HomeAnalysisMeasuring the digital economy in Zim

Measuring the digital economy in Zim

THE Organisation for Economic Cooperation and Development defines the digital economy as the share of Gross Domestic Product (GDP) accounted for by the Information and Communication Technology sector or the entirety of sectors that operate using internet protocol.

The digital economy has become a new high value and inclusive driver of growth disrupting the traditional model of development where Zimbabwe’s growth trajectory was heavily dependent on exports of natural resources.

Zimbabwe has the most to gain from building digital economies if it invests in technological innovation — modifying business models across all economic sectors through virtualisation of operating systems, servers, storage devices, and network resources as well as digitalisation of key business processes such as marketing, commerce, production, customer service, communication, and more.

A digital transformation is no longer an option for Zimbabwe, as digitalisation has become an integral part of today’s economy, working world, and everyday life.

The country has witnessed an explosion of digital goods and services over the past years: Google, Facebook, LinkedIn, Skype, Wikipedia, online courses, maps, messaging, music, and all the other apps for the smartphone. The Datareportal.com 2022 report alluded that an average person spends three hours a day consuming these services.

Many internet services used are free and have a zero price, so they largely go uncounted in official measures of economic activity such as GDP and productivity.

However, if we want to understand how the internet is contributing to our economy, we need better ways to measure free services like Facebook, Google, and Wikipedia.

The split between GDP and well-being becomes even starker as more and more of our economy becomes digital.

Digital goods are often free for users and so their contributions to well-being are excluded from GDP.

Thus, we see the benefits from the digital revolution everywhere except in the GDP statistics. Therefore, the country needs an approach that allows estimating the internet’s contribution to the economy in ways that have not been possible before.

The aim is not to replace GDP, which is incredibly useful. The gross domestic product too often ends up being misused as a measure of well-being simply because no better measure existed.

Hence, the need for a method of measuring the substantial benefits of services like Google search, Facebook, and Google Maps.

The country can use survey techniques to ask a question to hundreds of thousands of consumers about their preferences and thereby get estimates of the consumer surplus for a variety of goods, including free ones that are missing from the economic statistics.

A way of directly measuring consumer surplus in a scalable way is asking consumers to choose between keeping access to a good or giving it up in exchange for monetary compensation.

Such a measure is especially important when previously paid physical goods transition into digital goods.

A good example of this is the encyclopedia Britannica and Wikipedia. Britannica used to cost several thousand dollars. Wikipedia is free and has more quantity and better quality of articles than Britannica ever had. If we look at GDP, we will find that the encyclopedia industry is shrinking. However, consumers are better off and obtain a tremendous amount of consumer surplus from Wikipedia.

To measure the consumer surplus generated by Facebook, the country can recruit a representative sample of Zimbabwe-based Facebook users and ask them for the amount of money they would need to be compensated with to give Facebook up for one month.

To make sure that they respond truthfully, some of these respondents will be randomly selected and asked to give Facebook up for one month. At the end of the month, we verify that they indeed gave it up and give them the cash that they ask for.

This approach can be extended to other categories of digital goods such as Instagram, Twitter, and Tiktok among others.

The new metric developed can be called GDP-B since it builds upon GDP to account for the benefits of new and free goods. GDP-B involves expanding the GDP framework to capture the consumer surplus generated by free digital goods and other non-market goods, such as the environment.

The GDP-B will be a way to supplement GDP to capture the welfare gains of new and free goods. Thus, policymakers are urged to track this GDP-B metric when they want to focus on the well-being of consumers rather than the production side of the economy.

While the GDP-B estimates may not be as precise as the GDP measures, the country will be at least attempting to directly measure economic well-being which is not properly inferred from GDP in the digital era.

This GDP-B metric stays within the neoclassical framework and only captures the economic private benefits associated with the digital revolution.

Other researchers have developed methods to quantify aspects of subjective well-being including happiness and life satisfaction. On a spectrum ranging from current macroeconomic indicators such as GDP and productivity to well-being indicators, such as happiness, the GDP-B metric lies in between.

It is important for policy-makers to have a view of this entire spectrum and focus on the relevant metrics, while implementing a particular policy.

At the micro-level, managers can use the same consumer surplus method to calculate how much value their goods create for consumers. This value is a theoretical maximum of the total value that they are creating for consumers, which has obvious implications for investment, strategy, pricing, and long-term viability.

Long-term survival of products is more likely if they generate large amounts of consumer surplus. Keeping track of consumer valuations over time could provide managers with a more direct data-driven metric of consumer well-being that can shape how they evaluate the impact of policies.

These metrics can complement existing customer satisfaction metrics such as Net Promoter Score which do not look for customer value beyond promoting.

In conclusion, there has been a substantial increase in well-being that is missed by traditional metrics like GDP, or productivity. It is tempting to therefore conclude that the slowdown in productivity metrics over the past decade and a half might disappear if we properly account for the benefits of the digital revolution.

However, we cannot draw that conclusion because there were other important sources of consumer surplus, including free and nearly free goods like antibiotics, radio, and television that were introduced in the past.

Having said that, if we want to compare the economic well-being of people over time, we should be measuring metrics such as GDP-B moving forward.

The approach can be scaled up to estimate the contributions of not only thousands of digital goods but also convention goods from breakfast cereal to jet travel.

More ambitiously, we may be able to get better estimates of the benefits associated with other non-market goods, such as, the environment and public goods.

Ultimately, if researchers in a variety of countries around the world adopt this approach, we will get meaningful estimates of how both digital and non-digital goods contribute to our well-being, and with better measurement, comes better management.

  • Zvendiya is an independent economist. — rzvendiya@gmail.com. These weekly New Perspectives articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.

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