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ECONOMICS AND RESEARCH DEPARTMENT

ERD WORKING PAPER SERIES NO. 27

M. G. QuibriaShamsun N. AhmedTed TschangMari-Len Reyes-Macasaquit

October 2002

Asian Development Bank

Digital Divide: Determinants

and Policies with Special

Reference to Asia

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ERD Working Paper No. 27

DIGITAL DIVIDE: DETERMINANTS AND POLICIES

WITH SPECIAL REFERENCE TO ASIA

M.G. Quibria

Shamsun N. AhmedTed Tschang

Mari-Len Reyes-Macasaquit

October 2002

M. G. Quibria is Advisor, Operations Evaluations Department, Asian Development Bank; Shamsun N. Ahmedis Visiting Scholar, University of East Anglia, and Professor, Department of Economics, University of Dhaka;Ted Tschang is Assistant Professor, Singapore Management University; and Mari-Len Reyes-Macasaquitis Supervising Research Specialist, Philippine Institute of Development Studies. This paper draws partlyon an earlier paper that was prepared for and presented in an international conference of the AsianDevelopment Bank Institute. The paper has benefited from the comments of the participants of the conference,in particular Anne Krueger, Kirit Parikh, and Muzzammel Huq; and from the helpful discussions with RameshAdhikari, Heather Montgomery, Terry Morrison, Sang Woo Nam, Arvind Panagariya, Steven Parker, andT. N. Srinivasan. M. Arif Al-Mahmood and Thuy Thu Le provided valuable research assistance. The opinionsexpressed in the paper are those of the authors and not of the institutions they are affiliated with.

ERD Working Paper No. 27DIGITAL DIVIDE: DETERMINANTS AND POLICIES WITH SPECIAL REFERENCE TO ASIA

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Asian Development BankP.O. Box 7890980 ManilaPhilippines

2002 by Asian Development BankOctober 2002ISSN 1655-5252

The views expressed in this paperare those of the author(s) and do notnecessarily reflect the views or policiesof the Asian Development Bank.

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Foreword

The ERD Working Paper Series is a forum for ongoing and recently completedresearch and policy studies undertaken in the Asian Development Bank or on its behalf.The Series is a quick-disseminating, informal publication meant to stimulate discussionand elicit feedback. Papers published under this Series could subsequently be revisedfor publication as articles in professional journals or chapters in books.


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Abstract

Access to new information and communication technologies (ICT) remainsextremely unequally distributed across and within societies. While there have been agood deal of popular discussions about this “digital divide”, not much is known aboutthe quantitative significance of its various determinants. By undertaking a set of cross-country regressions, the paper finds that income, education, and infrastructure playa critical role in shaping the divide. Based on this analysis, the paper also offers somepolicy suggestions as to how to promote wider diffusion of ICT in poorer societies.

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Contents

Abstract vii

I. Introduction 1

II. Types of ICT 1

III. Determinants of ICT Adoption 3

IV. Policies to Promote ICT 8

A. Investment in Education 9

B. Investment in Infrastructure 10

C. Creation of Favorable Institutions 11

D. Fostering New Institutional Innovations 12

E. International Cooperation 14

V. Conclusion 14

References 16

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I. INTRODUCTION

Much has been written about the digital divide: the division of the world between thosewho have access to new information and communications technology (ICT) and thosewho do not. This inequitable access to ICT has implications for productivity and economic

growth of rich and poor countries. For example, the United Nations Development Programme(1999, 63) notes: “The network society is creating parallel communications systems: one for thosewith income, education and literacy connections, giving plentiful information at low cost and highspeed: the other are those without connections, blocked by high barriers of time, cost and uncertaintyand dependent upon outdated information.” Similar concerns have been expressed by such authorsas Dertouzos (1997) and Sachs (2000) with the latter claiming that a new map of the world hasbeen created, this time based on technology. However, there are many others who are much moreoptimistic. For example, Negroponte (1998) opines that ICT has a “leapfrogging” characteristicthat will enable the poor to catch up. As latecomers, developing countries can embrace existingtechnologies developed elsewhere and skip intermediate stages allowing them to save onconsiderable costs of development. In light of the contending viewpoints, it is important to learnwhat the basic economic determinants of the digital divide are and the ways to overcome it.

The organization of this paper is as follows. Section II provides a brief discussion of thevarious types of ICT, which constitute the backbone of the digital economy. Section III is devotedto a discussion of the determinants of ICT adoption. The quantitative analysis provided in thissection suggests that there is a strong association between ICT adoption with the socioeconomiccharacteristics of the country. In light of this discussion, the paper makes in Section IV someinferences about the policy choices for developing countries that would like to promote ICT adoption.The discussion of this section is primarily focused on Asian countries. However, despite the particularempirical focus of the present analysis, it is hoped that the insights from this analysis would beequally applicable to other parts of the developing world. The paper provides some concludingremarks in Section V.

II. TYPES OF ICT

Depending on the type of use, the new ICT can be roughly divided into three broadcategories, that is, ICT for (i) computing, (ii) communication, and (iii) Internet-enabledcommunication and computing.

With the invention of computers, which represents the most significant technologicalbreakthrough of the last half of the 20th century, the cost of computing has declined exponentiallyover the years. And the usage of computers has increased by leaps and bounds with the introductionof personal computers. At the most general level, computers augment and improve thinking


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capabilities of individuals and organizations and enhance their efficiency. One important examplerelates to the business management system, known as “enterprise resource planning” (ERP), wherenew softwares enable firms to efficiently integrate all facets of business, including planning,manufacturing, sales, and marketing. Another example of an important use of computing iscomputer-aided manufacturing and computer-aided design (CAD/CAM) in the product design forthe manufacturing process. This process has radically improved product lifecycles—in particular,it has reduced the time lag between conceptualization of the product and its entry into the market—as well as the quality and complexity of product design.1

Communication, which is one of the most important aspects of modern human life, hastwo broad categories: one-way and two-way communication. The most common form ofcommunication is one-way communication, which includes the broadcasting media like radio andtelevision. Two-way communication devices, which include faxes, telephones, telegraphs, and pagers,have improved significantly over the last two decades or so. The Internet’s growth is largely afunction of two-way communication links: between telephone lines and personal computers (PCs).However, in most developing countries, mobile telephones are easier to obtain than traditionalfixed landline telephones. Therefore, the movement of the Internet and Internet applications intomobile phone systems will have a tremendous technological implication for these countries.

