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Vrije Universiteit Brussels

If Internet was Cheap in Africa.

Would this be a Blessing or a Curse?

Kelvin Malupande
Promotor: Prof. Dr. Eddy Vandijck

Submitted in partial fulfilment of the requirement for

Master na Master in Business Information

Academic Year, 2005-2006

Brussels, Belgium

I would like to thank my supervisor, Prof. Dr. Eddy Vandijck (Dean Faculty of
Economic, Social and Political Sciences and Solvay Management School) for being so
easy to work with. I would also like to thank Dr. Dirk Kenis for the endless guidance he
gave me in choosing my dissertation topic which was not an easy task. I would like to
thank my wife Martha Malupande for the moral support she gave me during my
dissertation writing and finally the whole 2006 BIM (Business Information Management)
class who made the academic year enjoyable.


The impact of cheap internet in Africa has both advantages and disadvantages. Whereas
cheap internet and its causal effect has posed a competitive threat to the monopolistic
incumbent Legacy Telephone operators in terms of cheap IP Telephony, it has also
positively affected the socio-economic growth of states that have fully exploited it. This
dissertation employed both the qualitative and quantitative methods to understand the
causal effects of cheap internet in Africa. Case studies of two countries in Africa, Niger
with the worst Digital Access Index (DAI=0.04) and Mauritius with the second best
Digital Access Index (DAI=0.62) in Africa after Seychelles were done. A direct
proportionality between DAI and internet penetration was assumed. It was deduced and
proved that countries recording higher internet penetration rates also exhibited sound
socio-economic growth in all sectors. Cheap internet and therefore high penetration rates
accelerate efficiency, effectiveness and accuracy in the use of factors of production.
Availability of cheap internet attracts Foreign Direct Investment (FDI), which increases
economic growth, which further attracts more ICT infrastructure build up. It becomes a
virtuous cycle. Countries with the worst ICT infrastructure are apparently among the
poorest in the world. Thus if Africa had cheap internet, it would be guaranteed a sound
economic growth as the advantages outweigh the disadvantages.

Table of Contents

1. Introduction..................................................................................................................... 1
2. Africa on the World Telecom Scale................................................................................ 4
2.1 World Telecommunications infrastructure ............................................................... 4
2.2 African Telecom network ......................................................................................... 6
2.2.1 VSAT networks in Africa .................................................................................. 7
2.2.2 Fibre networks ................................................................................................... 8
2.2.3 Internet Exchange Points ................................................................................. 11 IXPs Cost Savings................................................................................. 12
2.3 African Internet Connectivity Evolution ................................................................ 13
2.3.1 African Internet Connectivity Status ............................................................... 13
2.3.2 The vicious Circle ............................................................................................ 17
2.3.3 Internet Service Provider (ISP) Competition................................................... 18
2.4 The Internet Virtuous circle .................................................................................... 19
3.0 The indirect economic and developmental impact of Internet and ICTs.................... 21
3.1 VOIP –A disruptive Technology ............................................................................ 23
3.2 Development Accounting ....................................................................................... 25
3.2.1 Cheap Internet effects on factor of production Labor...................................... 26 Advantages of Internet on Collaborative Brain Power ......................... 26 Disadvantages of Internet on Collaborative Brain and Manual Power. 28 Loss of brain power competitive advantage ...................................... 28 Loss of Manual power competitive advantage................................... 29
3.3 Cheap Internet effects on factor of production Capital........................................... 29
3.4 Cheap Internet and Development Accounting Efficiency ...................................... 30
3.5 Foreign Direct Investment (FDI) ............................................................................ 31
3.6 Causal Relationship between Information and Communication Technology and
Foreign Direct Investment ............................................................................................ 35
4.0 Internet –A must have enabler for E-Services ............................................................ 36
4.1 ITU Digital Access Index: World’s First Global ICT Ranking.............................. 38
4.2 ICT causal effects on economic impact: Country Case Study (Mauritius) ............ 39

4.3 ICT causal effects on economic impact: Country Case Study (Niger)................... 41
4.4 Economic Patterns of Mauritius and Niger and causal effect on ICT .................... 41
5 Conclusions.................................................................................................................... 45
Bibliography and References............................................................................................ 48

List of Figures
List of figures in Chapter 2
Figure 2. 1 Telecommunication infrastructures by region.................................................. 5
Figure 2. 2 Typical VSAT Installation ............................................................................... 7
Figure 2. 3 Current and Proposed fiber network................................................................. 9
Figure 2. 4 Estimated Internet Users in African Countries and percentage growth ......... 14
Figure 2. 5 Estimated Internet Users (World) and percentage growth ............................. 14
Figure 2. 6 Internet connectivity status map.................................................................... 15
Figure 2. 7 African insignificant contributions................................................................ 16
Figure 2. 8 The Internet Vicious Cycle............................................................................ 18
Figure 2. 9 Internet Virtuous Cycle ................................................................................. 20
List of Figures in Chapter 3
Figure 3. 1 Telecommunication Service Revenues on the rise......................................... 22
Figure 3. 2 Annual averages of FDI inflows.................................................................... 34
List of figures in Chapter 4
Figure 4. 1 The impacts of ICTs on social development: inputs, outputs and outcomes 37
Figure 4. 2 Highlights of Digital Access Index (DAI), 2002........................................... 39
Figure 4. 3 Lowest DAI in the world............................................................................... 39
Figure 4. 4 Map of Mauritius Connecting to the SAFE Submarine cable....................... 40
Figure 4. 5 Map of Niger-Land Locked Country............................................................. 41
Figure 4. 6 The World Development Indicators (Mauritius versus Niger)...................... 42
Figure 4. 7 Mauritius economic indicators ...................................................................... 43
Figure 4. 8 Niger economic indicators............................................................................. 44

List of Tables
Table 1 Typical Equipment costs of a VSAT Installation .................................................. 7
Table 2 Local versus International bandwidth comparisons........................................... 12
List of Maps
Map 1 Internet Exchange Points (IXP) in 2004................................................................ 11

1. Introduction

There are many pros and cons of having cheap internet in Africa. According to wikipedia
encyclopedia, Internet or simply the Net is the publicly accessible worldwide system of
interconnected computer networks that transmit data by packet switching using a
standardized Internet Protocol (IP). It is made up of thousands of smaller commercial,
academic, domestic, and government networks. It carries various information and
services, such as electronic mail, online chat, and the interlinked Web pages and other
documents of the World Wide Web. The saying “It’s a small world” has been heard
world over. Internet has indeed made the world smaller and brought people closer, of
course not physically but in a virtual sense.

One can not ignore the communication advantages that cheap internet would bring to
Africa. On the other hand, we expect damage to be incurred just like any other new
technology does. World changing advances in technology internet inclusive always bring
some predictions of doom, but one can stop progress. Some new companies will be born,
old ones will either die or evolve. It is clear that the inter-mediation business units will be
done away with in most cases. The Internet revolution has touched practically every
aspect of our private and professional lives. There is no doubt that its effects will grow,
whether positive or negative this is subjective to ones position in the value chain.

According to Tony Hallett, (2005), Communication costs particularly voice will reduce
because of competition from the ubiquitous Voice over IP (VoIP), a value added service
of internet. This implies a threat to the incumbent legacy landline and mobile operators
who might lose their only loyal subscribers who have stuck with them merely because
they have no alternative. In as much as VoIP is an affordable alternative for the
subscriber, it will call for a complete re-engineering of the business strategies on the part
of the operators. They have to reduce their service charges to compete favorably or they
have to adopt the new VoIP technology and invest in it. Are the African telephone
operators ready to allow this competition? It is not a question of whether internet will be
cheaper; it is a question of when.

Societies are becoming more inter-connected. Thoughts from different cultures are shared
through the use of Internet chat rooms and web postings. Study results also track the most
popular uses of the Internet: “The year 2005 study shows that e-mail is the top task
conducted online, followed by general surfing, reading News, shopping, and seeking
entertainment News.” (Chang Joshua (2005)) It can be summarized that the Internet is
now being used for common, everyday tasks that would have normally taken more time
to complete. Information availability will explode even further and education will be
available to remote areas.

