ICT and Economic Growth: Evidence from Kenya

Do ICTs contribute to economic growth in developing countries?

In the 1980s, Robert Solow triggered the idea of a productivity paradox, saying “You can see the computer age everywhere but in the productivity statistics.”  And for many years there was a similar developing country growth paradox: that you could increasingly see ICTs in developing countries except in the economic growth data.

That is still largely true of computers and to some extent the Internet, but much less true overall as mobiles have become the dominant form of ICTs in development.  In particular key studies such as those by Waverman et al (2005), Lee et al (2009), and Qiang (2009) have demonstrated a clear connection between mobiles and economic growth and/or between telecoms more generally and economic growth.  They all address the “endogeneity” problem: that a correlation between telecoms (indeed, all ICTs) and economic growth is readily demonstrable; but that you then have to tease out the direction of causality: economic growth of course causes increased levels of ICTs in a country (we buy more tech as we get richer); you need to try to control for that, and separate out the interesting bit: the extent to which the technology causes economic growth. 

The studies try to do this and show ICT investments cause economic growth, but they are all multi-country and provide no specific insights into the experiences of a particular developing nation.  If you know of such data, do please contribute.  Meanwhile, a recent edition of “Kenya Economic Update” provides an example.  Some overall points:

• The ICT sector grew at an average of nearly 20% per year from 1999-2009 (by contrast, Kenya’s largest economic sector – agriculture – shrank by an annual average of nearly 2% per year).
• The number of phone subscriptions has grown from the equivalent of one per 1,000 adults in 1999 to the equivalent of nearly one per adult in 2010; Internet usage rates for 2010 were around four per ten adults.
• Person-to-person mobile money transactions at the end of 2010 were equivalent to around 20% of GDP with two of every three Kenyan adults being users.

But the report’s strongest claim is this: “ICT has been the main driver of Kenya’s economic growth over the last decade. … Since 2000, Kenya’s economy grew at an average of 3.7 percent. Without ICT, growth would have been a lackluster 2.8 percent—similar to the populaton growth rate—and income per capita would have stagnated”.  So ICTs were responsible for 0.9 of the 3.7% annual GDP growth, and for all of Kenya’s GDP per capita growth.  Put another way, ICTs were responsible for roughly one-quarter of Kenya’s GDP growth during the first decade of the 21^st century.

Other nuggets from the report and from original World Bank data underlying the report:

• The “ICT sector” is actually the “posts and telecommunications” sector.  Comparing figures from Research ICT Africa for mobile + fixed line + Internet/data services with those for the overall sector suggests that ICTs form by far the majority (likely greater than 90%) of that sector.  For the ICT part of the sector, latest figures for 08/09 show mobile takes a 54.8% share, fixed line takes 39.5%, with 1.8% for Internet services and 3.8% for data services (not 100% due to rounding).
• The ICT sector in 2009 still represented only 5% of total Kenyan GDP (compared to 21% for agriculture/forestry), and growth has been volatile, at least as based on the recorded figures, ranging from 3.5% per year up to 66% per year during the first part of the decade, and from 7.9% to over 30% during the second part of the decade.  Only tourism (hotels/restaurants) was more volatile.  In six of the ten years of the 2000-2009 decade, though, ICT was Kenya’s fastest growing sector.
• In the first half of the decade, annual investments in mobile were higher than annual revenues; but the ratio has subsequently slipped to investment averaging around half of revenue.  Investments in mobile during 2001/02 to 2009/10 are estimated at US$3.2bn (c.KSh250bn) and US$3bn in fixed phone services, with broadband, Internet and BPO investments adding perhaps another US$1bn.
• The ICT sector provided a more than six-times-greater contribution to Kenyan GDP in 2009 compared to 1999.  Directly, the ICT sector contributed to 14% of the country’s GDP growth between 2000 and 2009 (at constant (i.e. not actual/current but accounting for inflation) prices, it grew from KSh13.7bn in 2000 to KSh71.8bn in 2009; GDP overall grew from KSh976bn to KSh1.382tn).  So the World Bank’s calculation that ICTs contributed a quarter of GDP growth during the decade also include a specific, quantified assumption about ICTs triggering growth in other sectors, in particular the financial sector.
• Employment in the ICT sector is estimated to be around 100,000 in 2011 (c. 0.7% of the estimated 14m overall labour force).  But ICT punches above its weight in other ways: changes in mobile prices at the start of 2011 were credited with both causing the Kenyan inflation rate to drop and with potentially derailing government constitutional talks due to the substantial knock-on effects in causing tax revenues to drop since phone companies now contribute such a significant proportion of government income.

So, overall, what do we have here?  Some fairly solid evidence that ICT sector growth (predominantly due to mobiles) is making an important direct contribution to economic growth in this developing country.  And some less clear evidence that the indirect GDP growth effect of ICTs may nearly double this.  Thanks to mobile money, Kenya has seen a particularly strong take-up and economic role for ICTs, but it is fairly typical in terms of mobile investment, revenues, subscriber base, employment, etc.  In that case, it’s not too much of an extrapolation to expect that ICTs will have contributed something like one quarter of GDP growth in many developing countries during the first decade of the 21^st century.  Evidence of ICT impact that development strategists and practitioners should be more aware of.

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