Internet Access and Speed: Why it matters for economic growth

In a relatively short period, the internet has had a profound impact on households, businesses, government and the way in which the global economy functions. It has changed the way we shop, work, source inputs, collect and transfer information, communicate, educate, think and meet people.

GLOBAL TRENDS IN INTERNET ACCESS AND SPEED

Global internet access has grown by almost 600% since the year 2000 to an estimated 2.5 billion users, and is expanding by roughly 200 million new users a year.

In some regions of the world, internet penetration is already extremely high. This is especially evident in North America and Japan where an estimated 80% of the population has direct access to the internet. The European Union is not that far behind, with an internet penetration ratio of around 73%; with some member states at over 90%. In contrast, only 16% of the population in Africa has direct access to the internet. Most of these users are concentrated in four countries, namely Nigeria, Egypt, Morocco and Kenya.

Together, these four countries account for almost 64% of all internet users in Africa and have a combined internet penetration of 32.5%.

The speed of access to the internet has also grown dramatically over the past decade and continues to improve. The global average peak internet connection speed was recorded at 16.6 Mbps (megabytes per second) in Q4 2012, up an impressive 35% over the past year.

In the US, the average peak connection speed was recorded at 31.5 Mbps in the final quarter of 2012, up 25% over the past year.

The latest speed rating in the US is more than 200% faster than the speed recorded at the end of 2007.

Remarkably, Hong Kong achieved an average peak connection speed of 57.5 Mbps in Q4 2012, up 25% year-on-year. Although some high-end users in Hong Kong have access to mind-boggling speeds of 500 Mbps, 2012 is the first time that a country’s average peak connection speed has exceeded 50 Mbps.

HOW WE STACK UP

South Africa’s internet penetration is a mere 17.5% of the population and has less internet users than Kenya, despite having a larger population.

South Africa’s average peak connection speed achieved a very modest and disappointing 7.1 Mbps in Q4 2012. While South Africa’s average peak connection speed has increased by an impressive 36% over the past year, the country is ranked as having only the 25th fastest internet in Africa and is ranked a paltry 120th in the world.

Understandably, average internet speeds are significantly slower than peak speeds. During Q4 2012, South Africa’s average internet speed was only 2.1 Mbps. In practice, the average internet user can still make a cup of coffee before the You Tube video loads. If you then factor in the high cost of having access to this low speed, South Africa’s internet access is incredibly expensive by global standards.

WHY ACCESS TO THE INTERNET MATTERS

An accepted principle of economic growth is that advancements in technology, which facilitate the development and adoption of new ideas, tend to boost economies. This principle is evident following the introduction of various types of public infrastructure, including telephones.

Over the past few years, a number of research reports have investigated the effect of the internet on economic growth. In general, these reports have concluded that access to the internet plays a positive and significant role in stimulating economic activity.

Three pieces of research are worth highlighting. The first was undertaken in 2009 by the Department of Economics at Myongji University, South Korea using panel data from numerous countries between 1991 and 2000.

The second was also compiled in 2009, by the IFO Institute for Economic Research at the University of Munich using data from 25 OECD countries between 1996 and 2007.

Lastly, in 2011 the McKinsey Global Institute researched the internet’s impact on growth, jobs and prosperity focusing on 13 countries that account for more than 70% of global GDP.

While the telephone infrastructure had more of a coordination function that lead to improvements in productivity, the development of high-speed internet has far more reaching effects. It accelerates the distribution of ideas and information, encouraging the development of new products, business processes, entrepreneurship and job matching. Simply stated, the development of high-speed internet boosts the innovative capacity of a country, which is good for growth and development.

The 2009 University of Munich research report into the relationship between access to broadband internet and economic growth reached two very important conclusions. Firstly, after introducing Broadband Internet, countries achieved 2.7% to 3.9% higher GDP per person. Secondly, every 10% increase in Broadband Internet penetration brings a 0.9% to 1.5% increase in the growth of GDP per person on average.

The McKinsey report is equally impressive in its conclusion, highlighting that the internet has been a major driver of economic growth in many major economies. Remarkably, in the 13 countries selected by McKinsey, the internet has contributed 10% of their growth over the past 15 years, and 21% of their growth in the past five years. Consequently, the internet now represents 3.4% of GDP.

Around 53% of this is in the form of consumer spending, while private investment in internet-related technologies and foreign trade accounts form an impressive31%, with the public sector accounting for the remaining76%.This means that in these countries the internet has a greater share of GDP than agriculture, utilities, communication, education and mining.

As would be expected, the internet’s economic impact varies widely, even among countries at the same stage of development. For example, the internet represents around 6.4% of GDP in Sweden and 5.4% of GDP in the UK, but only 3.1% in France and 2.7% in Canada. Within the BRICS, the role of the internet is much smaller than in the developed world, especially Brazil (1.5% of GDP), Russia (0.8% of GDP) and South Africa (0.3% of GDP). Interestingly, within China (2.6% of GDP) and India (3.2% of GDP), foreign trade comprises between a third and half of the internet’s contribution to GDP.

At a more micro level, McKinsey surveyed more than 4800 small-to-medium-enterprises and other entrepreneurial activities, and found that those companies that are utilizing the Web grew more than twice as fast as those with a minimal Web presence.

This applies across all sectors of the economy, including manufacturing.

Furthermore, internet-friendly companies created more than twice the number of jobs as companies that don’t make use of the internet. While some jobs have been lost by the growth of the internet, many more have been created including jobs directly linked to the development of the internet, such as software engineers and on-line marketers, but also more traditional jobs such as logistics to deliver online purchases.

MISSING OUT ON A GROWTH OPPORTUNITY

It is clear from the prevailing global research that South Africa is missing out on a major growth opportunity. This is highlighted by the country’s low level of internet penetration as well as the slow speed of connection.

Building an extensive Broadband capability in South Africa would provide many small businesses with a more effective way of competing with larger and more established businesses. It could also create many job opportunities for the youth as well as provide numerous emerging entrepreneurs with a platform to launch their business initiatives.

Tagged with: , ,
Posted in News, Press Room

Subscribe to Our Newsletter



The investment objective of the STANLIB Global Property Feeder Fund is to maximise long term total return, both capital and income growth.