Trade via Internet will rapidly increase. The market will expand and be easier to reach.
Africa can benefit highly from cheap internet as online shopping will bring along the
following advantages (Ken Austin):
 Most people can generally find what they are looking for online just as easy if not
easier than finding it at the local department store.
 Variety is more diverse since the market is global and not local.
 Prices are sometimes negotiable online since the products might be sold by
individuals or auctions.
 Items are more generally lower priced due to the high percentage of auctions and
discount sites.

On the contrary, Ken Austin argues that the following disadvantages should be taken note
 Shipping costs occur 90% of the time, sometimes bringing the discounted price
back up to the normal price of the same item found locally at a department store.
 Descriptions on bid sites and online auctions may not be accurate. Sometimes
sellers will talk up their item in order to sell it.
 Refunds are not as accessible and may not always be possible when conducting
online shopping.
 Payment devices may not be secure, allowing access to more people than simply
the seller, or abused access by the seller.

Internet shopping can be very useful and very convenient; however the issue of fraud and
security on the African market need to be revisited before fully embracing this

Decentralization of the work place may even eventually reduce or eliminate rush-hour
traffic. But new problems will undoubtedly appear, some of which are already affecting
us like Internet security and privacy. New Internet rules and regulations. Unwanted data.
Terrorist propaganda. In as much as internet is used for good, you can use it for bad cause
as well. You will find things that will disturb you. From neo-Nazis to advocates of
violence to jailed criminals to pornographers, you are sure to run into images,
information, and ideas that you do not like on the internet. Free speech includes the
freedom to say things other people may not like.

Making internet cheaper and thus, increasing connectivity is seen as the first step to
bridging the digital divide. As Sir Donald Maitland (1984) stated in his report,
telecommunications play an important role in social and economic growth, and therefore
should be part of every development programme.

This dissertation will systematically seek to study the dynamics of having cheap internet
in Africa and the chapters have been split thus.

Chapter 2 discusses the general overview of the current state of ICT infrastructure in
Africa and how it ranks in the world and Chapter 3 explains in detail, the indirect
economic impact caused by cheap internet and ICTs.

Chapter 4 relates the famous recently launched Digital Access Index (DAI) a measure of
ICT usage in a state to the economic indicators in a given society. The better the DAI,
the better the economic indicators and then I conclude in Chapter 5.

2. Africa on the World Telecom Scale
2.1 World Telecommunications infrastructure

World Telecommunication/ICT Development Report (2006)1 stated that, by the end of

2004, the world telecommunication industry had experienced continuous growth, as well
as rapid progress in policy and technology development, resulting in an increasingly
competitive and networked world. While on average almost one out of three of the
world’s citizens is a mobile subscriber, there are major regional differences. Indeed,
despite the rapid growth in all of the world’s regions, and particularly in the developing
countries, major differences in penetration levels persist. In 2004, Europe’s mobile
penetration rate stood at 71 percent, almost twice the penetration rate of the Americas (43
percent), and nearly four times the penetration rate of Asia (19 percent). Europe had
almost eight times the penetration rate of Africa, where less than one out of ten people
subscribe to a mobile service (see below, Figure 2.1, top left). These figures certainly
highlight that access to, and use of, mobile services remain unevenly distributed between
regions and countries. At the same time, they highlight potential market opportunities and
new customers for operators whose revenues already – and despite high competition and
falling tariffs – are on the rise.

The statistics display Africa as being below the world average, a figure not favorable for
attracting foreign investments. Africa’s internet penetration as of 2004 stood at 2.6%
(with South Africa and North African countries dominating this statistic) and the world
average at 13.2%, about 4 times that of Africa. The current state of telecommunication is
poor and something ought to be done if Africa is to survive in this competitive
knowledge economy. South Africa and North Africa have really pushed the penetration
level substantially; otherwise the sub-Saharan figures remain extremely poor.

ITU, World Telecommunication/ ICT Report 2006, ‘Measuring ICT for Social and Economic

Figure 2. 1 Telecommunication infrastructures by region
Source: ITU World Telecommunication Indicators Database (top left and bottom charts)
and ITU adapted from (top right).

From the figures on the graph, the scenario in Africa still registers lower penetration
rates. By end of 2004, the vast majority of broadband users were in the developed world
and globally, Asia, Europe and the Americas represented no less than 99 percent of all
broadband subscribers. Africa is home to a fraction of all broadband subscribers, and
many African countries have not yet launched high-speed Internet services (Figure 2.1,
bottom right).

Citing the ITU Secretary-General, Yoshio Utsumi2 “At the moment, developing countries
wishing to connect to the global Internet backbone must pay for the full costs of the


international leased line to the country providing the hub. More than 90 per cent of
international IP connectivity passes through North America. Once a leased line is
established, traffic passes in both directions, benefiting the customers in the hub country
as well as the developing country, though the costs are primarily borne by the latter.
These higher costs are passed on to customers [in developing countries]. On the Internet,
the net cash flow is from the developing South to the developed North.”

2.2 African Telecom network

According to New Partnership for Africa’s Development (NEPAD)3 report, the current
telecommunications infrastructure in Africa has been stated as consisting of a
combination of radio Relay links, open wire lines, radiotelephone stations, fixed local
loop installations and substantial mobile cellular networks. The report also highlights that
in most African countries, mobile cellular networks have increased significantly over the
past few years to match the number of fixed lines.
For inter-state communications, satellite and microwave links are mostly used. Two
African organizations administer these networks: Regional African Satellite
Communication organization (RASCOM) and the Pan African Telecommunications
Union (PATU). It has been noted that even though, there is existence of these authorities,
about 90% of African traffic is routed through Europe. African states pay about $400
million every year to have calls to other African countries routed through Europe.4

Steering Committee Chairman: NEPAD Council ‘ Developing a fiber optic backbone for Africa’
Peter K Kenduiywo (2005), “Workshop on Information Society and Regulation: Access and
Infrastructure”, sponsored by Telkom Kenya

2.2.1 VSAT networks in Africa

In Africa, the connectivity issue often appears to be the nightmare. Where there is no
access to physical cabled infrastructure like telephone lines and fibre, Wireless in form of
VSat is employed. Satellites can bring high-speed duplex Internet links to any place on
earth. Thus, while current satellite coverage of Africa certainly offers room for
improvement as most hubs are in America or Europe, it can already deliver solutions,
though you have to pay a fortune. See table 1 below for an approximate cost for VSat

Table 1 Typical Equipment costs of a VSAT Installation

Source: Partnership for Higher Education in Africa

Figure 2. 2 Typical VSAT Installation

A typical VSat installation for one site costs in the range between $30,000-$5,000
thousand dollars ($30,000-$50,000)5. These costs are based on the use of the New Skies
Satellite NSS 7. It is only afforded by only a few companies heavily funded giving them
competitive advantage over the small emerging entrepreneur.

Africa is heavily dependent on Vsats.6 Find hereunder the main uses of the satellite
service: The main service providers are Intelsat and Panamsat. As more sea submarine
cables are being laid (ESSay, SAT-3, SAFE), dependency on satellites will minimise as
satellite have delay syndrome of 600ms because of latency. Here are a few examples of
satellite use in Africa:

 Dozens of ISPs across Africa having a satellite dish that gives their subscribers
direct access to the Internet backbone in Europe or America.
 A lot of lodges in the nice remote quite places also use satellite to connect to
the Internet.
 A number of African banks use satellites to quickly access data from foreign
banks and to check the validity of credit cards. They also use satellites to link
other remote branches. Sometimes Satellites are used for ATM machines
though there is a trade-off with speed.
 WAN (Wide Area Networks) have exploited satellites for internetworking and
collaboration between branches of companies.

