The argument that there is no universally accepted methodology to calculate the size of the digital economy goes on. And if we are systematically under-reporting or certainly mis-measuring the economic contribution and impacts of digitalization, those decisions are being made with a poor understanding of what’s really happening in our economies says ANDREW WILLIAMSON.

In recent years, many governments around the world have been setting targets for the digital economy as a share of their nation’s gross domestic product (GDP), as part of their overall national digitalization planning.

Viet Nam, for example, has a goal of having the digital economy account for 30 per cent of its GDP by 2030. The United Arab Emirates’ (UAE) Digital Economy Strategy aims to double the contribution of the digital economy to the UAE’s GDP from an estimated 9.7 per cent in 2022 to 19.4 per cent within 10 years. There are many other examples.

As I highlighted in Measuring the Digital Economy – It’s Harder & More Important than You Think, however, a major problem remains that there is still no universally accepted methodology to calculate the size of the digital economy. And if we are systematically under-reporting or certainly mis-measuring the economic contribution and impacts of digitalization, those decisions are being made with a poor understanding of what’s really happening in our economies.

It is widely agreed that the digital economy transitions through three phases as it develops in maturity. We are most familiar historically with the initial ‘Core’ phase – this involves the traditional ICT sectors such as hardware manufacturing and software services (and are already mostly included in the national accounts for GDP calculation). But as digitization leads to digitalization, a country’s digital economy expands to the ‘Narrow’ definition.

High-quality broadband networks can provide better online experiences, which has led to new Internet businesses focused around e-commerce, social media, streaming videos, and other online enabled activities. This creates the many new business models we are familiar with today. But the smart scenarios as outlined in the ‘Intelligent Economy’ takes us from digitalization to the full digital transformation of our economies and societies. The so-called ‘Broad’ definition of the digital economy and final phase. 

Source: OECD, 2020. A Roadmap toward a common framework for measuring the digital economy. Report for the G20 Digital Economy Task Force, Saudi Arabia 2020. https://www.oecd.org/sti/roadmap-toward-a-common-framework-for-measuring-the-digital-economy.pdf

Accurately measuring the Narrow and Broad definitions of the digital economy across countries is challenging due to several factors. First, there are a lack of standardized digital input definitions, making it difficult to compare data consistently. Countries may also classify digital activities differently, from e-commerce to digital services. Second, digital activities often cross borders, complicating the tracking of transactions. Third, many digital services, such as cloud computing or data storage, are intangible, making them challenging to quantify. Additionally, informal digital markets and the gig economy are frequently underreported. Many Internet services (for example mapping and email) are in the first instance, consumed for free. Lastly, data collection methods and technological infrastructures vary widely across nations, leading to inconsistent and incomplete reporting.

In 2020, the OECD began to lead the way in formulating a best-practice approach to measuring the Narrow and Broad definitions of the digital economy. By late 2023, the OECD’s Informal Advisory Group on Measuring GDP in a Digitalised Economy published the OECD Handbook on Compiling Digital Supply and Use Tables (SUTs) as a guide to governments on how to best start consistently measuring the digital economy.

But we are still a long way from detailed, cross-country comparable estimates of the digital economy as a share of GDP published in a systematic way by national statistical offices.

Back in 2019, UNCTAD tried to provide such values in their Digital Economy Report. But their estimates were mostly based on the Core definition of the digital economy, with only limited aspects of the Narrow definition included.

So far it seems, the China Academy of Information and Communications Technology (CAICT) is the only organisation to have produced consistent estimates of the Broad digital economy as a share of GDP for China (annually) as well as for a range of other countries.

One can see from table (2) that CAICT’s estimates for the digital economy as a share of national GDP are much higher than those of UNCTAD’s (and other national estimates) as they explicitly aim to measure all economic activities significantly enhanced by digital inputs, as with the Broad definition for the digital economy.

A problem with the CAICT estimates, however, is that they are for a limited range of countries that publish sufficient underlying data for CAICT’s estimation methodology.

Nevertheless, CAICT’s estimates exhibit a strong correlation to several frequently referenced indexes and rankings that aim to measure the extent of digitalisation across many countries. For example IMD’s Digital Competitiveness Index and GSMA’s Mobile Connectivity Index. This is not that surprising, as both the CAICT estimates and these international indexes and country rankings aim to holistically measure the extent of the development of digital inputs and usage throughout national economies. They should be closely aligned.

The highest correlation I have found is that between CAICT’s estimates for the cash value size of the digital economy across countries and the country scores from the Network Readiness Index (NRI). Results are shown in chart (1).

Because of this strong relationship, we can infer the size of the Broad definition of the digital economy across an expanded data set of countries (by using the country scores in the NRI). This is what I have done for a number of important emerging markets and developing countries, producing calculations for the size of the digital economy as a share of GDP. Table (3) provides estimates for a range of countries for what I believe to be the first time ever. As a benchmark, my estimated value for China (highlighted in red) is almost identical for that published for China by CAICT.

This is admittedly a rough-and-ready approach to estimating the true value of the digital economy (Broad definition) as a share of GDP. These estimates are also based on 2021 data and so are likely to have shifted up a little to 2024. But until we get a widely adopted methodology from the likes of the OECD, this approach may serve as a guide to more easily estimating the true impact of digitalization away from more narrowly constricted measures such as those based on the Core and even Narrow definitions.

• Williamson is Vice President, Government Affairs and Economic Adviser, Huawei Incident & Breach Response , Legislation & Litigation , Security Operations.
• Editor’s Note: Follow the link below to read the infographics in the original article: https://blog.huawei.com/en/post/2024/10/31/new-way-to-estimate-size-digital-economy