The Internet, including the World Wide Web, is one of the most important technologiesto affect both communication and computing. The Internet provides, on one hand, a newcommunication medium that allows activities like e-mail or chat lists for group communication,and on the other, multiple modes of communication by fostering new interfaces between new andold forms of communication. For example, one can now communicate via voice to others throughInternet telephony, or use mobile phones to access the Web. The Internet also provides communitieswith a whole new means of communication (i.e., many-to-many point communication such as chatlists and discussion forums), and collaborative platforms. The World Wide Web, where people cansearch for and obtain information on the Internet, enables people to post messages, create homepages, and communicate with many others.

The Internet not only provides individuals with access to more information but also facilitatesnew ways of representing information (multimedia), structuring information (through hyperlinks),and creating information (through collaborative and distance work). Unlike many other mediathat treat users as passive, the Internet is an active medium that demands a greater degree ofsophisticated thinking and logical skills.

The rapid transformation of the Internet, as it moves beyond PCs into palmtops, mobilephones, and appliances, has radically changed not only communications but also commerce andcomputing in all fields, including scientific computing and business automation. Already, Bluetooth

1 An important advantage of CAD/CAM over conventional designs is its ability to transfer information regardingdesigns readily and accurately across organizational and national boundaries without distortions. In recentyears, the use of CAD/CAM has become widespread in multinational enterprises across the world.

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technological standards and devices allow any device to electronically “talk” to another devicethrough wireless systems, including the wireless Web, cell phones, and laptops. With the adventof new ICT, e-commerce has increased rapidly along with trade in information products. In business,the simple automation of business processes like accounting and payroll, and the subsequentintegration of these functions via ERP software, are being gradually replaced by Web-based inter-enterprise or intra-enterprise ERP, supply chain management, auctions for procuring supplies,and the like.

III. DETERMINANTS OF ICT ADOPTION

The status of ICT adoption of an economy is an indicator of its potential ability to exploitthe economic opportunities afforded by the new technologies—or more generally, its prospectsfor transition to the “new economy.” As expected, the adoption of ICT varies significantly acrosscountries. Like anywhere in the world, Asian countries have experienced a rise in the use of personalcomputers in recent years, though the degree of expansion has varied between countries.

Table 1 shows the most recent estimates of the numbers of PCs among Asian developingcountries. The newly industrialized economies (NIEs) are, quite expectedly, heading the pack andtheir figures are comparable to those of the advanced countries. For example, Singapore has 527.2personal computers per thousand people in 1999, which is 1.8 times the figure of Japan in thesame year. The rest of the developing countries, including India, which has achieved a large measureof international success in software development, have far fewer numbers of personal computersper capita, compared to the NIEs. The South Asian countries appear to have the lowest per capitacomputers in the list, ranging from one computer per thousand people in Bangladesh to 4.3computers in Pakistan.

Along with personal computers other indicators of ICT diffusion in an economy includeusage of televisions, main line telephones, mobile phones, fax machines, and Internet. Table 1provides a picture of ICT diffusion across Asian countries. Whether it is the use of cellular phones,main line telephones, or the Internet, their distributions across countries follow a pattern similarto per capita ownership of PCs. The striking picture that emerges from Table 1 is one of extremeinequality—one of the haves and the have-nots—representing a stark digital divide betweencountries.2

2 It is estimated that more than 75 percent of Internet users live in high-income economies, which contain only14 percent of the global population. Internet use in countries like Iceland, Norway, Sweden, and United Stateshas already reached more than half the population. This is in stark contrast with the rest of the world. Forexample, Internet use in South Asia is only 0.4 percent of its population (UNDP 2001).

Section IIIDeterminants of ICT Adoption


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Table 1. ICT Diffusion in Selected Asian Economies (per thousand people)

Telephone Main Cellular Personal InternetEconomies Lines Phones computers Users

(1999) (1999) (1999) (2000)

Developing Asia

Bangladesh 3.4 1.2 1 0.2People’s Republic of China 85.8 34.2 120 13.4India 26.6 1.9 3.3 4.5Indonesia 29.1 10.6 9.1 1.8Kazakhstan 108.2 3 n.a. 4.2Kyrgyzstan 76.2 0.6 n.a. 2.1Malaysia 203 137 68.7 68.8Nepal 10.6 n.a. 2.6 1.4Pakistan 22.2 2.1 4.3 8.5Philippines 39.5 36.6 16.9 6.2Sri Lanka 36.4 12.2 5.6 3.4Thailand 85.7 38.4 22.7 16.5Viet Nam 26.8 4.2 8.9 1.3

Industrial and Newly Industrializing Economies

Japan 494 449.4 289.6 213.8Hong Kong, China 577.5 636.1 290.5 260Singapore 482 418.8 527.2 419.1Korea 441.4 504.4 189.2 323.1Taipei,China 545.2 522.4 180.7 288.4

United States* 681.8 311.5 510.5 537.2

*Estimates for the United States were included for comparison. n.a. means data not available.Sources: International Telecommunication Union (2000) and Nua Internet Surveys (2000).

Why is there a stark divide? What are the basic economic determinants of ICT diffusion?Are the determinants of adoption and diffusion different in developing Asia from the rest of theworld? To address these queries, we undertook a set of elementary regression exercises coveringmore than 100 countries. These exercises cover a varying number of observations per indicatorof ICT diffusion depending on the availability of cross-country data. An Asian dummy was includedin each of the regression equations to determine the extent of variation in ICT diffusion in theregion from the rest of the world. However, due to lack of disaggregated data, this discussion doesnot make any distinction between different usages of ICT: whether it is used as a consumptionor production item. While the quantitative results are tentative, they are highly suggestive andseem to be in broad sympathy with the results available from advanced countries such as Japanand the United States (US).