2.2.2 Fibre networks

There are currently some fiber networks in Africa mainly along the western coast and the
southern tip of Africa. Some North African countries - Egypt, Tunisia and Algeria – are
catered for by one of the longest undersea fiber-optic cable: SEA/ME/WE-3 ("South East
Asia -Middle East Western Europe-3"). SEA-ME-WE-3 includes 39 landing points in


33 countries and 4 continents from Western Europe (including Germany, England and
France) to the Far East (including China, Japan and Singapore) and to Australia.
Maximum capacity of this two fiber pair cable is 505 Gbps.7 (see figure 2.3)

Figure 2. 3 Current and Proposed fiber network

Source: African Regional Conference for the WSIS Activities Report (2005)

North African nations are blessed with the SEA/ME/WE-3 ("South East Asia -Middle
East Western Europe-3") submarine cable and so is South Africa down on the tip which
is linked by probably the most successful African fiber network. It is a two segment
Submarine cable system; SAFE (South Africa - Far East) which links Malaysia and India
in the east to South Africa via Mauritius and Reunion and SAT-3/WASC (South Africa
Trans-Atlantic - West Africa Submarine Cable) which continues from South Africa to
Portugal and Spain in Europe with landings at a number of West and Southern African
Countries. The funding agreement for the project was signed in 1999 and President
Wade, one of the founding members of NEPAD, officially launched the networks in

Steering Committee Chairman: NEPAD Council ‘ Developing a fiber optic backbone for Africa’

Dakar in May 2002. The original capacity was 20 Gbps and is upgradeable to 120Gbps.
The 20Gbps is reportedly fully subscribed and is in the process of being upgraded to 40
Gbps. The submarine cables span a total of 28,000 km and connect the countries of
Portugal, Spain (Canary Islands), Senegal, Ghana, Benin, Cote D’Ivoire, Nigeria,
Cameroon, Gabon, Angola, South Africa, France (Reunion), Mauritius, India and

The ITU Africa Public & Private Sector Partnership Forum report (2004) 9also highlights
on how a consortium of East African telecommunication organizations that include
Tanzania Telecommunications, Telkom Kenya, Uganda Telecommunications, MTN and
Zantel and are discussing the development of the Eastern Africa submarine cable system
(EASSY). This is in an effort to complement SAT-3/SAFE/WASC and SEA-ME-WE3 to
complete a ring of undersea cables around Africa. This proposed African undersea cable
is planned to connect SAT-3 at Mutunzini in South Africa and SEA-ME-WE3 in
Djibouti. Other landing points will be in Maputo (Mozambique), Mahajanga
(Madagascar), Dar-es-Salaam (Tanzania), Mombassa (Kenya) and Mogadishu (Somalia).
Like the other cables already installed, EASSY will be a two pair fiber cable with a
proposed capacity of 16 or 32 -10Gbps wavelength or a maximum capacity of 320Gbps.

With all these developments, it is evident that sooner or later, internet is getting cheaper
as there will be too much supply.

Senior Research Scientist: Corning Incorporated ‘ Developing a fiber optic backbone for Africa’
The ITU Africa Public & Private Sector Partnership Forum report (2004)

2.2.3 Internet Exchange Points

There are currently ten national IXPs (Internet Exchange Points) in Africa: Democratic
Republic of Congo (DRC), Egypt, Kenya, Mozambique, Nigeria (Ibadan), Rwanda,
South Africa, Tanzania, Uganda and Zimbabwe (See map 1, IXPs in Africa). AfrISPA
has played a key role in setting up these exchanges with support from a variety of public
and private partners including the British aid ministry, DfID, and Cisco. However, a
number of other African countries are already holding preparatory discussions. If there is
a sufficiently high level of traffic to be exchanged at a local level then an IXP represents
a rational solution.10

Map 1 Internet Exchange Points (IXP) in 2004

Source: Network Startup Resource Center (at

IXPs solve problems of the following nature: “When an end user in Kenya sends an e-
mail to a correspondent in the USA it is the Kenyan ISP who is bearing the cost of the
international connectivity from Kenya to the USA. Conversely when an American end
user sends an e-mail to Kenya, it is still the Kenyan ISP who is bearing the cost of the
international connectivity, and ultimately the Kenyan end user who bears the brunt by
paying higher subscriptions.”

Discussion paper prepared for IDRC and ITU for the 2004 Global Symposium for Regulators

Worse still, when an African Internet user sends a message to a friend in the same city or
a nearby country, that data travels all the way to London or New York before going back
to that city or the nearby country. It has been estimated that this use of international
bandwidth for national or regional data costs Africa in the order of USD 400 million a
year. This situation has its parallel in telephony where it may be easier to route a call via
Europe or the United States to a neighboring Country than to do so directly.11

Therefore the intended effect of these IXPs is first to remove the need to route traffic
through North America or Europe between different African ISPs and different countries.
Secondly, acting together, African ISPs will have enough collective traffic to be able to
negotiate with carriers to peer traffic with the main Internet carriers, rather than buy
bandwidth. This will have the effect of halving costs because will pay for a half link (to
peer) rather than a full link (to interconnect via the peering facility in the US or Europe). IXPs Cost Savings

The underlying rationale for national IXPs producing cost savings is best illustrated by
comparing the costs of local and international bandwidth: (see table below)

Table 2 Local versus International bandwidth comparisons

Source: Telkom Kenya Bandwidth Tariffs December 2001.
It was observed that, before the Kenyan IXP (KIXP) was established; international
connectivity charges were nine times their equivalent local costs. Although there were
many market factors involved, within a very short time of the establishment of KIXP
international bandwidth rates in Kenya were reduced. However exchanging local traffic
through KIXP remains considerably cheaper than doing the same using international

Discussion paper prepared for IDRC and ITU for the 2004 Global Symposium for Regulators

2.3 African Internet Connectivity Evolution
2.3.1 African Internet Connectivity Status

Mike Chege (2002)12 estimated that, in Africa, each computer with an Internet or email
connection usually supports a range of three to five users. This put current estimates of
the total number of African Internet users at around 5-8 million, with about 1.5-2.5
million outside of North and South Africa. This is about 1 user for every 250-400 people,
compared to a world average of about one user for every 15 people, and a North
American and European average of about one in every 2 people. (The UNDP World
Development Report figures for other developing regions in 2000 were: 1 in 30 for Latin
America and the Caribbean, 1 in 250 for South Asia, 1 in 43 for East Asia, 1 in 166 for
the Arab States).
According to Claudia Sarrocco (2002)13, by 2000, almost all of the African states had a
direct connection to the global Internet. Nevertheless, the number of Internet users in
those countries remained extremely modest. In 2000, there were only about 580 000
estimated Internet users in Africa, representing less than one per cent of the population
and 0.16 per cent of global Internet users. The growth rate was also relatively low,
falling from 234 per cent in 1999 to just 56 per cent in 2000, not much higher than the
global growth rate, which had been assessed at 49 per cent. Refer to figures 2.4 and 2.5.

Mike Chege, (2002) , ‘The African Internet - A Status Report’
Dr Tim Kelly and Claudia Sarrocco (2002), ‘Improving IP connectivity in the Least Developed
countries’(Strategy and Policy Unit (SPU-ITU)




400 281%

230% 234%



1995 1996 1997 1998 1999 2000
Estimate Users LDCs (Total) 2'010 10'934 41'625 111'205 370'950 578'250
% Growth 230% 444% 281% 167% 234% 56%

Figure 2. 4 Estimated Internet Users in African Countries and percentage growth

Source: ITU World Telecommunication Indicators (2001)




200'000 70%



1995 1996 1997 1998 1999 2000
Estimate Users World 34'283'397 58'205'652 95'476'710 154'521'409 242'259'527 360'374'519
% Growth 116% 70% 64% 62% 57% 49%

Figure 2. 5 Estimated Internet Users (World) and percentage growth

Source: ITU World Telecommunication Indicators (2001)

The recent Telegeography report (2005) classified Africa as having a meager less than 1
Mbps of International Bandwidth Per Capita.

Figure 2. 6 Internet connectivity status map

Another research study by Telegeography (2004)14 reported on how the Internet

bandwidth connected to African countries grew by 67% in 2003. Despite this growth,
Africa’s share of global Internet capacity remained virtually unchanged at 0.2%. Over
half of Africa’s international Internet capacity is connected to Europe.

