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Digital Divide: The impact of closing Africa’s Internet gap

By Armando Cabral, Lohini Moodley and Safroadu Yeboah-Amankwah

Africa lags behind emerging Asian and South American markets in Internet-based GDP, but a focused strategy could yield massive social and economic gains.

The Internet exerts substantial influence on economic growth and enables transformations in both the public and the private sector— for all types of organizations, not just for online players— and regardless of an organization’s size. Among small and medium-sized businesses (SMBs), for instance, 75 percent of the Internet’s economic impact can be attributed to companies that are not pure Internet players.These businesses have benefited from the higher productivity that the Internet enables. In a global survey of 4,800 SMBs, McKinsey found out that companies utilizing the Internet grew more than twice as fast as those with a minimal Web presence.

One index of the Internet’s impact on growth is GDP— the Internet’s share of gross domestic product (see text box, page 40). In the world’s developed economies, the Internet already contributes more than 20 percent of GDP growth. But this growth is by no means limited to the mature economies of the West. In China, India, and Brazil, the Internet has accounted for more than 10 percent of total GDP growth over the past five years, and its impact is rapidly increasing. Conspicuously dwarfed by the world’s climbing iGDP, however, is the continent of Africa.

Over the most recent decade, Africa has made remarkable strides in its economic development – with GDP growth rates among the highest in the world, rapid urbanization and expansion in consumer spending power, and unprecedented business interest and investment. Despite these optimistic signs, however, Africa has lagged behind the rest of the world in Internet adoption. Per capita spending on information and communications technology (ICT) is a mere fraction of that in other parts of the world, and only 16 percent of Africa’s one billion people are Internet users.

Africa in the global Internet economy

While most other regions have undergone a boom in Internet adoption and considerable Internet related growth over the past decade, Africa has trailed behind. McKinsey analysis shows that Africa’s iGDP amounts to just 1.1 percent of GDP – half the iGDP of other developing countries and less than a third of the average developed country’s iGDP of 3.7 percent. If Africa could close this gap, the impact on GDP, business growth, and social outcomes would be massive.

More specifically, McKinsey assessed the iGDP of the 14 countries that together account for 90 percent of Africa’s GDP and found significant variation among them. Senegal’s iGDP stands at 3.3 percent and Kenya’s at 2.9 percent – a level comparable to that of France and Germany. Ethiopia’s iGDP, by contrast, is only 0.6 percent (Exhibit 1).

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In dollar terms, Africa’s iGDP is estimated at USD 18.0 to 18.5 billion – a fraction of that in other emerging economies. Two-thirds of this total is made up by private consumption of Internet-related services and equipment, including smartphones. Public expenditure on the Internet – including digitization of education and health services – currently amounts to only USD 2 billion.

Private investment in infrastructure and digitization generates a further USD 2 billion, while the Positive trade balance created by business process outsourcing (BPO) accounts for the remaining USD 2 billion.

McKinsey’s iGDP methodology

First presented at the 2011 eG8 Forum, McKinsey’s iGDP methodology is a quantitative approach to evaluating the Internet’s economic contribution. To measure the Internet’s impact on a country’s economy – that country’s iGDP in other words – the methodology uses the expenditure method of calculating GDP, assessing all the activities linked to both the creation and use of Internet networks as well as Internet services. These include:

  • Private consumption – the total consumption of goods and services by consumers via the Internet or needed to obtain Internet access
  • Public expenditure – Internet spending for consumption and investment by the government, across software, hardware, services, and telecoms
  • Private investment – in Internet-related technologies, including telecoms, extranets, intranets, and Web sites as well as in infrastructure
  • Trade balance – including business process outsourcing, e-commerce, and exports of goods, services, and Internet equipment, from which all associated imports are deducted.

However, the composition of iGDP varies across the sample, illustrating the different paths that countries have followed. Private consumption dominates across all countries except Morocco, where the trade balance is the largest element as a result of its BPO industry. Despite this being the largest factor in all the remaining countries, private consumption plays a particularly important role in Mozambique, Ethiopia, the Ivory Coast, Cameroon, Senegal, Kenya, and Ghana, accounting for more than 85 percent of iGDP. With around 25 percent of iGDP, Nigeria stands out in terms of its public expenditure as a result of e-government initiatives. Egypt shows relatively high private investment, generating 23 percent of its iGDP. The composition of iGDP highlights potential opportunities for growth.

Specific steps that African countries need to take to unlock the Internet’s tremendous economic potential vary considerably and depend on each country’s starting point. Some African countries are much further along the path of Internet-driven growth than others. McKinsey’s Internet Five Foundations (i5F) index assesses the vibrancy of a country’s Internet ecosystem (see text box below).

Five Foundations for unlocking the Internet’s full potential

For a country to unlock the Internet’s full economic potential, five foundations must be in place. McKinsey’s i5F index assesses the strength of each these foundations in a particular country, generating an overall score for the country’s Internet readiness – a score that correlates closely with current iGDP.

  • Government prioritization and support – including a clearly articulated ICT strategy and creation of a regulatory environment that favors infrastructure investment
  • Infrastructure – including electricity supply and the availability of secure Internet servers
  • Business environment – including business-friendly regulation and effective competition policy
  • Financial capital – including access to loans, venture capital, and equity financing
  • Human capital – sufficient qualified professionals in both the private and public sectors, dependent on factors such as the enrollment rate in tertiary education.