Macroeconomics

How innovations in telecom can promote inclusive growth

  • Blog Post Date28 March, 2014
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Applications of Information and Communications Technology, such as mobile banking, have potential to promote inclusive growth and equity. This column analyses conditions under which innovations in ICT can benefit the less well off, and how such innovations can be expedited. It recommends public provision of supporting infrastructure, focusing on consumer needs and reducing transaction costs for consumers.

Inclusive growth is a major Indian objective. A natural way to achieve it is if inclusion is of the type that facilitates growth. Information and Communications Technology (ICT) applications, such as the Internet and mobile phones, can support both growth and inclusion.

ICT helped India catch the outsourcing wave but this largely created opportunities for the skilled elite. One reason for the skewed benefits was poor delivery of public services such as health, education and infrastructure, which are greater obstacles for the less well-off. Inability to afford private substitutes constrains participation in new opportunities. For example, compared to big businesses, small businesses are more dependent on public services. While ICT itself can improve governance, its domestic adoption has lagged. More transparent electronic delivery (e-delivery) reduces the discretion and corruption often responsible for poor services.

Facilitating innovation in ICT

Normally private innovation favours the better-off, but ICT has more potential for innovation that benefits the middle- and lower-middle classes. There are three ways of facilitating such innovation. First, invest, through public investment or government subsidy for private investment, in technologies that make products the less well-off use. These are intermediate technologies that lie between high- and low-end technologies. Second, raise demand for such products through income transfers to the poor. Third, better public provision of relevant infrastructure, or undertake other measures to reduce costs for the poor so that their consumption power goes up.

Large market size stimulates innovation to profit from it, since adoption and further adaptation of technology responds to economic incentives. While the market size for intermediate technologies rises under both the second and third ways, the third way is more suited to ‘active inclusion’; defined as creating conditions for many to contribute to and participate in growth (Goyal 2012). Moreover, since innovation is induced in a decentralised manner under the second and third ways, scope for incorrect government investment choices and policy delays is reduced. Compared to income transfers, public goods, such as better air, water and sanitation, directly increase the productivity of the poor. Moreover, they suit Indian catch-up growth and youthful demographics, since they increase rewards to work, while redistributive strategies (second way) help target pockets of persistent poverty that are smaller and shrinking.

The mobile is an example of a technology product whose falling costs made it accessible to all Indian income classes, demonstrating ICT’s potential for inclusion. However, the development of mobile-enabled services is still lagging behind.

When can innovation be inclusive?

There are divergent views on ICT’s potential contribution to equity. There is a view that it just creates opportunities for the rich. But a simple example clarifies conditions under which ICT innovations can be inclusive (Goyal 2013). Consider an economy whose ICT sector has three technologies available at any period of time. The first A is more skill and capital intensive, B is intermediate, and C can be produced with low skills. The economy has two groups of worker-consumers - the high-skilled well-off (W) whose endowment has more capital relative to labour, and the low-skilled and less well-off (L) that are endowed with more labour relative to capital. The W group would choose technology A while L can only afford technology C. An illustration of technologies A, B and C from ploughing are if A is a tractor, then B could be a plough, while C would be a spade.

In the next period (period 2), technologies A and B improve so they produce more output with fewer resources. There is no improvement in the low-level technology C. Indeed, development requires moving away from the use of C. Both B and A improve to B1 and A1 respectively, with relatively more improvement in the high-level technology (A). Since the W group can afford it and can improve their welfare more by using technology A1 compared to B1, they prefer to use A1. Technology A is no longer used. But if the improvement in B is not much, and if the L group still cannot afford B, C continues to be the welfare-maximising or expenditure-minimising technology for them. In the new equilibria, the welfare of group W improves and that of group L is unchanged. The digital divide, or distance between the W and L groups, widens. The economy remains in a low-level trap (Cecchini and Scott 2003). There is more innovation in the high-level technology that is making the rich richer.