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How do country characteristics such as income and population size affect the use of ICT?Simple regression analysis suggests the following. First, computer usage is strongly correlatedwith GDP per capita, with an income elasticity of computer usage exceeding unity (see Table 2).Similarly, Internet use is highly correlated with income, with income elasticity being nearly 2.The usage of other types of ICT (fax machine, telephone main lines, television, cellular phone)is highly income-elastic. Second, as far as population size is concerned, regression analysis doesnot suggest any additional benefit from a larger size as far as personal computer, telephone mainline, and Internet use is concerned. However, when income is controlled, the use of cell phonesand televisions appears to increase with the rise of population. This may reflect the simplicityof the technology involved and their easy availability for purchase in most countries. Third, inall cases, the Asian dummy was insignificant, implying that these relationships are not substantiallydifferent in Asia from the rest of the world.

Table 2. ICT, Income, and Population

Variables Population Income Asia R2 Observations

Cellular Phone 1.065*** 1.882*** -0.191 0.86 145(25.617) (25.310) (-0.810)

Fax Machine -0.152 1.524*** 0.007 0.60 75(-1.783) (11.698) (0.017)

Internet Use 0.009 1.897*** -0.335 0.81 153(0.220) (28.904) (-1.536)

Personal Computer -0.098 *** 1.613*** 0.024 0.88 90(-2.999) (27.035) (0.222)

Telephone Main Line -0.056** 1.441 *** 0.083 0.86 144(-2.319) (31.807) (0.563)

Television 1.061*** 2.657 *** 0.492 0.86 57(8.664) (15.132) (1.573)

Notes: T-statistics are in parenthesis; ***, ** and * indicate statistical significance at the 1, 5, and 10 percent level, respectively.Standard errors are corrected for heteroscedasticity by using the method proposed by White (1980). All variablesare in per capita and in logarithms. For Asia dummy, Asia equals 1 and 0 otherwise. Income is per capita incomein purchasing power parity.

Sources: International Telecommunication Union (2000) and Nua Internet Surveys (2000).

How does education affect the adoption of ICT? Simple regression results, as reported inTable 3, suggest the following. The relationship between computer usage and education isstatistically significant at the 1 percent level with tertiary education. The same is true as far asInternet use is concerned. Moreover, secondary education is also significant at the 1 percent levelfor telephone. It may be noted that the firm-level evidence from Japan and the US confirms the



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complementarity of tertiary education with ICT use (Bresnahan, Brynjolfsson, and Hitt 1999).For other types of ICT, such as cellular phone, fax machines, and television, education does notplay any significant part.

Table 3. ICT, Income, and Education

Variables Income Primary Secondary Tertiary R2 Observations

Cellular Phone 1.882*** 0.004 -0.008 0.007 0.85 106(9.148) (0.812) (-1.174) (0.800)

Fax Machine 1.652*** 0.014 -0.013 0.015 0.70 59(5.688) (1.548) (-1.071) (1.560)

Internet Use 1.490*** -0.001 0.012 0.028*** 0.88 56(6.481) (-0.007) (1.252) (2.921)

Personal Computer 1.443*** 0.004 0.001 0.008*** 0.93 68(15.725) (0.661) (0.376) (2.804)

Telephone 0.917*** 0.001 0.018*** 0.001 0.89 107(9.412) (0.145) (4.169) (0.194)

Television 2.479*** 0.018 0.002 -0.007 0.85 49(4.521) (1.209) (0.210) (-0.534)

Notes: T-statistics are in parenthesis; ***, ** and * indicate statistical significance at the 1, 5, and 10 percent level, respectively.Standard errors are corrected for heteroscedasticity by using the method proposed by White (1980). All variables arein per capita and in logarithms, except percentages. For Asia dummy, Asia equals 1 and 0 otherwise. All regressionsinclude a population control, which is not reported. Income is per capita income in purchasing power parity. All theregressions include an Asia dummy that is statistically insignificant, and a population control, both of which are notreported.

Sources: International Telecommunication Union (2000), World Bank (2000), and UNESCO (2000).

Is there any complementarity between different types of ICT? Table 4, which reports aset of simple regression results, suggests the following. First, telephone use is strongly correlatedwith PC and Internet use. Internet has high correlation with telephone largely reflecting theircomplementary nature.

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Table 4. Complementarity between Technologies

Variables Income Telephones R2 Observations

Cellular Phone 1.884*** 0.030 0.87 133(7.451) (0.173)

Internet Use 1.251 *** 0.459 *** 0.83 138(6.009) (3.475)

Personal Computer 1.206*** 0.344** 0.90 85(6.670) (2.219)

Television 1.653** 0.680 0.87 56(2.421) (1.496)

Notes: T-statistics are in parenthesis; ***, ** and * indicate statistical significance at the 1, 5, and 10 percent level, respectively.Standard errors are corrected for heteroscedasticity using the method proposed by White (1980). All variables arein per capita and in logarithms. For Asia dummy, Asia equals 1 and 0 otherwise. Income is per capita income in purchasingpower parity. All the regressions include an Asia dummy that was statistically insignificant, and a population control,both of which are not reported.

Sources: World Bank (2000) and International Telecommunication Union (2000).

Second, as expected, there is no complementarity between telephone use and televisionuse and between telephone use and cellular phone use. Third, the correlation between Internetusage and income level increases when controlled for telephones. This suggests that in the presenceof a well-developed telephone infrastructure, income level becomes the principal determiningvariable.

Finally, our cross-country regression analysis suggests the existence of a nonlinearrelationship between income and telephone lines. This relationship indicates that there is a seriousdearth of telephones at low-income countries, but after a country reaches a threshold income level,telephones become relatively commonplace. Figure 1 represents this relationship, which is a thirddegree polynomial with statistically significant coefficients. Among the Asian economies, the NIEshave the highest per capita availability of telephones, somewhat comparable to other advancedcountries. There may be two different reasons for this distinct separation among countries in termsof telephone use. The first reason relates to supply factors: it simply reflects the fact that higher-income countries may have well-developed infrastructures. The second reason relates to demandfactors: it reflects the benefits of the so-called network externality. That is, the benefits of gettinga telephone rise as the number of people with telephones in the economy increases.