Telegeography (2004), “Telegeography's Global Internet Geography 2004”

Figure 2. 7 African insignificant contributions

Source: Telegeography Global Internet Geography 2004

According to Figure 2.7, the percentage of African contribution to interregional

bandwidth is too insignificant to appear on the figure and hence has been added to the
category other to aggregate with other developing states. Africa’s bandwidth deficit is no
secret. Despite 67% growth of international Internet capacity in 2003, Africa’s share of
global Internet capacity remained virtually unchanged at 0.2%. While Africa’s bandwidth
supply is clearly expanding, the rest of world’s Internet capacity is growing at a faster
rate. In 2003, Europe emerged as Africa’s top hub, with its share of the region’s
international IP connectivity hovering around 53%. The bulk of this capacity connects to
North Africa, which is served by several high-capacity submarine links to Europe. In
addition, the deployment of the SAT-3/WASC submarine cable has increased Europe’s
role in sub-Saharan Africa. North America, which in 2000 connected as much as 72% of
Africa’s backbone capacity, now accounts for only a third of the region’s connectivity.

2.3.2 The vicious Circle

The internet statistics in Africa suggests the existence of certain bottlenecks that are
affecting development, notably the

 lack of infrastructure

 unfavorable regulatory environment

 high pricing

 Lack of expertise

 And uncompetitive market structure.

These elements together form what can be called a “vicious circle”, which cannot be
broken without decisive intervention on one or more of the above-mentioned elements.
Figure 2.8 depicts a vicious circle scenario where internet is expensive. It all starts with
high connectivity charges on the part of ISP (Internet Service Providers) exacerbated by
low international internet connectivity. ISPs are in business and they want profit for every
dollar of investment. When internet costs are high, there is less demand of internet
services, and subsequently little or no investor interest. If there are no investors, there is
little development in infrastructure and internet growth stagnates.

No growth in Internet No exploitation of
infrastructure, connectivity economies of scale
limited Low bargaining
Internet power of ISPs
Lack of competition
Little High
interest of connectivity
private charges for
investors ISPs

Low demand
of Internet High end-user
services charges

Figure 2. 8 The Internet Vicious Cycle

Source: ITU IP Connectivity Project

2.3.3 Internet Service Provider (ISP) Competition

Competition is an important driver for economic growth, lower prices and better quality
(Van Bergeijk and Verkoulen, 2003)15. Competition can be seen as a mechanism or
instrument that contributes to the allocative and dynamic efficiency in the economy that
have positive welfare effects. The level or intensity of competition mostly fluctuates in
time and also shows variations in different industries.

Competition in most African ISP industry is very minimal. The African ISPs acquire
expensive bandwidth from Europe at very high prices and as such, the industry is not
very attractive to the other would be service providers and thus there is minimal
competition. It is only the government funded business units that can afford to invest in
such ventures. And when they invest, they make sure they use the influence of
government regulatory policies to block any entry into the industry. This situation forfeits

Bergeijk van and M. Verkoulen (2003),’ Economic Statistics’, 18 april 2003, pp. 172-175

the very fundamental principle of free market economy that encourages competition,
which brings about quality service delivery and at affordable prices. The vicious cycle
goes on and on. The incumbent service providers realize that the longer they keep the
growth of internet industry stagnant, the more profit margins they accrue from the
expensive premiums they wreck in from the poor subscriber who has no alternative.
According to Michael Porter the state of competition in an industry depends on 5 basic

o bargaining power of suppliers

o bargaining power of buyers

o threat of new entrants into the industry segments

o threat of substitute products or services

o positioning of traditional intra industry rivals

From figure 2.8 analysis of the cycle, it can be deduced that the bargaining power of the
buyers (both the ISP buying bandwidth from supplier-Europe and selling to the poor end
user who bears all the cost) is limited. Subscribers have no bargaining power and they are
exploited in the end. Whereas this situation is disadvantage to the buyer or end internet
user, it is on the converse good for the few ISPs as they are enjoying monopoly. There is
no threat for new entrants into the industry as the government has put up policies that
cushion them from competition.

2.4 The Internet Virtuous circle

On the contrary, when there is competition accelerated by liberalization of the internet

market, low internet costs are guaranteed because there is high supply of the service. Low
internet costs encourage high demand on the part of the internet user. With high demand,
investor interest is stimulated and of course this has the long term benefit of higher,
reliable international internet connectivity infrastructure being put up. In the end there is
more supply of bandwidth, which further reduces the wholesale internet pricing and

subsequently this trickles down to the end users. Another benefit of the virtuous cycle is
that the internet user has the bargaining power to negotiate pricing as there are a lot of
alternatives to pick from.
ITU IP Connectivity Project

Higher Liberalisation
international of the Internet
Internet connectivity market

Interest in investing Lower costs

Market growth
Bargaining power
of ISPs

Economies of scale

Figure 2. 9 Internet Virtuous Cycle

Source: ITU IP Connectivity Project

From the statistics analyzed on the bandwidth volumes in Africa, it is true to classify
Africa as experiencing the vicious cycle. To claim that the vicious cycle and thus
expensive internet is disadvantageous for the African society would raise a lot of dust and
concern from the incumbent established ISPs in Africa. The profit margins in this
scenario are favorable as there is no competition unlike when the internet is cheap. With
cheap internet, competition creeps in and profit margins are reduced and you have to
deliver better service levels to retain the same market share. Generally the benefits of
cheap internet would not probably be realized and appreciated by the service providers
but by the end user and general populace of a society through the following:

 e-learning

 e-government

 e-commerce

 knowledge sharing

 pc-banking

In the two Internet antagonistic cycle figure 2.8 and figure 2.9, any of the influencing
factors can be changed by government policies depending on whether that government is
trying to encourage free market liberalization and encourage the private sector investment
or on the one hand government can impend internet liberalization with the view to having
complete monopoly and avoid competition.
Bearing in mind that Internet connectivity is a fundamental factor determining Internet
access and use, it seems feasible to promote Internet growth in the African market and
overturn the current trend by increasing international Internet connectivity. The benefits
to be realized outweigh the disadvantages.

3.0 The indirect economic and developmental impact of

Internet and ICTs

Telecommunication Services revenues have continued to grow everywhere in the world.

Most notable is the contribution by ICT towards GDP in Africa. Worldwide, the ITU
Report (2006)16 estimates that telecommunication service revenues have more than
doubled, from US$ 517 to US$ 1’216 billion over the last ten years (Figure 3.1, left). As
a result, total telecommunication revenues have substantially increased as a percentage of
GDP in Africa, Oceania and Asia and have remained stable in Europe and the Americas.
Africa is the region where telecommunication service revenues as a percentage of GDP
have grown fastest. Today, they represent almost five percent of GDP in Africa,

ITU 2006,’ Measuring ICT for Social and Economic Development’, WORLD

compared to 4.5 percent in Oceania, 3.8 percent in Asia, 3.3 percent in Europe and 2.9
percent in the Americas. This highlights the importance of the telecommunication sector
for the African economy, see (Figure 3.1, right).

Figure 3. 1 Telecommunication Service Revenues on the rise

Source: ITU World Telecommunication Indicators Database.

With all this evidence and statistics, one can not over emphasize the importance of
making internet cheaper especially in Africa. It is looks like, making internet cheaper,
will further raise the contributions of Internet and ICT towards GPD and economic
development. But the internet brings along (VOIP) Voice over IP, or what is termed
internet telephony. “Voice over Internet Protocol” (VoIP) is a generic term referring to
a technical standard that enables the transmission of voice traffic in whole or in part, over
one or more network (internet), which uses the Internet Protocol (IP).

