Tuesday, January 20, 2009

Impact of Mobility on Economic growth in Developing Countries

The mobile subscriptions at the end of 2008 were 3.9 billion (penetration of 59%) are likely to cross 4 billion sometime in April-May’09. This means that the majority of the world’s population is already a mobile user. However, the real picture is missed in the averages. Many developing countries still have mobile penetration of less than 50%, e.g. India (30%), China (47%), Cambodia (26%), and Africa (39%). The subscriber base is expected to cross 5 billion by 2011. Majority of the next billion subscribers are likely from India, Africa and China.

There have been many studies conducted in various countries across the globe that show that increasing mobile penetration has a positive impact on the GDP growth of the country. This impact may be twice as large in developing countries as in developed countries

McKinsey in its research to assess the economic impact of the wireless sector in the countries of India, China and Philippines estimates that the indirect impact of wireless is at least three times the direct benefits. According to McKinsey, the total economic impact of wireless as the sum of three elements: the direct impact from mobile operators, the indirect impact from other companies in the wireless business system (hardware and software vendors, handset vendors, and so on), and a second form of indirect impact: the surplus enjoyed by end users. It estimated that by increasing penetration by 10% in China and India would produce tremendous end-user value of at least $10 billion, equivalent to an incremental 0.38%-to-0.61% contribution to GDP.

Vodafone (2005) reported that, in a typical developing country, an increase of 10 mobile phones per 100 people boosts GDP growth by 0.6% (based on research in Africa in 2004). Deloitte in its report ‘Global Mobile Tax Review 2006-2007’ estimates that with every 10% increase in mobile penetration, the GDP growth increases by 1.2%

A yet to be released study 'India: The impact of mobile phones,' conducted by the Indian Council for Research on International Economic Relations (ICRIER), shows that Indian states with 10% higher mobile phone penetration will enjoy 1.2% higher annual average growth rate than those with a lower teledensity. However, the study reveals that the real benefits of telecommunications only start when a region passes a threshold penetration rate of about 25%.

The quantum of economic impact may vary across various studies, though the consensus is that with every 10% increase in mobile penetration, the GDP growth increases by 1%. However, what is important is to understand the various benefits and what can the Government do to ensure that the benefits do trickle down to the lowest strata of the society.

Benefits of increased mobile penetration:
Productivity gains to individuals: Much has already been written and estimated about the productivity gains from use or mobile telephones. Productivity gains are on account of higher efficiency or more business/work to the users. The savings can be quantified in terms of time and money saved due to avoidance of travel. However, it is difficult to say how much addition business can be attributed to the use of mobile phones
Productivity gains to businesses: Mobile phones enable faster and more efficient decision making, improved logistics, etc. They also double up as productivity tools like Sales Force Automation, ERP data input devices, etc. No wonder the businesses (large and small) were the first to adopt the mobile phones
Inclusive financial services: The mobile phones out number the bank accounts by a large distance. Mobile phones can double up as bank accounts. Mobile technology has the potential to expand the reach of financial services to the poor. Branchless banking using mobile phones and a network of third-party agents (e.g. post offices, small retailers) can reduce the two biggest costs associated with providing financial services: building and maintaining a physical presence, and handling small transactions. A new area of interest is micro-finance which has been made popular by Gramin Bank. Micro-finance using mobile phones can greatly reduce the cost of funds to a financial institution
Remittance: Remittances play an important role in the development of a developing country. Mobile phones can play an important role in this market by making it quick, cheap and easy to transfer funds. Currently, sending funds through traditional money transfer operators such as Western Union and MoneyGram is expensive, with fees as high as $16 to send $100.19 Poor migrants send small amounts of money, so these fees are very regressive. In the Philippines, wireless providers like Smart Communications allow Filipinos working overseas to send money home in minutes with a text message for a fraction of the cost of money transfer operators
Empowerment of poor: Bringing easy and affordable access to telecommunications services to rural families will increase access to education and health services, and provide a forum for interaction with government services. Governments across the world are likely to look at mobile industry to fulfill its basic responsibility. M-Governance would also help reduce the corruption as middlemen would not be required for information from government departments
Women empowerment and security: A mobile device is a security device for most women in a developing nation. Women feel more secure at night if they have a mobile phone with them. A country develops faster if its women folks feel more librated and empowered to take decisions about their kids and family. Mobile is their window to the outside world. Many women would get the first experience of internet on their mobile. The knowledge would ultimately unshackle them, liberate them and help them take informed and confident decisions
Emergency situations: There is a more likelihood of an emergency situation in developing nation than a developed country. The emergency response infrastructure is also lacking in developing country. The mobile phones cut down the time to mobilize response teams
Foreign Direct Investment: Willams (2005), The Relationship between Mobile Telecommunications Infrastructure and FDI in Africa study shows that the FDI tends to be higher in countries where the mobile penetration is higher

It is difficult to quantify most of the benefits that accrue to the consumers of telecommunications. However, one thing is certain that the consumers find the mobile services useful and therefore are willing to spend a significant portion of their income on telecommunications. In all developing countries, the average spent on telecommunications is 2% of monthly expenditure. In a sample of Indian villages, the average was 3% of household income. In Chile poor people spend more of their incomes on telecommunications than on water, and even the average household spends more on telecom than on water and electricity combined. Income elasticities are also high: one study in India found a 1% rise in household income almost doubled demand for telecommunications in 2003

What can the Government do?
Government has a significant role in development of any industry and telecom industry is no different. The list below are some of the options before the Governments:
* Ensure that taxes on the industry are reasonable and not disproportionate
* Digitize information in the government departments
* Provide subsidy on M-Governance application development
* Ensure that the ecosystem works in a way that the operators do not have the monopoly over services like education, M-Governance, healthcare, etc. There needs to be a complete collaboration in the efforts of operators, handset vendors and VAS providers. Government should ensure that the applications are available in the handsets and the handset vendors are a part of the revenue share (or share of subsidy)
* Subsidize or encourage rural coverage


vikas said...

A very interesting post indeed. I particularly liked the section on benefits of increased mobile penetration.

Your ideas on inclusive financial services were interesting. However, I hope it does not go the the IT way.

In the euphoria of what the medium can do developers often forget that IT or now mobiles are a medium and not the system per se.

This was the undoing of many a web based systems in the initial days.

An interesting case study of a company that is using mpbiles to deliver financial services to the poor is Eko.

Do check out their website eko[dot]co[dot]in. Sounds interesting and is a live example of your proposal.

Mohit Agrawal said...

Vikas, you are absolutely right. There is a lot of hype around financial inclusion and there are many companies that are trying to get a pie of the opportunity. I hope that we would have learned from the IT experience and would be wiser this time. You can get to read an interesting report on financial inclusion at