In short, it appears that the principal determining factors for the diffusion of ICT indeveloping countries are income and investments in human resource and infrastructuredevelopment. However, the degree of influence of these variables is not uniform across the varioustypes of ICT.



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IV. POLICIES TO PROMOTE ICT

While there is a close interconnection between income and ICT diffusion, this relationshipis not a watertight one. The performance of many countries is better than what is warranted bytheir per capita incomes (whereas that of many others is worse than what is warranted by theirper capita incomes). This can be seen from the divergences of individual country performancesfrom the international averages for their respective income levels. In this paper we calculatesuch divergences for the Internet, the principal component of the new ICT revolution. Theinternational “average” line was derived by regressing Internet adoption against per capita incomeof the countries expressed in purchasing-power-parity terms. Table 5 shows the estimates ofdivergences for a number of Asian countries. These divergences from the averages are largelythe result of relevant physical and social investments promoted by these countries. Some countrieshave underinvested compared to their international averages for that income level. These countriesneed to increase their investment levels in those activities if they do not want to fall behind their“comparator” countries in adoption and diffusion of ICT. That would also require, among others,getting their relevant policies and institutions right.

11109876

800

600

400

200

0Tele

phon

e M

ain

Lin

es (

per

thou

san

d)

GDP per Capita (in log scale)

y x x x= 39.01 17.58ln + 2.52ln 0.11ln R = .89�2 3 2

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Figure 1. Relationship between Telephonesand Income Per Capita

Sources: World Bank (2000) and International Telecommunication Union (2000).

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Table 5. Internet Access in Selected Economies: Actual versus Predicted(per 10,000 people)

Economy Internet Access, Internet Access, Difference:Actual Predicted Actual - Predicted

Developing AsiaBangladesh 2 -164.04 166.04Bhutan 2 -138.84 140.84People’s Republic of China 134 87.10 46.90India 45 -60.93 105.93Indonesia 18 21.72 -3.72Kazakhstan 42 270.41 -228.41Kyrgyzstan 21 -26.37 47.37Malaysia 688 811.71 -123.71Maldives 6 227.93 -221.93Nepal 14 -193.41 207.41Pakistan 85 -113.06 198.06Philippines 62 151.90 -89.90Sri Lanka 34 68.96 -34.96Thailand 165 425.64 -260.64Viet Nam 13 -116.80 129.80

Industrial and Newly Industrializing EconomiesJapan 2138 2988.99 -850.99Hong Kong, China 2600 2629.85 -29.85Singapore 4191 3126.22 1064.78Korea 3231 1580.81 1650.19

United States* 5372 3903.10 1468.90

Notes: The predicted values for Internet use in column three are derived from a cross-country regression analysis for 157countries between Internet use and GDP per capita in purchasing-power-parity exchange rate. The estimated equationy = 0.144x - 360.02, with R2 = 0.75 is statistically significant at conventional levels. Positive numbers in column fourin the table indicate that the countries are actually using more Internet services than they are predicted to use attheir income levels in relation to international averages for those income levels.

*Estimates for the United States were included for comparison.Sources: World Bank (2000), International Telecommunication Union (2000), and Nua Internet Surveys (2000).

A. Investment in Education

As our earlier analysis suggests, the relationship between education and ICT iscritical. Education is important because it provides the skills required for creating, adapting, andutilizing such technologies. This is not to deny that even the illiterate or near-literate can possiblytake advantage of certain technological applications. But to go beyond elementary applications,education becomes increasingly important. Indeed, international evidence suggests that educationis a strong complement to Internet use and that the relevant educational levels are secondaryand tertiary levels as they are expected to upgrade the national capacity for adaptation and

Section IVPolicies to Promote ICT


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innovation.3 Therefore, if a country aspires to exploit in significant ways the opportunities offeredby new ICT, particularly the creation of new industries, it needs to emphasize secondary and tertiaryeducation. This lesson is in contrast with conventional wisdom that poorer countries shouldemphasize primary education that yields the higher rate of social returns to these countries(Psacharopoulos 1994). However, in most poor developing countries where illiteracy abounds andthe importance of ICT-related industries has not reached a significant level, it may be prematureto overturn the conventional wisdom.

Those developing countries that have already reached universal primary education for theircitizens should place more emphasis on secondary and tertiary education, particularly focusingon science, mathematics, engineering, and computing if they want to take advantage of new ICTopportunities. Nevertheless, one does not need to rely exclusively on the government for promotingsecondary and tertiary education. Many individuals who would like to take advantage of ICTopportunities are economically well off and may not need government financial assistance. Forothers, improved availability of student loans from the financial system can be a major help infinancing their educational expenses.

In addition to formal education, a rapidly changing technology like ICT would requirecontinuous training on the part of the workforce. But the principal responsibility of impartingsuch training should lie with the concerned firms in line with their requirements. However, thegovernment can also play an important part in inducing the firms to impart such training throughvarious types of tax incentives (UNDP 2001).

B. Investment in Infrastructure

For a country to succeed in ICT, one critical element is physical infrastructure intelecommunications links. The government has an important role in creating such infrastructure,especially in the poorer countries. This role stems from a number of important considerations.First, in very poor countries, the market forces may be shy both because of lack of effective demandand because of lumpiness of investment.

Second, even in countries where the private sector is not shy, the government has to playthe role of a catalyst and a regulator. It appears that there are potentially many opportunitiesfor fostering partnerships in the creation of infrastructure. To attract the private sector, thegovernment may have to play the role of a catalyst by instituting various innovative incentivemechanisms such as build-own-operate, build-own-transfer, etc. Even when the private sector isalready there, the government has an important function as a regulator. It may be noted thatthe telecommunications industry, which constitutes the basic infrastructure for ICT, is a naturalmonopoly.

3 Much of the Internet-based information is textual and in English. In many developing countries, a significantproportion of the rural population is either illiterate or has an education no higher than the elementary level.Therefore, a large segment of the rural population may not be able to access and comprehend the Web-basedinformation.