3.1 VOIP –A disruptive Technology

There can never be VOIP without internet. VOIP is a by product of internet and therefore
making internet cheaper subsequently leads to cheap VOIP. All the current market
indications show that IP networks and services like Voice over Internet Protocol (VoIP)
will replace traditional PSTN networks and services. ITU expects that by 2008, at least
50 percent of international minutes will be carried on IP networks and that many carriers
will have all-IP networks. Recent trends are certainly headed in this direction.17 If
internet will encourage VOIP, then it will be received with mixed feelings. Even though
VOIP being part of ICT will also contribute towards the economic growth and GDP, it is
a threat to the incumbent traditional telecommunication companies offering legacy
telephony. Voice over Internet Protocol (VoIP) is generally viewed as a “disruptive

Generally, Regulators in Africa have been reluctant to legalize the threatening VoIP, in
an attempt to protect the revenue sourced from the incumbent legacy fixed-line, and in
some cases, cellular mobile companies. In as much as number of the incumbent operators
complain loudly of the negative impact of the technology, a considerable number have
adopted a 'if you can't beat them, join them' attitude. You either exploit and deploy the
internet based VOIP or you give up the market share to the emerging VOIP

Tracey Cohen (2005)18, co-author of a report commissioned by the Commonwealth

Telecommunications Organization (CTO) titled “An overview of VoIP regulation in
Africa: policy responses and proposals” cited two Africa countries, Mauritius and South
Africa, that are using VoIP to realize economic and social objectives. He further
highlights that VoIP is part of Mauritius' action plan to drive a competitive regime in

ITU Strategy and Policy Unit News log (2005),’ VoIP and Regulation’ News related to SPU research
and analysis

Tracy Cohen and Russell Southwood for the CTO (2005),’An Overview of VoIP regulation in Africa:
policy responses and proposals’

international calling and make the nation an attractive BPO (business process
outsourcing) destination. In this scenario, we see the nation at policy level reaping the
benefits if internet was cheaper. The government has even allowed a number of
organizations to compete with the incumbent telecommunication company, Mauritius
Telecom. An element of this competition has come from licensed VoIP services.

According to the Tracey Cohen, on the other hand, South Africa is using VoIP to deliver
cheaper voice services to rural and under-served communities and that an extra mile was
taken in a 2001 amendment to the Telecommunications Act; the South African
government introduced a class of licenses to operate in geographic areas where
teledensity is less than 5 percent. The licensees are limited to small-business enterprises,
precluding established operators from accessing this market segment.

If internet was made cheaper and available subsequently leading to cheap VOIP, we will
see more and more users on the African continent turning to VoIP. In fact, Insight
Research estimates that in 2011, 76 percent of all outbound traffic on the African
continent will be VoIP19. Last year (2005), for example Insight Research team estimates
that of the 8.2 billion minutes of outbound calling, 4.7 billion will ride over a VoIP
network. This in itself is an advantage on the subscriber and the VOIP provider because
of the volumes of voice traffic but devastating to the incumbent telcos. Whether to claim
that cheap internet is a blessing or a curse to the continent of Africa depends on where
you are located on the value chain. If you are providing internet telephony, you celebrate,
otherwise you have to join the band wagon or close up. It seems there is going to be a
complete rebirth of companies. Old ones will close and pave way for the new ones based
on IP technology.


3.2 Development Accounting

Why are some countries so much richer than others? Francesco Caselli (2004)20 in his
paper claims that Development Accounting is a first-pass attempt at organizing the
answer around two proximate determinants: factors of production and efficiency. It
answers the question “how much of the cross-country income variance can be attributed
to differences in (physical and human) capital and how much to differences in the
efficiency with which capital is used?” The current consensus is that efficiency is at least
as important as capital (factors of production) in explaining income differences.

Conceptually, development accounting can be thought of as quantifying the relation-

Income =F (Factors, Efficiency). (1)

Income or rather economic development is a function of both factors of production and

associated utilization efficiencies. If efficiency is maximized, the cost of these factors of
production is reduced. Human beings receive salaries and wages in exchange for
providing businesses with the factors of production- the essential things needed to
produce goods and/ or services. Economists define factors of production as:
 Land
 Labor
 Capital
But in this paper, we are interested in the causal effects of internet and ICT on the
affected factor of production. It is evident and clear that internet can not in any way affect
land as a factor of production. On the contrary, it can easily be claimed that cheap
internet and ICT can adversely affect labor and capital inputs either in a positive way or

Francesco Caselli (2004),’ Accounting for Cross-Country Income Differences’ Draft: December 2004

The equation 1 models the fact that it is very important to understand that competitive
advantage of successful organizations is not only dependent on factors of production:
Land, Labor and Capital, but also on the efficiency with which they are harnessed.
Internet and web applications can help in the area of affecting the labor and capital
aspects. Africa has vast unused resources, but maybe the problem is lack of efficiency in
the use of the same. The internet can help in harnessing this much needed efficiency.

3.2.1 Cheap Internet effects on factor of production Labor

Tom Gorman (2003)21 defines labor as all human effort aimed at producing something or
performing a service for payment. The 21st centaury has revolutionized the way people
work and learn. The internet has had an impact on the labor aspect by providing free or
cheap and affordable training in the following areas:
 Distance learning
 E-learning
 Any web driven training tool
Critically analyzing Tom Gorman’s definition of labor as all human effort aimed at
producing something or performing a service for payment, we identify that generally,
man can offer this effort in two forms:
1. Brain Power
2. Manual Power with his physical body Advantages of Internet on Collaborative Brain Power

The internet has a great impact on item 1 (Brain Power) unlike on the manual aspect. It is
logically assumed that if you work in isolation, your output is limited to the knowledge
set you possess. On the converse, if you collaborate with other people in your industry,

Tom Gorman (2003),’The Complete Idiot's Guide to Economics’ Business & Economics, Page 104

through a medium, in this case internet, the limitation is reduced as the output is a sum
total of inputs from all the people subscribed into the collaborative team. This is what is
termed the efficient way of working. Gartner (2006)22 have identified the benefits of
internet collaboration and knowledge sharing through the following dimensions:
 Harnessing ideas.
 Working together effectively.
 Capitalizing on innovation.
 Knowledge sharing
 Expert systems
 Decision Support Systems
These are the priorities of today's leading enterprises. The building blocks that will help
every organization (Countries, Governments) succeed? How does the success come
about? The answer is simple, EFFICIENCY, according to Francesco Caselli (2004).
Portals, content management, collaboration and learning are what Africa needs to
efficiently utilize the innovation inherent in its resources. If internet were cheap, it would
be very easy to collaborate and produce world class goods and services prototypes. Africa
can benefit from knowledge sharing tools like:
 Communities of practice
 Internet Forums
 Chat Rooms to name but a few.
These tools and systems enhance efficiency and that is the prime desire in the
implementation of Knowledge support systems. One of the hard tasks in Knowledge
Management and Sharing is getting the requisite expertise located in different
organizations (that is, figuring out who has it on a subject by subject basis) and
convincing them to share their knowledge as either knowledge base like Frequently
Asked Questions (FAQ) or use Knowledge Management Systems. The Internet bridges
this hurdle. Nonetheless, tougher still is validating the credibility of the expertise
knowledge and this can be done using Content Management Systems (CMS) which
heavily depend on internet connectivity with other members of the organization. While

one creates the content, another person edits and yet another one authorizes. This is
efficient and productive. The internet is a vital part of this cycle. Disadvantages of Internet on Collaborative Brain and Manual Power Loss of brain power competitive advantage

It goes without saying, “Knowledge is Power”. He who has the knowledge has power and
Job Security? Are the experts ready to release their competitive advantage by sharing
their knowledge through the forums, knowledge bases and internet chat rooms? It is
generally known that employees who have spent a career lifetime enhancing their value
because they “know” something others don’t are logically reluctant to give away their
valuable expertise and. With this process of knowledge sharing through the internet, they
loose some or all of their value and hence their competitive advantage is reduced as
everyone knows what they know. Thanks to internet and who benefits? The person
learning or the person providing the knowledge? It is mostly unfair, when it is company
policy forcing you to post your most treasured brain power on the company web or
intranet (internet). The employer and the employee learning, benefit from the internet but
the person offering the knowledge; it is only they who can comment depending on how
secure they are with their job. Affording cheap internet in Africa can help in this regard
even if others are disadvantaged.

