Growing digital divide threatens recovery from Covid-19

By Richard Porter of EBRD

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• EBRD Transition Report 2021-22 highlights growing gaps in the use of online services and digital skills since the start of the Covid-19 pandemic
• Investment returns on digital services are far higher in economies with greater digital skills
• A “brain drain” of digitally skilled workers is affecting some countries’ prospects

A growing digital divide is emerging as a major threat to a robust recovery from the Covid-19 pandemic, according to new research by the European Bank for Reconstruction and Development (EBRD).

The Bank’s Transition Report 2021-22 ‒ System Upgrade: Delivering the Digital Dividend reveals the increasing gap between economies that have stepped up their use of online and digital services and those that have fallen further behind.

The report focuses on the 38 economies in which the EBRD invests. The Bank

found that, since the start of the pandemic, people who are wealthier, living in cities and more advanced economies are better able to order goods and services online, do their banking through the internet and work from home. Elsewhere, large parts of the population remain excluded from these opportunities and are more at risk of losing their jobs as digital technology becomes more widely used. Furthermore, many economies in the EBRD regions are experiencing significant “brain drain”, as people with strong digital skills move abroad.

While highlighting the digital divide, the report also shows how much progress has been made on the provision and use of digital and online services since the start of the Covid-19 crisis.

EBRD Chief Economist Beata Javorcik said: “In many countries, large parts of the economy, as well as schools and universities, went online in a matter of days when the Covid-19 pandemic hit. The digitalisation process is destined to continue and will remain one of the key forces shaping our world. Yet there are large digital divides between the EBRD regions and the advanced economies, between the various economies in the EBRD regions and within individual economies. Addressing these divisions is vital to their success.”

Helping countries and clients with their transition to digital technology is one of three strategic priorities for the EBRD, along with tackling climate change and supporting economic inclusion. Later today, the EBRD is expecting to announce its new strategic approach on accelerating the digital transition setting out how it will use all the instruments at its disposal ‒ policy, investment and advisory activities ‒ to unleash the transformational power of digital technology in the economies where it invests.

A new index of digital transformation

The Transition Report 2021-22 introduces a new index of digital transformation as a way of assessing the divide between and within countries. In the economies where the EBRD operates, only Estonia scores in excess of the average of more developed economies. The index calculates a score based on 22 different measures of the availability and use of digital technologies.

Estonia’s index score of 92.2 is the highest in the EBRD regions. Turkmenistan’s is lowest, at 16.1, while Tajikistan’s is next, at 23.7. The quality of regulation and online access to government services is one of the main reasons for these low scores. Among other EBRD investee economies, Egypt, Tunisia and Morocco post low scores for digital skills, while Lithuania and Slovenia come in higher, alongside Estonia.

The key constraint on digital development is insufficient skills. There is evidence that more educated people in the EBRD regions have been improving their digital skills, catching up with the most developed nations. However, older people and those with lower levels of education and income are increasingly being left behind.

This is having an increasing impact as digital technologies are used more widely in all industries. Occupations that are more exposed to automation through the use of artificial intelligence have seen more job losses.  Workers with fewer digital skills find it harder to adapt to new roles that become available.

The report also looks at the effect on economies and on financial services of investing in digital technologies.

On investment, it finds that the returns on digital-intensive capital are significantly higher in economies with stronger digital skills. A case study looking at high-speed broadband in Turkey shows that firms with better connectivity are more likely to export and introduce new products. In Russia, smaller firms have increased staff numbers by about 19 per cent, on average, following the roll-out of 4G mobile technology.

Access to financial services for households and small businesses has been improved by the growth of digital finance. However, at the same time, banks have been reducing the number of physical branches. And while some alternative finance platforms have emerged, they have been primarily focussed on debt rather than equity funding – unlike some more developed markets.

Beata Javorcik said: “The future is digital, and our task is to deliver the digital dividend as quickly and smoothly as possible. I firmly believe that with the right kind of digital transition, the economies of the EBRD regions will enjoy increased prosperity, better social outcomes and greater environmental sustainability.”

Lack of trust and low levels of digital skill constrain remote working