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Third, despite the strong case for a competitive market in ICT, many countries still maintainstrong barriers against entry. This entry barrier, along with the heavy government involvementin such ICT-related sectors as telephones, has spawned pervasive corruption in many developingcountries and has hiked up costs of communication. Privatization or deregulation would be themost efficient response to such a conundrum. Keeping their markets open to foreign trade andinvestment augurs well for the development of the ICT industry. Openness speeds up transferof technology and encourages investments on ICT. It has been suggested that multinationalcompanies as well as local firms take into account the existence of ICT networks as one of therequirements for investments.

Fourth, governments in developing countries should foster an environment that wouldencourage innovation through research and development. It may be noted that developed countriesthat have established their lead in the ICT realm have invested heavily in research and development(R&D). In the period 1992-1997, R&D in countries of the Organization for Economic Cooperationand Development accounted for 1.8 percent of GDP while that in East Asia and South Asia averaged0.8 percent in the same period (Rodriguez and Wilson 2000). With fiscal incentives and properenforcement of property rights, the private sector would have the impetus to engage in R&Dactivities. However, in areas where the market fails, particularly in basic research, the governmentshould take the lead. Aside from direct investments in R&D, the government can encourage researchlinkages between universities and the ICT industry. However, not every country can be in thecutting edge of technology. For most developing countries, which are followers in the technologyfield, the focus of R&D efforts should be in the area of adaptation of technologies according tolocal needs and conditions.

Finally, the government can play an important role in ensuring the telecom networkstandard. In many developed countries in Europe, the fortuitous outcome of a uniform networkhas come through the dominance of a single company or through the cooperation of several strongcompanies. But the situation is not so fortuitous in many other countries where a total chaos ornear chaos, in terms of standards, prevails. In the US, several incompatible mobile communicationsstandards exist side by side. In developing countries, the government can play a more proactiverole in circumventing such chaotic outcomes by imposing socially optimal standards.

C. Creation of Favorable Institutions

For those countries that seek to play an important role in the development and exportof ICT items such as software, they need to foster an institutional environment conducive to suchdevelopment. An important element of such an environment that would foster investment andharness creativity relates to adequate protection of property rights, enforcement of contracts, ruleof law, and personal autonomy etc., without which the economic incentives of firms to invest orinnovate would be largely eroded. These institutional aspects, which are an important prerequisitefor the successful adoption of new ICT but are often weak in poorer countries, need to be improved.But at the same time, the new ICT ideas are often interconnected and draw on each other’s concepts,



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which makes the task of defining the ownership of the intellectual product as well as appropriatingthe benefits all the more difficult. The task of defining intellectual property and the appropriatemechanism for protection has been the subject of good deal of discussion. When such “property”can be defined, one well-known method of protecting such property is of course the granting ofpatent rights, which offers the right incentives to the creators. However, as is well known, sucha policy creates at the same time a large element of distortion (because of the monopolistic natureof production) and may sometimes act as stumbling blocks to future innovations. Other methodsto encourage innovation include a recent proposal by Kremer (1998) who suggests the introductionof a system of prizes based on what the private firms would pay for the monopoly to produce theitem in question. While this is an interesting proposal, it involves substantial public expenditureon rewards for countries that are otherwise financially constrained. In any case, whatever approachthe government takes to manage innovation, the wrong approach would be to micromanage it.

If certain types of ICT are considered socially desirable merit goods (for example, thoseitems related to education, etc.), a case can be made for their wide diffusion among the populace.However, diffusion of useful ICT technologies is likely to involve substantial positive externality.In these circumstances, a case may be made for subsidization of ICT use like undertaking effortsto establish communal access to specific types of ICT.

Similarly, research suggests that the use of ICT has been most productive in firms witha flat and less hierarchical organization structure. This type of organization is more common inthe US than elsewhere in the world. One way to promote such an organizational structure is bykeeping markets open and competitive (Cohen, De Long, and Zysman 2000). The government policyshould therefore avoid pursuing policies that foster a closed and monopolistic environment in thename of “nurturing the infant industry.”

D. Fostering New Institutional Innovations

For developing countries, it is difficult to provide first-class infrastructure for the wholecountry. One way to circumvent the problem is to create special “technology parks” to cater tothe specific needs of the ICT industry. These high-tech locations offer superior infrastructure (suchas uninterrupted power supply, satellite downlinks, etc.), provide many fiscal incentives (tax holidaysetc.), and assure investors of expeditious government approvals and other logistic assistance.4

4 Some technology parks have achieved considerable success. The Singapore Science Park hosts more than 200IT-related R&D firms. India has developed a number of such parks in Bangalore, Hyderabad, Mumbai, andChennai. Another notable example is Taipei,China’s Hsinchu Park, which has an area of 580 hectares andemploys more than 70,000 R&D staff. Malaysia’s Multimedia Super Corridor is a more recent high-profile addition.In the Philippines, Metro Manila hosts a number of such technology parks, which are becoming the data centerhub for many foreign companies. Meanwhile, the Zhong-Guang village in People’s Republic of China has withinits vicinity 68 universities/colleges as well as over 230 state-level research institutes. Its tenants include over6500 firms (Furuta 2001).

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However, these technology parks are not limited to developing countries only. Suchtechnology hubs have also emerged in developed countries, often through private efforts but mostlythrough a combination of private and government efforts. What are the preconditions for successof these hubs? Based on interviews with the local government officials and representatives of thebusiness and the media, the Wired Magazine made an evaluation of the quality of about 50 leadingtechnology hubs of the world. Each hub was rated according to four criteria revealing the factorsthat influence investors in their site selection: the ability of universities and research facilitiesin the area to develop new technologies and provide training opportunities; the presence ofestablished firms and multinational companies; the entrepreneurial drive to start new venturesby the population; and the availability of venture capital to bring ideas to the market (Hillner2000). As expected, those technology hubs in Asia that are rated highly are essentially those thatbelong to the higher-income countries with the exception of Bangalore in India.5

From the experiences of these special technological hubs, a number of important lessonsseem to emerge. First and foremost, infrastructure matters and it should be easily available toICT entrepreneurs if the country aspires to succeed in this area. The government has an importantrole to play in the provision of the infrastructure. Second, rather than trying to micromanagethe private sector, the government should provide strong support to its growth by fostering anappropriate policy environment where entrepreneurship can flourish. Superior flexibility andautonomy are considered critical elements of a successful e-economy environment (Cohen, DeLong,and Zysman 2000). Third, the availability of human capital in the form of skilled workers istremendously important for the success of such a park or hub. Finally, the ability to attractmultinational companies and venture capital is likely to be critical in the successful growth ofthe location.