That is why plans to implement knowledge management and deliberate collaborative

knowledge sharing often require prior exercises and awareness campaigns in changing
corporate culture, moving knowledge workers and officers from a gatekeeper culture,
where knowledge is kept hidden and released only when it can enhance the employee’s
value, to a sharing culture, where knowledge sharing is encouraged and rewarded. It is
important to probably give incentives of some sort to employees who contribute to the
knowledge cycle. That will definitely inspire them to give out more than is needed.

28 Loss of Manual power competitive advantage

The Internet and Computers are just a handful of the technological marvels created over
the last few decades that have brought tremendous changes into our lives. Now we can
communicate with our families, friends and coworkers from anywhere at anytime just by
picking up a cell phone or connecting to the internet. Nonetheless, the internet is a labor
displacing technology. It brings along with it job losses. The jobs meant for human
beings are automated and thereby leading to job losses. A typical example is network
administration of an Exxon Mobil in Zambia from an administrator in Paris. The
administrator with his team in Paris are managing the Computer networks remotely via
internet technologies all over Exxon Mobil branches in Africa leaving the local African
IT personnel jobless. That is the evil of this internet technology. It actually brings
efficiency, productivity and profitability as labor costs are reduced and at the same time
displaces the physical manual labor. African people need the jobs and caution must be
taken as to how much cheap internet should be availed. Maybe regulatory policies can
check this but the fact is the advantages outweigh the disadvantages.

The introduction of new technology, computers and internet into production reduces the
amount of labor needed and lowers the cost of production, thereby increasing profits.
Maximizing profits and minimizing wages down is what counts, for investors that will be
attracted by cheap internet. For millions of workers, nonetheless, new technology in the
workplace leads only to harder work— except for the millions more tossed onto the
streets and into joblessness. That, however, is not what concerns the profit oriented
individual but value delivery at minimal costs even if it costs somebody’s job.

3.3 Cheap Internet effects on factor of production Capital

Capital includes factories and equipment, computers and tools, vehicles and roads-the
entire productive infrastructure and its individual components (Tom Gorman (2003)).
According to developmental accounting equation 1, efficiency in as far as capital is

concerned, would be enhanced in the following ways if there was available cheap internet
and ICT.
 The isolated computers would be networked, making it easy for several groups
with similar value interests collaborate and be efficient. The internet is the
ligaments that enable these groups collaborate and share knowledge.
 There are so many free shareware CAD, CAM tools on the internet that can kick
start the African entrepreneur to work efficiently. Study as modeled by Francesco
Caselli (2004) has shown that efficiency in the way the factors of production are
utilized differentiates the successful organizations and/or business from the failing
 Software development involves a team of collaborative knowledge workers
whose capital is knowledge. And the ability to create, process, store and
manipulate data on the web for software developers is a plus in itself. Microsoft
and Google Inc do not boast of their physical assets like building as capital, their
main capital is the knowledge workers who have to work innovatively in a
collaborative network.
Africa will benefit in the same way with cheap internet.

3.4 Cheap Internet and Development Accounting Efficiency

Citing the famous development accounting equation from Francesco Caselli (2004)
which proposes that the economic competitive advantage of an organization is a function
of both efficiency and factors of production thus:
Income = F (factors, efficiency)
It can be argued that if Africa embraced cheap internet, efficiency would be maximized.
Cheap internet would invite investors of VOIP (voice over IP) leading to cheap internet
telephony. This will dramatically reduce phone bills due to email, internet chatting and
collaborative knowledge sharing. Profit maximization demands a reduction in operating
costs and these accounts for most of the differences in economic growth between
developing and developed nations. Efficiency is what Africa needs as it has the resources.

3.5 Foreign Direct Investment (FDI)

If there is a little availability of official financial flows into a given community or society
for example Africa, it is important to encourage private financial flows within a well-
designed policy infrastructure that maximizes the contribution of private flows to national
development goals. One source of private capital flow, Foreign Direct Investment (FDI),
can play an important role in the overall development process, and in eventually meeting
the Millennium Development Goals of nations especially for Africa.

First and foremost, FDI is a source of capital accumulation, both physical capital and
human capital. As long as the FDI projects are well formulated and managed, their rate of
return will increase socio-economic growth, undoubtedly adding to the reduction of
unemployment, an indirect effect which is additional to the jobs created by FDI projects
themselves. Secondly, FDI can generate much-needed revenues for governments to spend
on nation-focused developmental infrastructure and services. These revenue effects are
both direct (through corporate taxes paid by the enterprises themselves as well as
revenues from FDI in the natural resource sectors) and indirect (when FDI raises
economic growth and therefore the economy’s total tax base). Hence, FDI can contribute
to the MDGs by reducing income-poverty (through its employment effect) and, via its
revenue effects, as a source of finance for public spending on human development,
particularly in the areas of basic health care, primary education and safety nets for the
poor ( Klein et al., 2001)23.

Benefits to be borne by FDI’s development in Africa are potentially strong, but whether
this potential is realized or not very much depends on the host country having a clear
vision of how FDI fits into its overall development strategy. Thus FDI can be harnessed
to diversify the economy thereby reducing over-dependence on a few commodity-based
economical-sectors; for instance by creating services and products that use the internet,

Klein, Michael, Carl Aaron and Bita Hadjmichael (2001), “Foreign Direct Investment and Poverty
Reduction”, New Horizons and Policy Challenges for Foreign Direct Investment in the 21 st Century

new information and communication technologies (ICTs) and Web Internet based
technologies thus:
 PC-Banking
 E-Commerce
 E-Government
 Telemedicine
 E-Learning
 E-games
 Collaborative Knowledge Sharing

Both Malaysia and Mauritius have successfully used FDI in this way, including public
investment in infrastructure, training, and skills to attract FDI into sectors which have
high-value added according to Tony Addison and George Mavrotas, 200424.

Like was discussed in the internet vicious cycle where expensive internet hinders
foreign investment into a society, expensive internet deters development of so many
value added benefits like VIOP (Voice Over IP), cellular mobile communications that
can use the internet for backbones linking several mobile GSM base stations. It is evident
that, if you want investors to flock into a society you have to avail a few factors of
production at a lower price to attract them. Cheap internet and subsequently cheap ICT is
one such factor of production that needs to be integrated into African government ICT
policy formulation.

If low wage levels were the main attraction for foreign investors, then Africa would
dominate vertical FDI, but in fact Africa receives very little FDI from the available
cheap labor. Instead, trained human capital and infrastructure are the main driving factors
for vertical FDI. Nonetheless, with cheap internet and thereafter cheap internet learning
facilities, the African human capital would be developed to a level that would attract FDI.
The quality of the host country’s human capital stock strongly influences FDI flows as

Tony Addison and George Mavrotas, 2004, ‘Foreign Direct Investment, Innovative Sources of
Development Finance and Domestic Resource Mobilization’

well as quality of the associated technology transfer (Keller 1996; Noorbakhsh et al.
2001; Saggi 2002)25. Large investments in education and training have enabled Malaysia,
Singapore, Taiwan (and now China) to move up the value-added ‘ladder’ from
manufacturing-intensive in unskilled labor. These countries have created highly effective
partnerships with foreign investors to import, use and develop high technology. This
Foreign Direct Investment was attracted by a deliberate infrastructural Internet and ICT

High quality ICT infrastructure and skills are now critical in integrating local producers
into international Business to Business networks, and in attracting vertical FDI in
services as well as manufacturing (Addison and Heshmati, 2004)26. Vertical FDI takes
place when the multinational fragments the production process internationally, locating
each stage of production in the country where it can be done at the least cost. Some
routine tasks such as customer support and data processing in financial services, as well
as higher value-added tasks such as design and product development together with
software Development, are examples that depend heavily on the collaborative work
culture that the internet and ICT has brought. Internet and ICT capacity also influences
horizontal FDI to produce manufactures and services for sale in the host country market,
particularly in large markets such as Brazil, China and India, where ICT is increasingly
used to manage supply chains (with greater efficiency and lower inventories reducing
business costs). Horizontal FDI occurs when the multinational undertakes the same
production activities in multiple countries. If Africa embraced policies encouraging cheap
internet, efficiency would be the talk of the day and productivity inevitable. Another
classical example is South Korean companies producing locally for the Indian consumer-
goods market who are heavy users of local ICT and internet.

