Digital innovation has the potential to increase the gains from rural economic activity, in part by allowing rural workers to capture larger pieces of the economic pie.
The rural-urban economic gap is one of the most important factors that shape overall economic inequality. Digital innovation undoubtedly carries the promise of accelerating rural development, and various public and private sector-led initiatives — such as India’s broadband expansion programme, BharatNet, and China’s concerted investment in digital education to reach rural areas — are trying to harness its potential. But is this innovation enough to allow rural workers to engage in productive, fulfilling work without migrating to cities?
The trends in income and employment in urban versus rural areas, particularly in low- to middle-income countries, are murky at best. In India, the rural-urban income gap narrowed between 1983 and 2010, but this is attributed in part to rural areas “urbanising” and being absorbed into fast-expanding city centers that provide higher paying jobs and better services to citizens. <1> In general, it is quite challenging to isolate the effects of digital technology on rural income, rather than confounding factors such as rural to urban migration and social welfare programmes targeting rural populations. In this sense, data from China may provide a better indication of trends, since the hukou system of permits prevents rural workers from moving to more productive urban regions. In China, the income gap has actually increased: urban households earned 2.2 times as much disposable income relative to rural ones in 1990, and 2.7 times as much in 2017. <2>
No doubt digital technology has facilitated important quality of life improvements in rural areas — access to online markets, food delivery, and streaming entertainment, for example, have narrowed the gap between the lived experience of urban and rural populations. However, this is markedly different from narrowing the productivity or economic gap between these groups. Three principal, albeit not exhaustive, ways in which digital technology can bridge the urban-rural economic divide are ‒
1. Attracting higher-paying jobs to rural areas, chiefly through the development of digital infrastructure that allows remote work and the development of tech ecosystems;
2. Increasing the gains from rural economic activity, for example by leveling the competitive landscape for pricing and market information or increasing access to global markets;
3. Facilitating higher participation in systems that improve the productivity of rural workers, such as access to finance, education, and healthcare.
For each of these mechanisms, the reach and impact of digital innovation in low- to middle-income economies have been mixed.
First, digital technology holds the promise of attracting higher-earning jobs to rural areas by facilitating remote work and the development of tech ecosystems, thus addressing the ‘brain drain’ problem of highly skilled individuals having to move to urban centers. While this may be a viable path for advanced economies, the impact of such innovation is relatively muted in developing economies where the services sector comprises a minority share. In India and China, the agricultural and manufacturing sectors together account for 69% and 56% of labor force participation, respectively. <3>,<4> In these economies, proximity to farms and factories remains key, and the advent of teleworking infrastructure is less relevant to workers’ livelihoods.
Second, digital innovation has the potential to increase the gains from rural economic activity, in part by allowing rural workers to capture larger pieces of the economic pie. One way is by facilitating greater transparency in pricing and other market information through public information systems. In India, for example, the Ministry of Agriculture runs AgMark: a web portal that disseminates pricing information from wholesale markets, allowing small farmers to better understand demand and obtain fair pricing for their produce. Similar price information systems have attracted public and private sector investment in other developing economies, with a welldocumented track record of easing access to market information and improving incomes. <5>
Another is by democratising channel access, such as giving small farmers and rural entrepreneurs the opportunity to reach more buyers through online marketplaces. Here, the advantages to rural workers are less clear, as e-commerce has delivered outsize gains to a few oligopolistic platforms. In the US, Amazon accounts for an incredible 49.1% of all online retail spend, followed not so closely by eBay, which accounts for 6.6%. <6> This is a losing proposition for small retailers: as more go online, they must compete for premium positions on just one or two online platforms. As a result, customer acquisition costs have increased by 50% over the past five years, while the average value of an online order has remained flat. <7> The same trends are visible in the growing Indian and Chinese e-commerce markets. In India, FlipKart and Amazon India together capture 60% of online sales, <8> while in China, Alibaba alone captures 60%. Rural enterprises and entrepreneurs may be absolutely better off by being able to access a larger market, but it is difficult to imagine relative gains to rural workers in this system of concentrated market power.
