Connecting the Unconnected in Developing Asia

David Dean
Member of the Future of the Internet Initiative of the World Economic Forum
Senior Advisor to The Boston Consulting Group

Executive Summary

• One in four of all new Internet users globally between now and 2020 will come from countries in developing Asia other than China and India
• Many of these unconnected citizens live in rural areas, or are underprivileged
• Urgent action is required in four areas: improving access to Internet infrastructure, making services significantly more affordable, raising adoption rates through more relevant local digital content and services, and enhancing digital literacy skills
• Decision makers should take a holistic, multi-stakeholder approach to addressing the challenges, and recognize that speed and urgency are paramount.

Asia is a continent of contrasts, and this is true of its digital economy too. Home to some of the highest connection speeds in the world, some of its citizens are the Internet's most avid users, yet hundreds of millions of people remain unconnected—either because they have no access to the Internet, or cannot afford to use it if they do. With the appropriate policies, investments and engagement, connecting the unconnected can transform lives, business, government and society. With urgent action digital inclusion can be achieved.

We focus here on sixteen South, East and South East Asian countries, which are neither as rich and well developed as Singapore and Brunei, nor as expansive as China and India. This group—which we call Asia16¹—is home to one billion people, almost as many as in Africa, yet its GDP is double (in PPP terms).

With a burgeoning middle class, Asia16's Internet population has doubled in the past five years to over 250 million users, or 25% of the population. Over 20% its population lives in countries where Internet penetration is already at or above the global average—countries such as Malaysia, the Philippines and Viet Nam. Half of the population lives in countries where Internet penetration will soon reach 25%, the point at which its benefits accelerate, driving growth and increasing income levels. With high growth rates across the region, Internet penetration is expected to double to half a billion [PDF, 1.5 MB] by 2020. In fact, one in four of all new Internet users globally between now and 2020 will live in Asia16.

Asia16's digital economy appears poised for take off, but investment levels remain very low. Even including Singapore, which often acts as a start-up hub for SE Asia, venture capital represents only 0.03% of Asia16's GDP—compared with 0.25% for India. Despite this, Asia16 is home to unicorns such as the e-commerce platform Lazada, the ride-hailing service Grab, Indonesia's online marketplace Tokopedia, and Viet Nam's online media company VNG. Across the region, thousands of start-ups like Little Fashion in Cambodia, Rarejob in the Philippines, Infinite Solutions in Mongolia, and Takas in Sri Lanka vie to establish themselves in customers' and investors' minds alike.

But today 775 million citizens remain unconnected. Many live in rural areas, with no access to infrastructure. Almost 450 million of them are women. Half live in the region's five poorest countries—Bangladesh, Cambodia, Myanmar, Nepal and Pakistan. Over 100 million of Asia16's adults are illiterate—62% of them women—and almost half of the region's adults are unbanked. Addressing their needs presents significant challenges.

The value of connectivity

The economic argument for connecting the unconnected is clear. Countries can boost their GDP by 2-3% by reducing e-friction, the barriers to the digital economy' development.

Within Asia16 Malaysia scores best on BCG's e-friction Index, being positioned in the third quintile and scoring better than some European countries. With improved infrastructure, Malaysia could quite easily move further up the Index. The Philippines and Thailand are fourth quintile countries, with infrastructure again preventing a higher ranking. Bangladesh, Indonesia, Pakistan and Viet Nam all sit in the fifth quintile².

Clearly Asia16 is a geographically, socially and culturally diverse group, and the development of their digital economies will reflect this. Their goals will differ—for some, providing access to the digital economy for the majority of the population will be key, for others broad participation in the Fourth Industrial Revolution will be a priority. Whatever the goal, bold and urgent action is required to accelerate Internet deployment and usage across the region, and to build the skills required for competitiveness in the digital economy.

Massive investment is required too. Estimates vary, but Asia16 is likely to require $10-20 billion p.a. in telecoms infrastructure [PDF, 2.6 MB] over the next decade—and even more to significantly accelerate Internet deployment [PDF, 1.6 MB] in the poorest countries. $4-5 billion p.a. is required in SE Asia alone in order to develop flourishing digital ecosystems, and billions more are needed to develop digital literacy across the region.

So what needs to be done? And how can the sense of urgency be increased?

