Karishma Banga, Adria Rius Rodriguez and Dirk Willem te Velde, September 2020
Economic transformation is crucial to poverty reduction, through transforming production opportunities, lowering the costs and increasing the variety of consumption and enabling government services and other factors to provide better services. Digitalisation affects all of these channels in fundamental ways. This paper develops a framework to understand how. It argues that digitalisation can have positive and less positive or even negative effects in all of these channels but with likely overall net positive effects, sometimes large. It applies the framework to the cases of Kenya and Cambodia. It also argues that policy matters greatly for whether these positive effects materialise.
Digitally enabled economic transformation and poverty reduction: a framework
Economic transformation is brought about through productivity improvements by means of (i) structural changes – that is, movement of the labour force from less productive sectors of agriculture to manufacturing and services – or (ii) within-sector productivity shifts as a result of firms upgrading or firm entry/exit. It affects poverty reduction through three channels: production structures (the poor as producers), consumption of goods and services (the poor as consumers) and service delivery.
Digitally enabled economic transformation (DEET) affects poverty reduction under each of the channels. If managed well, DEET will reduce poverty, but digital technologies can also pose a threat and exacerbate existing inequalities and/or create new ones. How successfully these channels are able to reduce poverty will further depend on the enabling policy environment, comprising three sets of policies, related to building digital capabilities, fostering inclusive digital change and promoting competitiveness.
Photo: A woman attending to some seedlings on a farm in Kenya. Flore de Preneuf/ World Bank. Licence: (CC BY-NC-ND 2.0)