Emerging Economies and the Digital Age

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Emerging Economies and the Digital Age

The following information includes a synopsis of the data found in a report by McKinsey Global Institute called “Digital Globalization.” This article only contains some of the information in that report, and we encourage you to delve deeper into it if you are interested in knowing more.

There are currently 3.2 billion people online- 43% of the world’s population. Cross-border communications have grown 45x in the last decade, and nearly 50% of the world’s traded services are now digitalized (McKinsey Global Institute). Over the past ten years digital connectivity has become the key to every aspect of life, from business, to connecting with old friends, to gaining new knowledge. In just ten years the digital age has arrived and changed the world. So where will digital connectivity lead to next?

Digital connectivity and data flow are now greater drivers of world economies than the entire global goods trade. No longer are international interactions governed by the flow of goods and services. Goods and finances have in fact flat-lined in recent years, and are no longer growing aspects of world GDP. Data flow, on the other hand, has become an increasingly dramatic contributor. Emerging economies in particular are slowly gaining more ground as contributors to this aspect of world GDP. According to McKinsey, emerging economies are now counterparts on more than half of global trade flows. This is where the next decade’s transformation will most likely occur.

Though the bulk of digital connectivity still lies in a few developed nations (the US, Singapore, the Netherlands, and Germany lead), there are set to be some big changes as it impacts emerging economies over the next ten years. Emerging economies have the potential to gain enormous GDP growth through data flow and digital connectivity. This same MGI study predicts that emerging economies will actually account for 45% of the Fortune Global 500 by 2025 (currently they account for 25%). But how is this possible when they are currently so far behind the leaders in digital connectivity?

There is a model in development economics that explains this possibility. The model states that the farther a country is from its economic “steady state” the faster it will grow to reach that point of economic stability. For example, though the United States may be enacting the same economic growth procedures as Guatemala, the latter will grow at a much higher rate since it has more to gain to reach a level of economic stability.

The same applies to emerging economies that are currently outside of the digital connectivity spectrum. The further they are from being 100% connected, the more they have to gain by investing in data flow. The aforementioned nations with the highest levels of connectivity have already tapped out on growth in this area, but emerging economies are starting from scratch and have much more to gain.

It is certainly still slow-going for these emerging economies to catch up to the front runners, but if these countries are able to find ways to take advantage of their potential for growth, the results could be astonishing.

What steps are necessary for an emerging economy to be successful in this endeavor? There must first be an increase in internet access, as well as an investment in human capital (training, education, and language literacy online). There also needs to be a healthy business environment in which data flow operations can thrive.

In many countries this may be challenging, as wide-spread corruption and lack of access to bank loans and assistance prohibits business growth, but there is hope. These issues are being combated by organizations like the World Bank, as well as smaller non-profits, who are working to cultivate safe investing and business environments in countries where connectivity and access to the digital world is low.

The past ten years have brought a more connected world through digital connectivity, and the next ten years are predicted to do the same. As emerging economies discover their potential for growth in the data flow and digital connectivity sector, we will keep an eye out for potential investment markets and new influential contributors to the world economy.

Samuel J. Sweitzer
Samuel J. Sweitzer
Founder and President of Anson Analytics, Inc. - an RIA firm specializing in Research Based Investment Management for Corporate Retirement Plans and Private Investors. Sam is a Chartered Financial Analyst (CFA) and currently serves as Anson's Chief Investment Officer. Sam resides in South Metro Atlanta with his wife and two daughters.

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