Now assume innovation is such that technologies A and B improve to A2 and B2 respectively, with relatively more improvement in the intermediate technology (B). Even with its current resources, the L group can shift from using technology C to using B2, since B is now cheaper. If the improvement in B is large enough, the group W can also raise welfare by shifting to technology B2 from technology A. The digital divide between groups W and L is narrowed. As most consumers shift to technology B2, its market size increases, and market size can induce further innovation and improvement in the intermediate technology.

The example illustrates the three ways to induce inclusive innovation discussed earlier. Inclusion involves shifting group L to the better technology B. The first way is to invest in technical change in B, thus cheapening it so it is accessible for group L. The second is to transfer resources to group L so they can afford B, the third is to reduce other indirect costs they face, thus allowing them to afford better quality technologies.

Greater use of intermediate technology raises profits and induces innovation. So the second and third ways to shift L to using B also support the first. Innovation in a technology occurs if its price is high or if its market size is large. The price of the high-end technology is generally higher, but the market size effect can favour the intermediate technology. It can be shown that if the technologies are substitutes (that is, they can replace each other in use) the market size effect dominates the price effect, above a threshold, determined by relative prices, productivity and market size. If the market size of B is not large enough to overcome the higher price and productivity of A, innovation will be high-skill intensive and further the digital divide. But once market size of B rises sufficiently to cross the threshold, more innovation will occur in B.

Learning from neighbours

The Indian and Pakistani experience with mobile banking illustrates how simple reductions in transaction costs can induce inclusive innovation. The regulatory structure for mobile banking was set out in the same time period for both India and Pakistan. In 2008, Pakistan also started with a bank-led model that was expected to continue until the players and stakeholders gained some maturity. Like India, customer account relationship had to reside with some financial institution (FI) and each transaction had to be undertaken through the customer account, with no actual monetary value stored on the mobile phone or server.

Four years after the approval for mobile banking transactions, Indian volumes remained low, although there was some growth. Transactions doubled to 5.6 million in January 2013 compared to 2.8 million in the previous year. But this was tiny given the large mobile subscriber base. Out of more than 850 million subscribers in 2012, only 12.2 million were registered for mobile banking services and a small fraction of those were active service users. Pakistan, with a much smaller population, already had 10.4 million transactions in September 2012.

Comparing the regulations in India with those in Pakistan provides insights into what drove Pakistan’s relatively greater success in this area. Pakistan also insisted on a key role for FIs and data records to ensure security and stability. But critical differences were higher initial levels and limits allowed for mobile banking transactions, regulations specified for more income categories, a wider universe of business correspondents, more flexibilities and functions for FIs, and reduction of transaction costs for users. Mobile banking services were not restricted to mobile service providers but could be offered through fuel distribution companies, Pakistan post and chain stores. Elements that had discouraged participation, such as biometric fingerprint scans requirement for account opening, were removed. Electronic account opening with a digital image was permitted, removing the necessity of physical presence. These features increased creativity in use, enabling a closer link to customer needs. They brought in both the more and the less well off. Thus, market size increased as more users were attracted to mobile banking. This in turn induced more innovation, improving an affordable intermediate technology such as B. Bill payments and person-to-person transactions accounted for more than 80% of Pakistani mobile transactions.

Concluding remarks

Using this framework to assess India’s telecom policies shows that the key to expediting inclusion through ICT is not well understood. There have been failures in the provision of ICT-specific infrastructure such as broadband, while regulatory measures limit market size. A strategy of focusing on customer needs and reducing transaction costs would work well for India given its naturally larger markets. If better public services expand the numbers who can afford better technologies, and induce more innovation in them, that itself can create more inclusion.

Further Reading

  • Cecchini, S. and C. Scott (2003), “Can information and communications technology applications contribute to poverty reduction? Lessons from rural India”, Information Technology for Development, 10, 73-84.
  • Goyal, A (2013), ‘Growth drivers: ICT and inclusive innovations’, IGIDR working paper no. WP-2013-018. 
  • Yojana (2012), ‘An appraisal of five year plans and the future’, Special issue on An Approach to 12th Five Year Plan – Issues and Challenges, January. 
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