.  But, reviewing the measures that are available, we estimate the digital economy as defined here to constitute around 5% of global GDP and 3% of global employment.

There is significant unevenness between and within regions.  For example, the digital economy likely constitutes a two-to-three times higher share of GDP in the global North than the global South.  Conversely, digital economy growth rates in the global South are estimated to be twice as fast as those in the global North.

Combined with higher-than-average wage and productivity levels, this points to the growing importance of the digital economy in developing countries.  Yet growth is constrained by a set of serious barriers and a lack of knowledge including policy guidance.  All this supports DIODE’s goal of strengthening the research base on digital economies in the global South.

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