Tony Addison & George Mavrotas (2004) postulate in their paper that Globalization’s
present wave encompasses a number of trends which should, in principle, be very

United Nations University (WIDER,2003),’ The New Global Determinants of FDI Flows to Developing
Tony Addison and George Mavrotas, 2004, ‘Foreign Direct Investment, Innovative Sources of
Development Finance and Domestic Resource Mobilization’

positive for FDI in developing countries. These include: the emergence of globally
integrated production and marketing networks; the associated reduction in transactions
costs arising out from the spread of information and communication technologies (ICTs)
held together by internet backbones. Updated statistics released from UNCTAD in the
World Investment Report (UNCTAD, 2003b) and the World Bank (Global Development
Finance 2003) undoubtedly suggests a downturn in FDI inflows to African nations as
compared to Asian and the South Americas who have heavily invested in Internet and
ICT technologies. (See figure 3.2). Africa needs to invest in internet to make it cheaper
and put up liberalization policies that will bring competition and subsequently bring
Foreign Direct Investment (DFI).

Figure 3. 2 Annual averages of FDI inflows

A very paramount issue is the role of infrastructure (Internet, ICT) for attracting FDI
inflows. ICTs have been classified as positive catalysts for FDI. The need for internet and
ICTs, and the way they are transforming the world, were confirmed with the UN’s
decision to hold the World Summit on the Information Society (WSIS). The resounding
success of both phases of the Summit (December 2003 in Geneva and November 2005 in
Tunis) further highlighted the magnitude of the topic. The final WSIS outcome
documents – the Tunis Commitment and the Tunis Agenda for the Information Society –
highlight the potential of ICTs in “improving the socio-economic development of all

human beings”. They also point to the “growing importance of the role of ICTs, not only
as a medium of communication, but also as a development enabler, and as a tool for the
achievement of the internationally-agreed development goals and objectives, including
the Millennium Development Goals (MDGs)”. A recent UNCTAD survey of the
executives of multinational corporations (UNCTAD, 2000)27 suggests that the state of
(physical) infrastructure is one of the key inhibiting factors for undertaking FDI projects
in Africa, along with limited access to finance, high administrative costs (inefficiencies
caused by lack of internet and ICT), the tax regime, poor access to global markets, low
level of skills and the regulatory and legal framework governing FDI among others.
These disadvantages to foreign investment more than offset the low price of labor in

3.6 Causal Relationship between Information and Communication

Technology and Foreign Direct Investment

Heshmati et al., (2006) highlighted in their research that there is a simultaneous causal
relationship between investments in internet, information and communication technology
(ICT) and flows of foreign direct investment (FDI), with reference to its implications on
economic growth. For their empirical analysis, data from 23 major countries with
heterogeneous economic development for the period 1976–99 was used. Their causality
test results suggested that there is a causal relationship from ICT to FDI in developed
countries, which means that a higher level of ICT investment leads to an increase inflow
of FDI. Internet which is part of ICT may contribute to economic growth indirectly by
attracting more FDI.

There is vast amount of case studies that demonstrate that Foreign Direct Investment
(FDI) has made a positive contribution to the economic growth of developing countries.
Some recent examples are Marwah and Klein (1998) for India, Li, Liu and Rebelo
(1998), Sun (1998) and Liu (2002) for China, Ramirez (2000)for Mexico, Lim and

UNCTAD World Investment Report 2000. New York: UN, July 2000.

McAleer (2002) for Singapore, Marwah and Tavakoli (2004)for Indonesia, Malaysia, the
Philippines and Thailand. Borensztein, Gregorio and Lee (1998) and Makki and
Somwaru (2004) are also among the cross-country studies which recorded positive
impacts of FDI on economic growth in developing countries.

4.0 Internet –A must have enabler for E-Services

The Internet is the world’s biggest computer network, connecting millions of people and
organizations in our “global information society”. Behind the scenes on the internet, there
is hardware sending data from place to place and software that glues the system together.
The internet has brought with it E-Services. E-services are distributed services that are
accessible via the Internet through Uniform Resource Locators (URLs)28.With this broad
definition, any object that can be invoked using Internet protocols qualifies as an e-
service. From this definition we identify the following as part of E-Services.
 E-Commerce
 E-Education
 E-Government
 E-Business
 E-Health
 E-Banking
Is as much as it is not easy to measure the impact of E-Services and ICTs in the area of
governance, health environment, education and any Internet enabled work (Process), the
repercussions that information and communication technologies are having in these
sectors are real and a number of studies and surveys have produced some concrete
results. See figure 4.1 for ICT impact on socio-economic-development.

Akhil and Vijay,” Enabling of the Ubiquitous e-service Vision on the Internet”, E-Service Journal (2001)
HP Laboratories

Figure 4. 1 The impacts of ICTs on social development: inputs, outputs and outcomes
Source: ITU

Figure 4.1 clearly portrays how inputs in an ICT environment are efficiently utilized to
produce outputs and subsequently outcomes. Efficiency is the buzz word.

To have these highly efficient services, you need reliable internet infrastructure. Does
Africa have the internet infrastructure to carry these services? Far from it. No wonder it
would be a blessing if Africa had cheap internet. It can never be over-emphasized how
much cheap internet is needed on the African continent. The internet is so versatile being
applied in almost every facet of our daily life. It supports the Data, Information and
Knowledge capture and transfer from one point to another. In almost every value related
working process, there are work flows to be followed and internet is better exploited for
these tasks. For instance, with e-government, the internet facilitates efficiency by
supporting the right person at the right time with the right information in the right format
on the right medium. Content Management and collaborative Systems have really
exploited the internet in that direction of harnessing efficiency.

To analyze the impact of cheap internet on the African continent, case studies of two
antagonistic countries in terms of internet penetration will be made. One will be based on
a country that has seen high internet penetration rate and another on a country that has
lowest African ICT ranking. The assumption made herein is that the internet penetration
is directly proportional to the 2003 newly launched ICT benchmarking Digital Access
index (DAI)29. The economic indicators between these two countries will be compared
and a causal relationship between high internet penetration rates and social –economic
impact will be deduced.

4.1 ITU Digital Access Index: World’s First Global ICT Ranking

The Digital Access Index (DAI) was launched in 2003 by the Marketing, Economics and
Finance Unit of the ITU. It is a new index, which measures the overall ability of
individuals in a country to access and use new ICTs. The DAI is designed and formed on
the basis of four fundamental vectors that impact a country's ability to access Internet and
ICTs: infrastructure, affordability, knowledge and quality and actual usage of ICTs. The
DAI has been calculated for 181 economies where European countries were among the
highest ranked. Of course most of the African countries fall in the Low DAI range, not
surprising enough. The DAI makes it possible for countries to see how they compare to
their peers and their relative strengths and weaknesses. This could help in the policy
formulation for corrective measures as you know where you are in the world rankings.
The DAI also provides a transparent and globally measurable way of tracking progress
towards improving access to ICTs.30

ITU-D (2003) : Market, Economics and Finance (MEF) Unit

Figure 4. 2 Highlights of Digital Access Index (DAI), 2002
Source: ITU

Figure 4. 3 Lowest DAI in the world

Source: ITU
Thus with the figures 4.2 and 4.3, it was found out that the best two countries with the
best two DAI in Africa were Seychelles and Mauritius. On the contrary, the two worst
ranked were Niger and Burkina Faso. For the causality analysis, Mauritius and Niger will
be taken as case studies.