Four areas of focus

There is no silver-bullet approach to driving the digital economy. Landlocked countries have different infrastructure needs than coastal countries owing to their lack of direct access to undersea fibre-optic cables. Rural areas need different last mile solutions than cities—perhaps involving the use of innovative technologies such as drones, satellites or balloons. Equipping youth for the digital economy requires different approaches than bringing the elderly online. The poorest, illiterate and least privileged require solutions that are tailored to their needs, which are distinct from those who are wealthier or better educated.

Leaders need to recognise that successful countries have taken a holistic approach to their digital agendas and ensured involvement of all kinds of stakeholders from government, the private sector, NGOs and civic society. Concerted and consistent efforts are required in four areas: [PDF, 3.4 MB] improving access to Internet infrastructure, making services significantly more affordable, raising adoption rates through more relevant local digital content and services, and enhancing digital literacy skills in the population.

Infrastructure access is a prerequisite. Infrastructure deployment is a challenge across Asia16, especially in rural areas or regions far from the sea.  Governments and policy makers can leverage the experience gathered elsewhere:

• Define a long-term digital strategy, including a national broadband plan and the establishment of a transparent and predictable regulatory framework. Clarity here encourages investments in networks and other types of digital infrastructure.
• Encourage the supply of international bandwidth. Until the AAE-1 submarine cable becomes operational later this year, Cambodia has no submarine cable landing station and landlocked Lao PDR is dependent on low capacity landlines to its neighbors.
• Implement the 700 MHz band for mobile broadband, which could result in a digital dividend [PDF, 1.0 MB] for the Asia-Pacific region worth almost $1 trillion in additional GDP.
• Promote competition, as it tends to encourage investment and reduce prices. This has been very clearly seen in Myanmar [PDF, 1.4 MB]. In contrast, the Philippines has the slowest connectivity and among the highest prices in the region in part due to the countrywide telecoms duopoly.
• Incentivize collaboration between network providers through support of network sharing to raise the attractiveness of investments, especially for remote areas. Malaysia, the most progressive market in the region, has four active network-sharing arrangements in place.

Affordability is a significant hurdle. Building infrastructure is a big challenge; making its usage affordable an even bigger one. Malaysia and Thailand are the region's most affordable countries, but not a single developing country [PDF, 1.6 MB] meets the UN's affordability benchmark of broadband priced at less than 5% of monthly income for those living in poverty.  Several initiatives can bring costs down:

• Reduce taxes on devices and access. Bangladesh, Cambodia and Pakistan continue to tax digital products as luxury goods, unlike Sri Lanka, which has foregone new taxes on mobile phones.
• Treat spectrum auctions as opportunities to attract investment and drive infrastructure deployment, rather than major revenue-generating opportunities: operators subsequently pass on spectrum costs to users.
• Allow experimentation with different pricing models [PDF, 468 KB] for Internet services, including service-specific plans and zero-rated services. Initiatives in the Philippines, Bangladesh and elsewhere suggest that such offerings can help nurture a digital ecosystem [PDF, 646 KB].
• Promote carrier-neutral Internet exchange points (IXPs), the physical infrastructure through which Internet service providers and content delivery networks exchange traffic, as a highly cost-effective way of enhancing local connectivity and reducing costs. Of roughly 500 IXPs worldwide, fewer than 30 are in Asia16. The lack of adequate IXP infrastructure in the Philippines [PDF, 5.9 MB] drives up latency and cost, as roughly 40-70% of local traffic is routed either through Hong Kong or Los Angeles.

Local digital content and services need encouraging. Making the Internet a relevant, local language resource requires content, applications and services that are accessible to consumers and businesses alike. BCG research [PDF, 4.4 MB] demonstrates that small businesses that embrace the Internet employ more people, export more and grow faster—in the case of Indonesia more than eight times as fast—than those that do not. Proven steps include:

• Digitize government services to increase citizen involvement, improve the quality of services and raise efficiency. Malaysia, Mongolia and Sri Lanka all score strongly on the UN's e-Government Development Index.
• Promote digital citizen engagement. Social networks such as Rappler in the Philippines, and Qlue in Jakarta, help strengthen the accountability between policy makers and providers, especially when government and civil society organisations collaborate.
• Encourage mobile money services. Digital finance can be a game changer across Asia16, as offerings such as WING and SmartLuy in Cambodia demonstrate.
• Address cybercrime. Fraudulent billing is a particularly cause for concern in Indonesia, Pakistan and the Philippines and is a hurdle to e-commerce.
• Promote content and registrations under local country code domains to encourage local content. Even including China and India, only about 7% of the world's million most popular websites are from developing Asia.
• Encourage applications of the Internet of Things, [PDF, 6.1 MB] including for development purposes—in Timor-Leste IoT is being used to identify illegal fishing. Accelerating IPv6 deployment, where Malaysia scores relatively well, will help prepare for future IoT applications.
• Coordinate regulations to reduce fragmentation of the Internet in the region and promote the free flow of data across borders as this helps advance e-commerce, fuels economic growth and drives innovation.
• Encourage investment in the physical logistics systems and payment platforms that support e-commerce, as well as reducing the barriers to cross-border trade.

Skills need building. Lack of basic literacy skills is still a major problem in Asia16's poorest countries. Lack of digital literacy is seen as a constraint to employment by 40% of working age urban Vietnamese and almost 30% of Laotians. Actions that can make a difference include:

• Drive for full school enrolment, especially for girls. With almost 500 million of Asia16's population aged 24 years or less, the opportunity for a digital demographic dividend is tremendous. Equipping them with digital skills will automatically lead to more local content, applications and services.
• Address teacher shortages by deploying technology in the classroom. One example is 1BestariNet in Malaysia.
• Create digital literacy programs for those no longer in the formal education system, including reverse mentoring of older people, to ensure that it is not only the young who are digitally literate.
• Support the development of entrepreneurial skills through tech hubs and educational programs. Many of Asia16's countries are vying to attract the talent and investment needed to make such hubs work.  True Incube and TechGrind in Thailand are just two of many examples, and vibrant start-up scenes can be found in Kuala Lumpur, Ho Chi Minh City and Manila too. The best involve the public sector as well as universities.
• Encourage the creation of jobs requiring digital skills. In Thailand, for example, the number of students graduating with IT degrees currently far exceeds the number of jobs available.

Connecting Asia16's unconnected requires each country to identify the problems affecting it most severely and develop relevant solutions, based also what has worked elsewhere. Successful initiatives are characterized by:

• Multi-stakeholder involvement: Initiatives often fail, or fall short, when consensus and alignment is missing. A multi-stakeholder approach can be very effective in setting common goals, adopting the most effective policies, and committing to the most urgent actions to take.
• Holistic approach: infrastructure plans, affordability, content development and skill building need to be addressed in parallel and consistently. Initiatives cannot be restricted to a narrowly defined set of players, as the digital economy affects all industries and organizations. Regulation needs to be seen from the perspective of the desired outcomes for digital health care, digital agriculture, digital financial services, etc.
• Speed and urgency: The need for speed is virtually impossible to underestimate. Unless urgent action [PDF, 1.6 MB] is taken it could be decades before Internet penetration in parts of Asia16 reaches levels seen today in developed countries, undermining economic and social development and denying millions access to services that can change their lives. Hurdles to implementation need to be addressed quickly, so as to accelerate the impact of all initiatives.
• Scalability and borderlessness: Initiatives need to have as broad an impact as possible; point solutions will not be sufficient. Cross-border initiatives, where possible, have the potential to encourage more investment and support scalability. Reducing restrictions on cross-border data and trade flows, for example, could boost GDP and investment by several percent. Removing roaming charges, as Africa's Northern Corridor [PDF, 3.4 MB] has done, could boost communication and trade links. The ASEAN Economic Community is one forum for pursuing such ideas.

Today the digital economy represents about 5% of the GDP [PDF, 3.4 MB] of the developed world's economy. Achieving a similar level for Asia16 would add over $100B to its GDP, and help deliver growth and prosperity to the whole region. Reducing poverty, hunger, inequalities, or improving health and education, require significant and lasting investments in affordable Internet access and the skills needed to benefit from it. Some may baulk at the magnitudes involved, but government leaders and policy makers should ask themselves what the costs of inaction are—the costs of not connecting the unconnected. These are high too. For farsighted leaders, the answer will be clear.

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¹ Specifically: Bangladesh, Bhutan, Cambodia, Indonesia, Lao PDR, Malaysia, Maldives, Mongolia, Myanmar, Nepal, Pakistan, the Philippines, Sri Lanka, Thailand, Timor-Leste, and Viet Nam.

² Bhutan, Cambodia, Lao PDR, Maldives, Mongolia, Nepal, Pakistan, Sri Lanka and Timor-Leste were not included in this analysis