In light of the above, it is unlikely that all developing countries would succeed in developingspecial technology hubs. Nor should every country attempt to do so. Before attempting to undertakesuch a venture, each country should make a comprehensive evaluation of their true economic costsand benefits. In many cases, these technology hubs in developing countries could turn out to beenclaves of technological excellence and sophistication with little spillovers—technological or humancapital—for the rest of the economy.

5 This list includes some of the Asian cities: Taipei, Bangalore, Tokyo, Kyoto, Hsinchu, Hong Kong, Inchon, andKuala Lumpur.



14

E. International Cooperation

In addition to national efforts, international organizations can play a role in promotingICT in poorer countries.6 A specific set of policy initiatives that international organizations couldsupport to bridge the digital divide may include the creation of uniform standards through technicalassistance and policy advice. However, premature standardization can become impediments totechnological innovations. Second, in many developing countries, government monopolypredominates in the telecommunications sector. The international organizations can play a rolein deregulating this sector as well as ensuring free entry of the private sector, including foreignfirms. Also, as we have noted earlier, there are instances where there is an economic case forgovernment subsidization or tax incentives. In poorer countries, where the government is fiscallyconstrained, international organizations can offer the necessary financial assistance to create thebasic infrastructure, as the private sector—both domestic and foreign—may not be forthcomingfor obvious economic reasons.

V. CONCLUSION

The advent of new types of ICT, in conjunction with globalization, has opened up freshopportunities for economic and social transformations from which both developed and developingcountries can immensely benefit. In this regard, two important features of new ICT have beenemphasized. First, unlike previous technological innovations, access to new technologies—andthe benefits they can bestow—can be almost immediate to developing countries. New ICT canbe applied selectively and innovatively to directly enhance the welfare of the poor, although theexisting data do not afford a full-fledged cost-benefit assessment (Quibria and Tschang 2001). Second,new types of ICT are likely to contribute toward a more efficient integration of the global labormarkets than was considered possible before. While the forces of globalization are rapidly breakingdown trade and investment barriers, new types of ICT are facilitating relocation of manufacturingand services industries more in line with comparative advantage across the world. The new typesof ICT promote more efficient delivery of services, especially where such services can be digitized,and ensure rapid dissemination of market information. This process has the potential of bringing

6 The increasing concern for the widening digital divide between the developed and developing countries hasled to a flurry of activities in the international development community. The Group of 8 (G-8) countries haveadopted the Okinawa Charter on the Global Information Society in its summit in July 2000 to assist developingcountries in their efforts to narrow the digital divide. The G-8 created the Digital Opportunity Task Force (DotForce) that includes stakeholders from G-8 and developing country governments, private and nonprofit sectors,and international organizations (DOT Force 2000). In the area of bilateral cooperation, Japan pledged to provide$15 billion in development assistance over five years to overcome the digital divide. International organizationslike the Asian Development Bank and the World Bank have also placed special emphasis on ICT disseminationin poor countries in their list of priorities.

15

about a more seamless integration of the global labor markets—including those for unskilledworkers—and elimination of absolute poverty.

Notwithstanding the immense potential of new types of ICT, many observers feel that thedigital divide will not evaporate immediately or automatically. It is also felt that an aggressivestrategy of investment in ICT, neglecting other critical developmental priorities, solely with theobjective of eliminating the digital divide, may be counterproductive. Such a strategy will simplydetract attention from the more fundamental developmental needs that many countries requireto address on an urgent basis. They include such fundamental constraints to economic developmentas improving the basic infrastructure; opening up markets; breaking telecommunication monopolies;pursuing an effective legal and regulatory system; and providing education for all. For countriesthat try to skirt these problems, their efforts at computerization and Internet access may turnout to be mere wasteful investments—and indeed a recipe for financial disasters, given the scopefor better use of scarce investible resources elsewhere in the economy.7

If governments in poor countries channel their scarce financial and political resources todeveloping social and human capital, building the basic infrastructure and creating a level playingfield for the private sector, that will go a long way in creating the prerequisites for the ICT sectorto flourish. Beginning modestly with such areas as data processing and teleworking, the poorcountries can gradually move to more sophisticated tasks of software development and hardwareinnovation. Thus, notwithstanding the concerns voiced on the perils of being left behind in thisdigital age, developing countries should carefully balance between their conflicting needs of adoptingmodern technology and preparing the basic foundation for economic development.

7 A recent study by Pohjola (2000) investigated the relationship between IT investments and growth in 39 countriesover the period 1980-1995. It found that, whereas such investments boosted growth in developed economies,they were not beneficial in developing countries that lacked complementary policies.

Section VConclusion


16

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of the South Pacific Countries:A Case Study of Vanuatu—T.K. Jayaraman, December 1993

No. 5 Reforms in the Transitional Economies of Asia—Pradumna B. Rana, December 1993

No. 6 Environmental Challenges in the People’s Republicof China and Scope for Bank Assistance—Elisabetta Capannelli and Omkar L. Shrestha,

December 1993

No. 7 Sustainable Development Environmentand Poverty Nexus—K.F. Jalal, December 1993

No. 8 Intermediate Services and EconomicDevelopment: The Malaysian Example—Sutanu Behuria and Rahul Khullar, May 1994

No. 9 Interest Rate Deregulation: A Brief Surveyof the Policy Issues and the Asian Experience—Carlos J. Glower, July 1994

No. 10 Some Aspects of Land Administrationin Indonesia: Implications for Bank Operations—Sutanu Behuria, July 1994

No. 11 Demographic and Socioeconomic Determinantsof Contraceptive Use among Urban Women inthe Melanesian Countries in the South Pacific:A Case Study of Port Vila Town in Vanuatu—T.K. Jayaraman, February 1995

No. 12 Managing Development throughInstitution Building— Hilton L. Root, October 1995

No. 13 Growth, Structural Change, and Optimal

OCCASIONAL PAPERS (OP)

