Which Wheels to Grease? Reducing Friction in the Internet Economy

Which Wheels to Grease? Reducing Friction in the Internet Economy

          
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Which Wheels to Grease? Reducing Friction in the Internet Economy

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  • The Impact of e-Friction

    The Boston Consulting Group’s e-Friction Index ranks economies according to four types of friction: infrastructure, industry, individual, and information. (See Exhibit 1.) Infrastructure-related friction, which limits basic access to online activity, is the most significant and accounts for one-half of an economy's total e-friction score. The other three components are equally weighted. Industry-related sources of friction, such as shortages of capital and skilled labor, hold back successful online-business operations and the development of digital businesses. Individual friction—payment systems and data security are two examples—affects the degree to which citizens and consumers engage in online activities. Information-related friction includes the volume of content available in a local language, a country’s commitment to Internet openness, and the obstacles to accessing certain types of content.

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    Reducing e-friction can have a big impact on national competitiveness as well as on social and economic development. Digital technologies are transforming essential social services, such as education and health care, as well as the ways in which people interact with their governments. The potential for massive improvements in universal utilitarian services, such as transportation and banking, is clear. But billions of people still cannot connect to the Internet. More than 4.5 billion people live in high e-friction economies (those in the fourth and fifth quintiles of our index), including some 3.2 billion people who are not connected to the Internet. (Since most of the economies not covered by the index are likely to have a high degree of e-friction, expanding the index to cover the world would increase these numbers to more than 5.5 billion and 4.2 billion, respectively.) There are about 2 billion people under 19 years of age in the 65 economies. Some 85 percent of them live in economies with the highest levels of e-friction. These young people will be entering—or wanting to enter—the workforce over the next decade or two. Will they have the skills to contribute to and benefit from the Internet economy?

    Low e-friction correlates closely with high Internet penetration and strong digital economies. Top-ranking e-friction economies have Internet penetration rates of more than 80 percent, while many low-ranking economies have penetration rates of 50 percent or less. That said, the off-line population in the economies in the top two e-friction quintiles still numbers about 150 million, many of whom are elderly, have a low income, or are unskilled. The U.S. has the developed world’s largest off-line population, accounting for about 40 percent of this figure, or some 60 million people.