Digital inequality deepens economic inequality

SWIDEREK Digital inequality deepens economic inequality

Europe is clearly divided into two speeds when it comes to the internet and its use by citizens, companies and governments.

The distance between the leaders and the laggards is growing as well. That means that the differences between countries in reaping the benefits of the digital economy are deepening. The countries of Northern Europe, such as Denmark, Finland and Sweden, and the smaller countries of Western Europe, such as the Netherlands and Luxembourg, are in the lead, according to the annual Digital Economy and Society Index (DESI) for the EU member states, published by the European Commission. The laggards include the Balkan states, as well as Poland and Italy. The analysis of the DESI values for the top and bottom ranked countries shows that the chasm between the most advanced member states in implementing the objectives of the European Digital Agenda 2020 and the least advanced is systematically expanding.

DESI Index

It consists of five components which describe the state of the broadband telecommunications infrastructure, the digital skills of citizens, the use of the internet by consumers and companies, and the level of digital public services. The index shows the progress of the individual countries on the path to a digital economy and a digital society and allows for comparison between the states.

In the countries ranked at the top of the list, between 97 per cent (Finland) and 100 per cent (the Netherlands and Luxembourg) of households are covered by fixed broadband internet. In these countries, fixed broadband internet is used by 61 per cent (Finland) to 96 per cent (Luxembourg) of households, and 75 per cent (Finland) to 98 per cent (the Netherlands) have a bandwidth of no less than 30 Mb/s. The internet is used by 91 per cent (Sweden, Finland) to 97 per cent (Luxembourg) of inhabitants of the countries from the top of the ranking, and 69 per cent (Sweden) to 86 per cent (Luxembourg) of the inhabitants of these countries have at least basic digital skills.

In the case of countries with the lowest DESI values this is, respectively, from 86 per cent (Poland) to 99 per cent (Italy and Greece), from 55 per cent (Italy) to 70 per cent (Croatia), from 44 per cent (Greece) to 74 per cent (Bulgaria), from 58 per cent (Bulgaria) to 70 per cent (Poland), and from 26 per cent (Bulgaria) to 55 per cent (Croatia).

The DESI components and the overall value of the index for the individual countries show that although access to the internet and its quality are important in the modern economy, a high penetration of fixed broadband internet connections and a high percentage of high-speed connections (with a bandwidth above 30 Mb/s) is not necessary to be among the leaders. One example of this is Finland. Although it is the European leader in terms of mobile access to the internet, due to the relatively low percentage of households that have fixed internet connections and the low share of high-speed connections, it is not among the leaders of the DESI sub-index concerning broadband infrastructure. Finland’s strength lies in the digital skills of its citizens, as well as the use of the internet by businesses, consumers and public administration.

GDP per capita and the use of internet

In the report entitled “Reaping Digital Dividends; Leveraging the Internet for Development in Europe and Central Asia” the World Bank claims that there is a correlation between the GDP per capita level and the speed of internet connections in a given country, but also emphasizes that there are exceptions. The positive exceptions include Romania and Latvia, while the negative surprises include France and Italy. The World Bank also sees a relationship between GDP per capita and the percentage of the population using the internet. The authors of the report reject the idea that simply increasing penetration of the internet and improving its quality will enable poor countries to catch up with the more affluent ones.

In another study entitled “Reaping Digital Dividends”, the World Bank claims that the experience of the EU member states shows that cheap and almost universal access to the internet does not necessarily mean that companies and people will start using it, which especially applies to the more technologically advanced capabilities. Consequently, universal access to the internet does not automatically translate into economic benefits.

One example of this may be the fact that companies in Europe have low rates of using the internet in trade, and especially in international trade (according to DESI it is only used by 7.5 per cent of companies from the EU members states). They also fail to take advantage of the opportunities for reducing operating costs and increasing effectiveness that are provided by cloud computing (it is used only by 13.5 per cent of EU companies). Moreover, those who use cloud computing are typically limiting themselves to simple applications, such as email or data storage. The use of electronic invoices is also relatively low (they are used by less than 18 per cent of the EU companies). In turn, European consumers are not making the most of the opportunities for remote work or the use of internet banking services (online banking is used by 57 per cent of the EU population).

Europe is behind the rest of the world

The authors of the World Bank’s report stress that the weakness of e-commerce in Europe results from a still low use of electronic payment methods, including credit cards, as well as poor logistics and overregulation of markets. Both, consumers and businesses are concerned about the safety of transactions and operations carried out via the internet. As many as 25 per cent of European companies admit that due to their safety concerns they do not use cloud computing. According to the authors of the report, overregulation may partly result from legislators’ lack of understanding of the principles of e-commerce.