22

No. 1 Estimates of the Total External Debt ofthe Developing Member Countries of ADB:1981-1983—I.P. David, September 1984

No. 2 Multivariate Statistical and GraphicalClassification Techniques Appliedto the Problem of Grouping Countries—I.P. David and D.S. Maligalig, March 1985

No. 3 Gross National Product (GNP) MeasurementIssues in South Pacific Developing MemberCountries of ADB—S.G. Tiwari, September 1985

No. 4 Estimates of Comparable Savings in SelectedDMCs—Hananto Sigit, December 1985

No. 5 Keeping Sample Survey Designand Analysis Simple—I.P. David, December 1985

No. 6 External Debt Situation in AsianDeveloping Countries—I.P. David and Jungsoo Lee, March 1986

No. 7 Study of GNP Measurement Issues in theSouth Pacific Developing Member Countries.Part I: Existing National Accountsof SPDMCs–Analysis of Methodologyand Application of SNA Concepts—P. Hodgkinson, October 1986

No. 8 Study of GNP Measurement Issues in the SouthPacific Developing Member Countries.Part II: Factors Affecting IntercountryComparability of Per Capita GNP—P. Hodgkinson, October 1986

No. 9 Survey of the External Debt Situationin Asian Developing Countries, 1985—Jungsoo Lee and I.P. David, April 1987

No. 10 A Survey of the External Debt Situationin Asian Developing Countries, 1986—Jungsoo Lee and I.P. David, April 1988

No. 11 Changing Pattern of Financial Flows to Asianand Pacific Developing Countries—Jungsoo Lee and I.P. David, March 1989

No. 12 The State of Agricultural Statistics inSoutheast Asia—I.P. David, March 1989

No. 13 A Survey of the External Debt Situationin Asian and Pacific Developing Countries:1987-1988—Jungsoo Lee and I.P. David, July 1989

No. 14 A Survey of the External Debt Situation inAsian and Pacific Developing Countries: 1988-1989—Jungsoo Lee, May 1990

No. 15 A Survey of the External Debt Situationin Asian and Pacific Developing Countries: 1989-1992—Min Tang, June 1991

No. 16 Recent Trends and Prospects of External DebtSituation and Financial Flows to Asianand Pacific Developing Countries—Min Tang and Aludia Pardo, June 1992

No. 17 Purchasing Power Parity in Asian DevelopingCountries: A Co-Integration Test—Min Tang and Ronald Q. Butiong, April 1994

No. 18 Capital Flows to Asian and Pacific DevelopingCountries: Recent Trends and Future Prospects—Min Tang and James Villafuerte, October 1995

STATISTICAL REPORT SERIES (SR)

Poverty Interventions—Shiladitya Chatterjee, November 1995

No. 14 Private Investment and MacroeconomicEnvironment in the South Pacific IslandCountries: A Cross-Country Analysis—T.K. Jayaraman, October 1996

No. 15 The Rural-Urban Transition in Viet Nam:Some Selected Issues—Sudipto Mundle and Brian Van Arkadie,

October 1997No. 16 A New Approach to Setting the Future

Transport Agenda—Roger Allport, Geoff Key, and Charles Melhuish

June 1998No. 17 Adjustment and Distribution:

The Indian Experience—Sudipto Mundle and V.B. Tulasidhar, June 1998

No. 18 Tax Reforms in Viet Nam: A Selective Analysis—Sudipto Mundle, December 1998

No. 19 Surges and Volatility of Private Capital Flows toAsian Developing Countries: Implicationsfor Multilateral Development Banks—Pradumna B. Rana, December 1998

No. 20 The Millennium Round and the Asian Economies:An Introduction—Dilip K. Das, October 1999

No. 21 Occupational Segregation and the GenderEarnings Gap—Joseph E. Zveglich, Jr. and Yana van der MeulenRodgers, December 1999

No. 22 Information Technology: Next Locomotive ofGrowth?—Dilip K. Das, June 2000

23

Edited by S.Ghon Rhee & Yutaka Shimomoto, 1999$35.00 (paperback)

9. Corporate Governance and Finance in East Asia:A Study of Indonesia, Republic of Korea, Malaysia,Philippines and ThailandJ. Zhuang, David Edwards, D. Webb,& Ma. Virginita CapulongVol. 1, 2000 $10.00 (paperback)Vol. 2, 2001 $15.00 (paperback)

10. Financial Management and Governance IssuesAsian Development Bank, 2000Cambodia $10.00 (paperback)People’s Republic of China $10.00 (paperback)Mongolia $10.00 (paperback)Pakistan $10.00 (paperback)Papua New Guinea $10.00 (paperback)Uzbekistan $10.00 (paperback)Viet Nam $10.00 (paperback)Selected Developing Member Countries $10.00 (paperback)

11. Guidelines for the Economic Analysis of ProjectsAsian Development Bank, 1997$10.00 (paperback)

12. Handbook for the Economic Analysis of Water SupplyProjectsAsian Development Bank, 1999$15.00 (hardbound)

13. Handbook for the Economic Analysis of Health SectorProjectsAsian Development Bank, 2000$10.00 (paperback)

1. Rural Poverty in Developing AsiaEdited by M.G. QuibriaVol. 1: Bangladesh, India, and Sri Lanka, 1994$35.00 (paperback)Vol. 2: Indonesia, Republic of Korea, Philippines,and Thailand, 1996$35.00 (paperback)

2. External Shocks and Policy Adjustments:Lessons from the Gulf CrisisEdited by Naved Hamid and Shahid N. Zahid, 1995$15.00 (paperback)

3. Gender Indicators of Developing Asianand Pacific CountriesAsian Development Bank, 1993$25.00 (paperback)

4. Urban Poverty in Asia: A Survey of Critical IssuesEdited by Ernesto Pernia, 1994$20.00 (paperback)

5. Indonesia-Malaysia-Thailand Growth Triangle:Theory to PracticeEdited by Myo Thant and Min Tang, 1996$15.00 (paperback)