Third, and most promisingly, digital technology can help close the rural-urban economic gap by allowing rural populations to participate in long-term productivity enhancing systems, including education, finance, and healthcare. In both India and China, the digitisation of education, which aims to deliver quality teaching to rural students using online platforms, has become a government priority. The links between educational attainment and income are well-established: in India, the urban-rural wage convergence is in part attributed to a convergence in educational attainment, with the urban advantage narrowing from 164% more education-year completed in 1983 to 78% in 2010. <9> The expansion of online learning tools is projected to accelerate this trend.
Similarly, technologies like Aadhaar, the biometric database of unique IDs, has been a driving force in lowering the unbanked population from 60% of Indian adults in 2011 to 20% in 2018. <10> While only the first step, higher financial inclusion combined with financial literacy and tailored financial products will be critical to enhancing rural productivity. Finally, advances in healthcare — including remote diagnostic capabilities and web portals that disseminate basic health information — can help bridge shortages of trained medical professionals in rural areas. Improved health outcomes affect economic well-being by increasing worker productivity and reducing the financial burden of illness.
Of course, the gains to rural populations stemming from digital innovations are predicated on myriad factors, including access, affordability, and literacy. The idea that the average rural worker in India or China who cannot today rely on around the-clock electricity could launch on online store or participate in a virtual classroom appears far-fetched. In both countries, rural internet penetration remains at roughly 20% today, compared to nearly 60% in urban areas. <11>,<12> While China has been largely successful in expanding broadband coverage, only 7% of Indian households have access, and almost all in urban centers. <13> Significant investment in digital infrastructure is needed to fully harness the potential of the digital revolution in rural areas.
Overall, the impact of digital innovation in bridging the rural-urban economic divide is mixed. On the one hand, greater access to markets, market information, and finance, education, and healthcare resources can help rural workers lower transaction costs, identify growth opportunities, and improve long-term productivity. On the other, the oft-touted benefits of remote work enabled by digital technology are less relevant in many low- to middle-income economies reliant on non-services sectors. Moreover, digital innovation has created new oligopolistic systems, concentrating market power and profits among a few service providers and further enhancing the ruralurban divide.
This essay originally appeared in Digital Debates — CyFy Journal 2019.
<1> Viktoria Hnatkovska, “Urbanization is Narrowing India’s Rural-Urban Wage Gap”, World Bank, 27 October 2014. Accessed: 30 September 2019.
<2> National Bureau of Statistics of China. Annual per capita disposable income of rural and urban households in China from 1990 to 2017 (in yuan). 2018. Statista. Accessed: 30 September 2019.
<3> World Bank. India: Distribution of the workforce across economic sectors from 2008 to 2018. 2019. Statista. Accessed: 30 September 2019.
<4> National Bureau of Statistics of China. China: workforce breakdown across economic sectors from 2007 to 2017 (in millions). 2018. Statista. Accessed: 30 September 2019.
<5> Luc Christiensen, Siddhartha Raja, and Esteve Sala, “Can Technology Reshape the World of Work for Developing Countries?”, World Bank, 1 June 2017. Accessed: 30 September 2019.
<6> Ingrid Lunden, “Amazon’s share of the US e-commerce market is now 49%, or 5% of all retail spend”, TechCrunch, July 13, 2018. Accessed: 30 September 2019.
<7> Don Davis, “Ecommerce Profitability is Down”, Digital Commerce 360, 13 May 2019. Accessed: 30 September 2019.
<8> Daniel Keys, “Flipkart is poised to Overtake Amazon in India by 2023”, Business Insider, 29 March 2019. Accessed: 30 September 2019.
<9> Hnatkovska, ibid.
<10> Ramesh Iyer, “Financial inclusion in India is soaring. Here’s what must happen next”, World Economic Forum, 14 January 2019. Accessed: 30 September 2019.
<11> Surabhi Agarwal, “Internet users in India expected to reach 500 million by June’’, Economic Times, 20 February 2018. Accessed: 30 September 2019.
<12> Meng Jing and Sarah Dai, “Behind the great firewall, China’s internet is thriving – even in rural areas”, South China Morning Post, 3 February 2018. Accessed: 30 September 2019.
<13> Devina Sengupta, “Subscriber base of broadband to grow 44%: Study”, Economic Times, 1 January 2018. Accessed: 30 September 2019.
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Aditi Kumar is the Executive Director of the Belfer Center for Science and International Affairs at the Harvard Kennedy School where she also leads the ...
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