TCS Daily

Digital Divisions, Tunnel Visions

By Meelis Kitsing - July 7, 2003 12:00 AM

Before the arrival of the "digital divide" cult, the issue used to be simple. Citizens of rich countries swim in the overcapacity of communication networks, while billions of people in poor countries have never made a phone call. Forget the rocket scientists' urge to know how the staff of the World Bank actually counted all these lucky people who are not terrorized by telemarketers; the right question to ask is why Internet use spreads in some countries and not in others.

The answer is a no-brainer: Internet diffusion is a product of economic wealth and a broader level of development. A general comparison of developed and less-developed countries supports this claim. For example, the average per capita Internet diffusion in the European Union is higher than in the applicant countries.

However, when countries are studied on an individual basis, such generalization can be overstated and EU countries are clearly divided. In his study "The new economy in Europe (1992-2001)", Italian economist Francesco Daveri points out that two-thirds of EU citizens live in countries where information technology is as widespread as in the US, while one-third live in the countries that are slow IT adopters.

This spring the European Commission challenged this fact further by inviting three applicant countries, Estonia, Malta and Slovenia, to move from the eEurope+ program, dedicated to developing the information society in applicant countries, to the eEurope program, dedicated to member states. This is official recognition that a large "digital divide" exists among the applicants despite their many similarities in overall development -- and that some applicant countries actually are on the same level of Internet diffusion as EU members.

Truth be told, Estonia and Slovenia, with per capita Internet penetration rates of approximately 40 percent each (lets leave Malta aside as its development has not been influenced by a socialist past), actually outperform several EU members in this category, e.g. Greece, Italy and Spain. Hence, it is not only other applicant countries that should learn from Estonia and Slovenia, but the EU as a whole should take a closer look at these countries as well.

At first glance, these two success stories support the agenda of e-activists who don't like the idea that Internet diffusion is a function of broader development because the approach does not offer any positive policy agenda for "Internet policy." Naturally, these activists push the idea that the direct encouragement of Internet use in the less-developed world will promote democratization and economic development.

There is some truth to the latter claim. The use of the Internet can certainly reduce transaction costs in the economic, political and social processes. However, a narrow-minded focus on the Internet -- without broader consideration of economic and political reforms -- risks overselling the benefits of the Internet.

A recent book by Shanthi Kalatil and Taylor Boas titled "Open Networks, Closed Regimes: The Impact of Internet on Authoritarian Rules" (Carnegie Endowment for International Peace, January 1, 2003) brings a refreshing perspective by questioning the conventional wisdom that the Internet will free the world. On the basis of eight case studies authors argue that the Internet does not necessarily pose a threat to authoritarian rule.

The positive externalities of the Internet tend to dominate when open networks are combined with an open political and economic system. Even more importantly, the issue is not just the benefits of the Internet -- economic and political openness is a crucial factor for getting the Internet diffused in the first place.

However, the current zeitgeist ignores the broader factors and overhypes the implications of direct social engineering. It is not surprising that the memory of political decision-makers is biased toward their own short-term goals and that experts on e-everything have their own interpretations of history. The microwave-cooked explanations for recent success assume Estonia and Slovenia acted like large corporations. Under the leadership of smart executives who saw the light at the end of the tunnel, strategic decisions were made to advance the information society a decade ago and then the dream became reality. Soon these philosopher kings will vie with Al Gore for Internet paternity rights.

However, the real reasons Estonia and Slovenia have high levels of Internet diffusion have more to do with broader development than with clever decisions by domestic decision-makers claiming to engineer the "Information Society." Recent success has led these cyber-wizards to decorate themselves with what Friedrich Hayek called "pretense of knowledge."

Slovenia inherited the best economic starting position in Central and Eastern Europe. The Yugoslav brand of socialism was much milder than in any other parts of the East bloc, and Slovenia in particular benefited from this looser economic control, gaining in terms of Western technology transfer as well as engagement in international trade. Slovenia had the most advanced telecom infrastructure in the East bloc and a strong IT-skill base that had already started to emerge in the 1970s. Currently, Slovenia's per capita GDP of $10,000 is significantly higher than that of any other applicant country and equals that of EU's poorest countries. The gradual transition in the 1990s allows us to now characterize Slovenia as a "smooth transformer", with step-by-step changes having helped the country exploit its advantageous starting position. Hence, Slovenia's high per capita Internet penetration rate is an outcome of its wealth and advanced starting position.

Before the collapse of the Soviet Union, the transfer of Western technologies to Estonia was impossible due to the export controls of NATO members and Japan. The country's rapid utilization of Western technologies and emergence of new infrastructure were outcomes of radical economic opening and reform of its public sector. Free market reforms in the 1990s show Estonia as the Radical Reformer with a very liberal foreign direct investment regime, unilateral free trade and low taxes. Such policies required curbing of public sector expenditures and increased efficiency.

The utilization of information technology in the public sector offered a crucial means of achieving the goal. Foreign direct investments from the technology-savvy Nordic countries into the telecom sector made many innovative services available for domestic users. The barriers for entry in the telecom market were kept low, and the country made concrete commitments to the privatization of its incumbent telecom company while opening most telecom services to competition and ending the monopoly in the fixed line telephony by the end of 2000. Increased use of the Internet has led to constant improvements in demand and supply for more sophisticated services, and this has been crucial for Estonia's success.

Most importantly, Estonia, with its per capita GDP at 2.5 times lower than that of Slovenia, demonstrates that the Internet can be diffused and utilized in countries with different levels of wealth when countries open their markets for competitive pressures. Even if per capita Internet use in Slovenia and Estonia is similar, in 2001 Slovenia had only 148 Internet hosts per 10,000 inhabitants compared with 357 for Estonia. Such a large difference indicates that serious structural impediments exist on the supply side in Slovenia.

If the EU wishes, as its eEurope Action Plan adopted in 2000 states, to "quickly exploit the opportunities of the knowledge-based economy and in particular the Internet" among newcomers, then it should learn from Estonia rather than Slovenia. Slovenia is an exception due to its wealth and initial starting position. Particularly for the new members the choice is not between across-the-board radical reforms or gradual changes with tunnel vision - it is reform radically or stay digitally divided forever.

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