6. Emerging Asia: Changes and ChallengesAsian Development Bank, 1997$30.00 (paperback)

7. Asian ExportsEdited by Dilip Das, 1999$35.00 (paperback)$55.00 (hardbound)

8. Mortgage-Backed Securities Markets in Asia

SPECIAL STUDIES, ADB (SS, ADB)(Published in-house; Available commercially through ADB Office of External Relations)

1. Improving Domestic Resource Mobilization ThroughFinancial Development: Overview September 1985

2. Improving Domestic Resource Mobilization ThroughFinancial Development: Bangladesh July 1986

3. Improving Domestic Resource Mobilization ThroughFinancial Development: Sri Lanka April 1987

4. Improving Domestic Resource Mobilization ThroughFinancial Development: India December 1987

5. Financing Public Sector Development Expenditurein Selected Countries: Overview January 1988

6. Study of Selected Industries: A Brief ReportApril 1988

7. Financing Public Sector Development Expenditurein Selected Countries: Bangladesh June 1988

8. Financing Public Sector Development Expenditurein Selected Countries: India June 1988

9. Financing Public Sector Development Expenditurein Selected Countries: Indonesia June 1988

10. Financing Public Sector Development Expenditurein Selected Countries: Nepal June 1988

11. Financing Public Sector Development Expenditurein Selected Countries: Pakistan June 1988

12. Financing Public Sector Development Expenditurein Selected Countries: Philippines June 1988

13. Financing Public Sector Development Expenditurein Selected Countries: Thailand June 1988

14. Towards Regional Cooperation in South Asia:ADB/EWC Symposium on Regional Cooperationin South Asia February 1988

15. Evaluating Rice Market Intervention Policies:Some Asian Examples April 1988

16. Improving Domestic Resource Mobilization ThroughFinancial Development: Nepal November 1988

17. Foreign Trade Barriers and Export Growth

September 198818. The Role of Small and Medium-Scale Industries in the

Industrial Development of the PhilippinesApril 1989

19. The Role of Small and Medium-Scale ManufacturingIndustries in Industrial Development: The Experienceof Selected Asian CountriesJanuary 1990

20. National Accounts of Vanuatu, 1983-1987January 1990

21. National Accounts of Western Samoa, 1984-1986February 1990

22. Human Resource Policy and EconomicDevelopment: Selected Country StudiesJuly 1990

23. Export Finance: Some Asian ExamplesSeptember 1990

24. National Accounts of the Cook Islands, 1982-1986September 1990

25. Framework for the Economic and Financial Appraisalof Urban Development Sector Projects January 1994

26. Framework and Criteria for the Appraisaland Socioeconomic Justification of Education ProjectsJanuary 1994

27. Guidelines for the Economic Analysis of ProjectsFebruary 1997

28. Investing in Asia1997

29. Guidelines for the Economic Analysisof Telecommunication Projects1998

30. Guidelines for the Economic Analysisof Water Supply Projects1999

SPECIAL STUDIES, COMPLIMENTARY (SSC)(Published in-house; Available through ADB Office of External Relations; Free of Charge)

24

SERIALS(Co-published with Oxford University Press; Available commercially through Oxford University PressOffices, Associated Companies, and Agents)

1. Asian Development Outlook (ADO; annual)$36.00 (paperback)

2. Key Indicators of Developing Asian and Pacific Countries (KI; annual)$35.00 (paperback)

JOURNAL(Published in-house; Available commercially through ADB Office of External Relations)

1. Asian Development Review (ADR; semiannual)$5.00 per issue; $8.00 per year (2 issues)

1. Informal Finance: Some Findings from AsiaPrabhu Ghate et. al., 1992$15.00 (paperback)

2. Mongolia: A Centrally Planned Economyin TransitionAsian Development Bank, 1992$15.00 (paperback)

3. Rural Poverty in Asia, Priority Issues and PolicyOptionsEdited by M.G. Quibria, 1994$25.00 (paperback)

4. Growth Triangles in Asia: A New Approachto Regional Economic CooperationEdited by Myo Thant, Min Tang, and Hiroshi Kakazu1st ed., 1994 $36.00 (hardbound)Revised ed., 1998 $55.00 (hardbound)

5. Urban Poverty in Asia: A Survey of Critical IssuesEdited by Ernesto Pernia, 1994$18.00 (paperback)

6. Critical Issues in Asian Development:Theories, Experiences, and PoliciesEdited by M.G. Quibria, 1995$15.00 (paperback)$36.00 (hardbound)

7. From Centrally Planned to Market Economies:The Asian ApproachEdited by Pradumna B. Rana and Naved Hamid, 1995Vol. 1: Overview$36.00 (hardbound)Vol. 2: People’s Republic of China and Mongolia$50.00 (hardbound)Vol. 3: Lao PDR, Myanmar, and Viet Nam$50.00 (hardbound)

8. Financial Sector Development in AsiaEdited by Shahid N. Zahid, 1995$50.00 (hardbound)

9. Financial Sector Development in Asia: Country StudiesEdited by Shahid N. Zahid, 1995$55.00 (hardbound)

10. Fiscal Management and Economic Reformin the People’s Republic of ChinaChristine P.W. Wong, Christopher Heady,and Wing T. Woo, 1995$15.00 (paperback)

11. Current Issues in Economic Development:An Asian PerspectiveEdited by M.G. Quibria and J. Malcolm Dowling, 1996$50.00 (hardbound)

12. The Bangladesh Economy in TransitionEdited by M.G. Quibria, 1997$20.00 (hardbound)

13. The Global Trading System and Developing AsiaEdited by Arvind Panagariya, M.G. Quibria,and Narhari Rao, 1997$55.00 (hardbound)

14. Social Sector Issues in Transitional Economies of AsiaEdited by Douglas H. Brooks and Myo Thant, 1998$25.00 (paperback)$55.00 (hardbound)

15. Rising to the Challenge in Asia: A Study of FinancialMarketsAsian Development Bank, 1999Vol. 1 $20.00 (paperback)Vol. 2 $15.00 (paperback)Vol. 3 $25.00 (paperback)Vols. 4-12 $20.00 (paperback)

SPECIAL STUDIES, OUP (SS,OUP)(Co-published with Oxford University Press; Available commercially through Oxford University PressOffices, Associated Companies, and Agents)

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