They also write that there is no strong correlation between the level of the use of the internet by companies and GDP per capita. This is confirmed by DESI, which shows that the digitalization of companies in Slovenia, Spain, Lithuania and Portugal is greater than in Germany, Italy, Luxembourg, the United Kingdom and France. Companies from Scandinavia, the Netherlands and Slovenia are among the leaders in using the internet.

The World Bank data show that there is a strong positive correlation between the use of the internet by companies and the level of competition on the local market. Increased competition on the market leads companies to use internet, and this increases competition. Technological companies or those using new technologies are entering into markets, where “classical” companies have operated, and force the latter to increase their use of technology.

The authors believe that governments should create a regulatory and legal environment friendly to the digital economy and its implementation, and that the rules on competition, including those concerning concentration, should be adapted to the fast-changing business environment due to the use of the internet and on the internet.

Digitalization is beneficial for all

The digitalization of the public administration and the provision of its services over the internet reduce operating costs. According to the World Bank report, the scale of using digital tools in the contacts between enterprises and the public administration – including tax matters – does not depend on whether a given country is affluent and economically developed or not. What really matters is whether the government is prepared for digitalization. The most common form of communication is the exchange of correspondence. According to the World Bank, governments should automate all routine activities and make them available for online use. This would improve the efficiency of public administration. The state should also ensure that all the interfaces of digital public services are user friendly. If they are badly designed, they become a barrier to access to services.

The World Bank points out that the productivity boost and the lowering of barriers to market entry, achieved thanks to the use of the internet, increase market competition and reduce the chance of survival of inefficient companies. This in turn facilitates the influx of capital and skilled workers to effective companies and further improves their efficiency. Inefficient companies have more opportunities when the government subsidizes some enterprises or branches of the economy, e.g. in order to prevent an increase in unemployment and social unrest, which might result from their collapse, or when high artificial barriers to market entry are maintained. Such actions lead to a decrease in productivity.

To harness the internet to work for the benefit of a company requires organizational changes, and these must be planned and carried out by managers. That is why the degree and way of using the internet in companies depends on the quality of the staff. Excessively restrictive internal company policies and a weak employee training system may increase costs of internetization. The digitalization of the processes does not significantly improve effectiveness. What matters most are the qualifications of the employees. Digitalization increases productivity of those who have higher digital competencies and reduces the productivity of those who have low or non-existent digital skills. This is because the use of the internet forces employees to change their routine behavior.

Changes to the labor market

The internet, its increasing penetration and use by companies is changing the labor market. An increase in demand for highly skilled workers can be observed, but also for those with low skills. The labor market is shrinking for people with medium-level skills, who perform routine activities. There is no clear answer, however, as to which skills will be required in the future. The simple answer is: the ones that cannot be automated. Although the question remains which particular activities are included. Predicting these developments is difficult and it’s illustrated by the information that there are algorithms that automate some of the lawyers’ work in the M&A transactions.

According to the authors of the report, formal higher education is important in finding a job in the digital economy, but specific skills are also crucial. Consequently, it is important that advanced digital competencies are acquired during the process of education (in primary and secondary schools) – as in the case of, among others, the Scandinavian countries. Then they should be developed throughout a person’s entire working life. If these skills are not developed during our active professional life, sometime in the future we may have trouble adapting to another new technology.

According to the report of the World Bank, the internet creates not only new jobs and new professions, but also new methods of working. One example of new methods of employment are the various platforms in the sharing economy, e.g. Uber, which give people the opportunity to work whenever they want and whenever they have the time to do so.

The internet has enabled freelancers to work remotely – including companies operating overseas. The World Bank believes that remote work especially helps women (including mothers raising children) and older people to find employment. The report emphasizes that the accessibility of cheap and high quality internet is conducive to the growth of remote employment.

According to the World Bank, the highest percentage of people working remotely is recorded in Scandinavia – there the number doubled in the years 2002-2015. The World Bank states that the number of people working remotely in sectors heavily using the internet is significantly higher than in other branches of the economy.

The authors emphasize that the ability to find less expensive specialists, and sometimes even fill vacancies, is an important advantage that companies derive from remote employment. From the perspective of a worker, in addition to the chance of employment, this method of working also provides a chance of higher earnings, especially if they live in a country with lower wages and establish cooperation with a company from a country with higher wages. In this way, remote work may eliminate the disparities in remuneration and play a similar role as migration does.

Remote work also carries certain risks. It may limit the legal and social protection of the worker and encourage work in the shadow economy. According to the authors of the report, it is in the interest of governments to reduce this risk by adapting the social security schemes and tax systems to the changing rules of the labor market. At present they are focused on the traditional employer-employee relationship, whereas the sharing economy is heavily decentralized.

The authors of the “Reaping Digital Dividends” report warn that poor internet quality and the low digital skills of the society, resulting, among others, from a weak education system, may deepen the polarization between the rich and the poor countries.

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