A new digital economy is emerging where the internet of things (IoT), mobile technologies, artificial intelligence and digitisation are creating new opportunities and new business models in Asia. Based on studies conducted by IHS and McKinsey, by 2025, around 30 billion devices will be connected with IoT, and the potential economic impact is estimated to be $3 trillion. The digital economy is disrupting every field of human activity from healthcare delivery and education to access to finance and energy storage, improving productivity and efficiency in these areas. Harnessing the benefits of these rapidly evolving technologies will be a crucial element to drive the next wave of growth and development in the emerging economies of the region.
With a rapidly growing middle class, an increasingly diversified economy, and a burgeoning young population, Southeast Asia is well positioned to embrace this digital revolution, and has the potential to enter the top five digital economies in the world by 2025. (2020–Seven Growth Economies – AT Kearney | Southeast Asia). In addition to playing an important role in encouraging inclusion and alleviating poverty in developing countries, the digital economy can generate opportunities worth billions of dollars for businesses in the region in the next few decades, helping to accelerate the achievement of key sustainable development goals.
But even with innovations that have enabled many communities to catapult into the twenty-first century, developing countries are still behind developed nations in internet and broadband penetration. Without technology, people in remote, poverty-stricken regions have no access to bank accounts, healthcare services, educational opportunities, or small-business loans – no way to participate in the global marketplace. The share of the population living in rural areas is also much higher in developing countries. To bridge the technology gap, spur that level of financing and realise the region’s digital potential, we need to create markets and bring more private sector rigour and innovation to countries, especially the poorest and most fragile ones.
The International Finance Corporation (IFC) is the largest global development institution focused on the private sector in emerging markets, investing around $19 billion per year. We are working actively with the World Bank, our sister organisation, to strengthen and accelerate the digitisation of economies through investments in digital infrastructure, digital ID and e-government platforms, e-commerce, financial technology (fintech) and digital education. Together, we are also working to improve regulatory environments, promote competitive business environments and increase accountability to prepare people for the jobs of the future.
In Southeast Asia, Indonesia alone has a population of around 260 million, representing over 40 per cent of the entire population of the region. More than half the population is less than 50 years old, providing a large workforce, and consumption capacity. The country has set ambitious targets and is ready to become Asia’s digital economic powerhouse, with internet penetration growing at three times the global average speed, and smartphone penetration expected to rise significantly.
Despite this huge potential and the government’s ongoing digital initiatives, the country’s digital market still faces challenges. Indonesia is spread across a sprawling archipelago and more than 75,000 villages are still offline. It has low international bandwidth, low per capita income in some areas and low average connection speeds. There is also a growing rural-urban divide as broadband providers focus mainly on the larger islands of Java and Sumatra and populated urban areas. The Philippines also has an online penetration of only 44 per cent, the lowest compared to its Southeast Asia peers. To deliver universal digital access, the public and private sectors need to work together to invest in infrastructure and pursue reforms that bring greater competition to telecommunications markets, promote public-private partnerships, and yield effective regulation.
In many of these countries, the uptake of new technologies is often too slow to guarantee the productivity enhancements that can result in sustained growth. IFC has been actively investing in early-stage technology since the early 2000s and has established a dedicated venture capital (VC) group. To date, IFC has invested $1 billion in companies and funds, and through our investments in verticals such as health care, ed-tech, fintech, internet – including e-commerce – and clean-tech, IFC aims to promote innovation across sectors, support local businesses and accelerate cross-border technology transfers. Our increased focus on supporting digital transformation in emerging Southeast Asia has led to partnerships with several regional early-stage venture funds that help build local start-up ecosystems and create hundreds of new jobs.
IFC’s recent investments in Wavemaker Partners, a seed-stage fund, and Jungle Ventures, a seed to Series-A stage fund manager, will help to boost seed capital availability, mobilise institutional capital and will better position companies for follow-on funding, sustainability, and job creation. IFC’s investment in Oway, a Myanmar-based leading online travel platform with products that span airlines, hotels, tours and taxi bookings, is contributing to Myanmar’s economy by creating jobs, improving transportation and promoting the country’s emerging technology industry.
Apart from investing in start-ups and VC funds, IFC is developing programmes to connect start-ups with new markets. TechEmerge is an IFC matchmaking programme that connects global technology start-up companies with corporate customers. The first programme was focused on healthcare technologies that could be utilised in the Indian market. Out of 330 applications ,17 innovators from around the world were selected to pilot their technology innovations in the Indian market.
Countries like Indonesia, Vietnam, Thailand and the Philippines have the potential to rank as leading digital economies if they continue to exhibit a steady upward trajectory in improving their readiness. By supporting the development of digital infrastructure, there is an opportunity to improve access to quality infrastructure and services, and overall economic growth and development. A recent study found that boosting SMEs’ digital engagement could increase Indonesia’s annual economic growth by 2 per cent, the jump it needs to become a middle-income country by 2025.
Fostering higher levels of education and skills will be critical to end poverty and promote prosperity in a rapidly globalising world, and improving health care will also be equally important. Each year, the steep costs of health care drive 100 million people into poverty and around 57 million children in developing countries remain out of school. Countries like Vietnam rely heavily on a government-funded health care system, yet hospitals and medical equipment all require upgrades, qualified medical staff are still in short supply, and people in rural areas still have limited access to healthcare. The government alone cannot meet the infrastructure and capacity gaps in the region, so the private sector needs to be part of the solution. IFC is uniquely placed to help deliver on this ambitious agenda with its focus on digital health.
Our new strategy, IFC 3.0, focuses on leveraging the World Bank, our advisory teams and other development partners to put in place frameworks that allow markets to function and promote competition. IFC’s strategy is to create markets that put the private sector at the forefront of development, helping to save scarce public resources. We are implementing this new strategy to mobilise private sector solutions in all our work at the World Bank Group. We call this approach maximising finance for development. We work with countries through sector reforms and de-risking instruments and ultimately mobilising private capital.
Closing the digital divide requires expanding broadband access in developing countries; conducive policy, regulatory and technical reforms for digital economies to emerge within developing countries, and a competitive digital infrastructure and ICT industry. It calls for strategies to strengthen educational institutions and connect world-class teachers to students who need them most. It calls on stakeholders to define clear roles for the public sector, private sector and development partners, and to build competent institutions to lead the transformation process. It also involves assisting the mainstreaming of digital applications in various sectors by leveraging digital enablers such as big data analytics, cloud computing, mobile platforms and payment systems, and location services for smarter development solutions.
IFC and the World Bank stand ready to help accelerate connectivity by combining regulatory reform with adequate funding and private sector support. We can help bring the public and private sectors together to decide on the necessary infrastructure, schools, roads, broadband and regulations needed to support the growth of big and small businesses. Only through strong partnerships with the private and public sectors, can we pave the way for innovation in Southeast Asia’s rapidly changing digital economy, lay the foundations for sustainable and inclusive economic growth and improve the lives of millions of people. n
Pravan heads Internet Investments in Asia for the Venture Capital team at the International Finance Corporation, a member of the World Bank Group. IFC has invested over $1 billion in venture capital investments in VC Funds and directly into Internet, HealthTech, EduTech and CleanTech companies. His investments include Lenskart, BigBasket, NephroPlus, Moglix, Azure Power and Portea Medical in India and Jungle Ventures, Jungle SeedPlus, Oway and Reddoorz in Southeast Asia. Prior to joining IFC, Malhotra was a Principal with ORIX Venture Finance in New York and started his career in investment banking. Malhotra holds an MBA from the Wharton School, University of Pennsylvania and is based in Singapore.
