Hu Yoshida

Digitization and GDP per Capita are Strongly Correlated

Blog Post created by Hu Yoshida Employee on Aug 15, 2018

Various world organizations and financial institutions have sought to develop a digitization index to evaluate a country’s ability to provide the necessary environment for business to succeed in an increasingly digitized global economy. The following study was done in 2016 and is interesting since it shows a strong correlation between digitization and GDP per capita. The most advanced digitization countries have a higher GDP per capita.

Digitization chart.png

Where a country falls on the digitization index depends on how this index is defined. However, there have been several studies done using different digitization indices and in most cases the ranking of the countries were very similar. BBVA has developed a working paper to define a Digitization Index (DiGiX) which is widely accepted. This is a comparative index which rates the countries from zero to one. The BBVA study shows Luxemburg with the highest rating of 1.0. Although the GDP chart above uses a composite index, the digitization index on the x-axis ranks the countries in a similar manner to the BBVA DiGiX. The Y-axis is an assessment of GDP per capita without the impact of oil revenues. This may not be valid since digitization could influence oil revenues in a similar way that it impacts all revenues.

 

The following slide shows the types of indicators that were considered in BBVA’s DiGiX.

Digital Index.png

 

One anomaly on this chart is South Korea. South Korea is one the most technologically advanced countries, with technology leaders like Samsung. LG, and Hyundai. Korea Telecom dazzled everyone at the Winter Olympics with its display of 5G networks. 92.4% of the population use the internet and South Korea has consistently ranked first in the UN ICT Development Index. However, the GDP for South Korea, is below that of countries that are much lower on the digitization index. This shows that digitization is not the only factor in driving GDP.

 

Korean workers.png

The South Korean worker is the hardest worker in the world, logging some 300 work hours more per year than workers in most other countries, and yet productivity and prosperity is lagging behind less digitalized countries. One of the reasons given is that their retirement systems is not adequate to support retired workers and many of them have to find low paying jobs after retirement. Up until recently the retirement age was 55 and young workers had to look forward to supporting their parents and grandparents. According to the New York Times sky-rocketing household debt, high youth unemployment and stagnant wages are hobbling the economy. Young people have to scramble to compete for a small pool of jobs at large prestigious companies or accept lower paid work at smaller companies. Many cannot find work and the unemployment rate for young people is 10%. These are political and social issues that go beyond digitalization.

 

Lim Wonhyuk, professor of economic development at the KDI School of Public Policy and Management was quoted in the New York Times offering this suggestion: “The government needs to nurture a business ecosystem that is more ably disposed to start-ups protecting their intellectual property rights and giving them better financial access and incubating and supporting them.” What is needed is a way to spur innovation and disrupt the business models of established businesses.

 

Up until recently South Korea was not known as a tech startup hub. Very few “Unicorns”, (startup companies that achieve $1 billion in valuation) have come from South Korea. That may be about to change according to Crunchbase, an  publisher of news covering the technology industry. Crunchbase has noted in a recent article, South Korea Aims for Startup Gold, that there is an increase in VC funding and a competitive lineup of potential Unicorns.

 

Another interesting country on the chart above is China. While this shows China to be very low on the digitization index, China leads the world in innovation when it comes to the number of Unicorns. According to Business Insider, Chinese retailers JD.com, Alibaba, and Moutai hold the top three spots on the list of top 20 fastest growing brands, while Amazon holds the thirteenth spot. That has a lot to do with the fact that China has the largest population in the world, close to 1.4 billion. That also lowers China’s GDP per capita to about 8600 USD. Consider what it would do to China’s GDP if the digitization rate were to increase by 10 points!

 

Digitization clearly shows a positive impact on GDP per capita. However, digitization does not occur without the focus of government since digitization has a lot to do with infrastructure, connectivity, and regulations. As a result, we are seeing government digitization initiatives around the world.

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