4.2 ICT causal effects on economic impact: Country Case Study


Mauritius is an Island in the Indian Ocean of southern African. It boasts of a multi-ethnic

little population of 1,240,827 and got independence in 1968 and has developed from a
low-income, agriculturally based economy to a middle-income diversified economy with

growing industrial, financial, and tourist sectors.31 The CIA fact book indicates that, for
most of the period, annual growth has been in the order of 5% to 6%. This tangible
achievement has trickled down to the whole citizenry through
 more equitable income distribution
 increased life expectancy
 lowered infant mortality
 And a much-improved infrastructure.
See hereunder the map of Mauritius and the SAFE submarine fiber cable system

Figure 4. 4 Map of Mauritius Connecting to the SAFE Submarine cable

In an attempt to reduce isolation and small markets, Mauritius recently connected to the
Southern Africa Far East (SAFE) fiber optic submarine cable, which significantly
enhances its connectivity. Besides that, Mauritius is taking advantage of its linguistic
skills (both English and French are widely spoken) and geographical location to promote
itself as a base for ICT companies to expand into francophone markets, particularly in
Africa. According to the ITU’s Digital Access Index (DAI), which ranks 181 countries


according to their ability to access ICTs, Mauritius ranks 62nd, second in Africa to
Seychelles which ranks 52nd worldwide. (See figure 4.2).

4.3 ICT causal effects on economic impact: Country Case Study (Niger)

Niger, a Sub-Saharan, landlocked nation is one of the poorest countries in the world,
according to the rankings last updated on the United Nations Development Fund index of
human development. It became independent from France in 1960 eight years before
Mauritius (1968) did. Its economy centers on subsistence crops, livestock, and some of
the world's largest uranium deposits. Drought cycles, desertification, a 2.9% population
growth rate, and the drop in world demand for uranium have undercut the economy.32
The Digital Access Index (DAI) is 0.04, the least in the world according to ITU. Figure
4.5 shows how land locked the country is.

Figure 4. 5 Map of Niger-Land Locked Country

Source: CIA Fact Book

4.4 Economic Patterns of Mauritius and Niger and causal effect on ICT

The world development indicators indicated in the figure 4.6 show major antagonisms
between the two countries, Mauritius and Niger. The per capita Gross National Income


(GNI) for Niger is 210 (US$) as compared to 4640(US$) for Mauritius. This is a huge
difference with Mauritius per capita GNI being 20 times that of Niger. The CIA Fact
book also records $13200 GDP per capita (PPP) unlike Niger which has a very humble
GDP per capita (PPP) of $800.The discrepancy is so huge which aggress with the causal
relationship that was postulated between the Digital Access Index (DAI) and socio-
economic development. Mauritius is the second best in Africa ranked at 62 nd in the world
after Seychelles ranked 52nd. Niger is the last ranked in the world with DAI value of 0.04.
DAI for Mauritius is 0.5 (see figure 4.2 and 4.3).

The life expectancy of Niger (44.7) is below that of Mauritius which is pegged at 72.7. It
is evident, that the life expectancy of a society speaks volumes about the economic
situation in that environment. The longer the life expectancy, the better the economy.

Figure 4. 6 The World Development Indicators (Mauritius versus Niger)

Source: World Bank Data and Statistics

Figure 4. 7 Mauritius economic indicators
Source: CIA Fact book

Analyzing the sector composition of the GDP between the two states, some interesting
truths are revealed. Mauritius has agriculture (6.1%), industry (29.9%) and services
(64%). For Niger we see agriculture (39%), industry (17%) and services (44%). (See
Figure 4.7 and 4.8). With the second best DAI in Africa, we quickly deduce that,
Mauritius has utilized the ICT and internet technologies for its good in all the sectors and
hence efficiency exploited. The results are tangible and are documented. In fact,
Telecommunications in Mauritius has had a major impact on foreign direct investment
(FDI).The November 2000 sale of 40 per cent of Mauritius Telecom to France Telecom

netted the government Rs 7.2 billion (US$275 million), an amount equivalent to half of
all FDI over the last ten years.33

In Niger, the population living below, the poverty line amounts to 63%, whereas that of
Mauritius is a mere 10%. Meaning most of the people in Mauritius have a better living
standard. It is clear that there simultaneous causal effect between ICT and socio-
economic growth. If you have ICT infrastructure, there is economic growth efficiency
and FDI. On the other hand FDI can also attract ICT. It is therefore important that the
African policy Makers understand this concept, and then economic growth will be
inevitable. Making internet cheaper and affordable will bring economic growth.

Figure 4. 8 Niger economic indicators

Source: CIA Fact Book

ITU (2004),’The Fifth Pillar-Republic of Mauritius’-ICT CASE STUDY

5 Conclusions

Concerning internet, prognosticators agree that it will continue to grow, they only differ
as to how big, how fast and exactly what final impact it will have on the planet earth. The
advantages that would be borne if Africa had cheap internet by far outweigh the
disadvantages. Cheap internet in Africa would bring about VOIP (Voice Over IP)
inevitably which is a threat to the incumbent Legacy PSTN operators. It is an advantage
to the common subscriber but a threat to the monopolistic Operators. One has to weigh
whether to sympathize with the incumbent operators who have the monopoly or be pro-
liberalization paving way for new emerging telecoms entrepreneurs. Making internet
cheaper in Africa would spark the virtuous cycle which postulates that cheap internet and
ICT infrastructure lowers the price of the internet, which attracts Foreign Direct
Investment (FDI), which further creates jobs. Not only that, cheap internet means the
presence of many ISPs, bringing competition and further making the service cheaper and
affordable with better quality. FDI brings socio-economic development in a society,
which further attracts investors and the systems becomes self sustaining in the end.
Undoubtedly, the opposite happens when internet and ICT infrastructure are expensive
and not affordable.

One cannot underestimate the power of internet in the Business circle. Use of ICTs in
Business raises productivity, efficiency and effectiveness in helping to boost economic
development. Internet and ICT infrastructure are a fundamental requirement for
businesses to carry out electronic transactions. In this global world, without internet, you
definitely cut-off and isolate yourself from the world. The internet has also been widely
used in PC Banking and this has lessened the crowding of clients in the banking hall,
making the whole process efficient to the few people who go physically to the bank for
some reasons. The providence of Internet in business also has a social aspect, with many
officers developing and sharpening their ICT skills and obtaining access to the Internet
through their workplace, which they can then use in other areas. Nonetheless, this internet
technology will bring to demise some businesses. Others will evolve for them to cope
with the new way of doing business. The intermediation business units will suffer the

worst damage. Care must be taken though for Africa, as the internet will definitely seek
to go against the Michael Porter Five Forces Model which perpetrates the notion of
blocking any competitive entry into your market sphere. But the internet has come to
unblock those barriers. The internet has opened a way for customers to deal straight away
with your suppliers bypassing you. A typical example is DELL, selling their Computers
to single clients without using agents. But we can not stop the internet because of a few
isolated cases. Life has to go on. We look at the holistic view and it seems the internet
has more positive impact that negative.

As the famous adage goes,” Knowledge is power”. With the internet, you can have access
to all the knowledge you want, no matter what category. Africa in my opinion needs
knowledge. Africa needs to be informed and Africa needs training in terms of skills.
Without internet, this can never happen. Thus it suffices to say that availing Africa cheap
internet is one big stride in the right direction of economic freedom and sustainable
development. Education is a key component of a nation’s transformation towards actively
and fully participating in the global information society. Educational Institutions, which
apparently have high internet penetration rates in Africa, can have an important role in
Research and Development Projects. With the internet, connecting schools and bringing
students online in developing countries may have a major impact on raising the standard
of African skilled workers, who are relevant for the society therein.

African government can exploit internet and have a major impact on enhancing
accountability, efficiency and transparency of processes in the public civil service. The
availability of ICTs in public administration also has social implications, since
government workers can develop ICT skills and access the Internet from the workplace.
Internet is a source of entertainment, even though it can be abused; just like any other
good thing; it is a norm for good things to be abused sometimes but what is called for is
responsibility on the part of the user.

It is imperative that Africa makes deliberate policies to avail cheap internet at whatever
cost because the return on investments is worth it. The internet is much more than a huge

database, a technological achievement, and a convenience for improving life. It is
powerful influence in shaping Society, and as historically as the industrial revolution. The
internet is a gateway to a richer life style and more opportunities for all the things we
want to do, from finding jobs, to finding toys at Birthdays, to finding assistance for
staying health and fit and doing all sorts of things-some bad and some good. In the end it
is actually advantageous to have cheap internet in Africa because the negative impacts to
be borne are worth sacrificing for.

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