The internet has profoundly shaped modern society. It facilitates interconnectivity between individuals and information and has an important impact on society, the economy and culture. It is high time we started examining how the internet is shaping the Maltese economy and society.

It started off as a tool for improving communications but has transformed into a ubiquitous technology supporting all sectors of the economy. In fact, the internet is now widely considered a fundamental infrastructure in much the same way as electricity, water and transportation networks. To evoke the key economic role that the internet has gained in recent years, the term “internet economy” has become a widely used expression.

Even though policy makers and politicians are aware of the internet’s economic importance, there is no widely accepted methodology worldwide for assigning an economic value to it. Policy makers regard broadband and mobile data networks as platforms for innovation and development. A recent study by British regulator Ofcom showed that the UK government has to fund broadband rollout, because leaving broadband delivery to private interests and the market will not achieve the results the government would like to achieve in the interests of its citizens and businesses.

Given the growing importance of the internet as a policy tool, the question of the value of the internet economy becomes particularly relevant. An illustration of this is the case of Malta, where internet access was heavily disrupted for a day in the summer of 2008. This leads us to question the economic consequences of such a service disruption and consequently about the economic dimension of the internet economy.

The Organisation for Economic Coordination and Development (OECD) defines the internet economy as “the full range of our economic, social and cultural activities supported by the internet and related information and communication technologies”. In economics, this is referred to as a General Purpose Technology (GPT) and corresponds to other phenomena such as electricity.

Economists at OECD came up with several approaches at looking at the broad universe of the internet economy. These involved measuring: 1) direct impact, 2) dynamic impact and 3) indirect impact.

 

Direct Impact

This is the most conservative approach and relies mainly on official data. It groups studies that measure the size of the internet economy expressed as part of the GDP. This approach attempts to measure the share of the GDP value added that is generated by internet-related activities and includes value added generated by:

 

·        Activities supporting the internet (eg ISPs, internet equipment manufacturers, etc.)

·        Activity purely based on internet (eg search engines, e-commerce services, etc.)

 

There are a few results based on the direct impact approach and below is a summary of a few OECD countries:

 

STUDY

COUNTRY

Estimated internet-related value added

(% of GDP)

Boston Consulting Group (BCG)

United Kingdom

7.2%

BCG

Sweden

6.6%

BCG

Hong Kong

5.9%

BCG

Denmark

5.8%

BCG

Netherlands

4.4%

BCG

Czech Republic

3.6%

BCG

Poland

2.7%

BCG

Spain

2.2%

BCG

Italy

1.9%

Deloitte

Australia

3.6%

 

Dynamic Approach

The dynamic approach to measuring the impact of the internet examines the net share of additional GDP that is generated by all internet-related activities across the economy. This is done by looking at the statistical relationship between measures of internet development and economic variables such as GDP growth or employment. The scope of studies that follows this approach includes the effects that the internet has on the productivity and profitability of firms. Consequently, these studies evaluate the contribution of the internet to the net growth of the economy as measured by official statistics.

 

There are many studies related to this approach, of which a famous one is the UNCTAD study on the impact of the internet on the gas and oil extraction industry. This study highlighted how the internet and its applications is an important tool that has become an essential element for various activities in these sectors for companies such as BP, Royal Dutch Shell, China National Petroleum and Gazprom. Internet solutions facilitated collaboration among teams working in different remote areas, and created a foundation for business intelligence applications and stronger content management.

 

Indirect Approach

This approach looks at the economic impact of the internet that reaches beyond GDP. It studies two main impact areas:

 

·        The impact of the internet on consumer surplus, and

·        The broader welfare gains generated thanks to the internet (eg impact on the environment, social capital formulation, governance transparency, education, health, etc.)

 

Consumer surplus generated through consumption of goods and services can be offered through 1) activities supporting the internet, 2) activities purely based on the internet and 3) activities as a result of the internet.

Apart from the effects of the internet on the consumer surplus, other impact areas are the broader, society-wide effects caused by the internet. Examples include the myriad effects that the internet has on the environment, education, scientific research, governance, social capital, health, ageing, science and so forth. The internet enables solutions that could have a significant positive impact on the environment. This broad impact is captured by the term “Green ICT” that in turn encompasses various solutions such as smart grids, smart buildings, smart cities and so forth. 

The majority of households with residential internet services among OECD countries now have broadband connection. How much new economic value has resulted from the transition to broadband internet? This is often referred to as “broadband bonus” and some of the estimates from 2007 to 2010 for some countries expressed in millions of US dollars (US$M) as well as the Compound Annual Growth Rate (CAGR) are presented in the table below:

 

COUNTRY

2007

US$M

2008

US$M

2009

US$M

2010 US$M

CAGR

Australia

4184

4550

4231

4583

21.7%

Austria

1189

1568

1560

1588

15.3%

Canada

5302

5560

5641

6536

9.8%

Luxembourg

135

160

167

173

18.6%

Switzerland

1542

1766

1899

2095

17.4%

UK

8057

8466

7595

8040

9.4%

USA

35341

37444

39890

39789

7.1%

Source: Greenstein and McDevitt

 

These results conform to expectations, as there is a positive correspondence between GDP and broadband bonus amongst OECD countries.

 

Conclusion

The internet has become a ubiquitous, economic infrastructure. Governments around the globe, including the Maltese government, have mapped – or are in the process of mapping – out strategies for a digital economy. It is thus imperative to come up with methodologies to actually measure the internet economy and include these methodologies as an integral part of the digital economy strategy. Coming up with strategies, implementing them and then not having any economic measuring indicators would be self-defeating.