Digital Transformation and the Prosperity of Nations

Thoughts about technology that is inclusive, trusted, and creates a more sustainable world

These posts represent my personal views on the future of the digital economy powered by the cloud and artificial intelligence. Unless otherwise indicated, they do not represent the official views of Microsoft.

Last week I wrote about how the coronavirus has spurred governments around the world to think about issues of digital sovereignty as they develop their plans for national recovery. I proposed that these issues can be usefully grouped into two broad categories:

1. Who gets to make the rules that govern the digital economy?
2. Who reaps the benefits of digital transformation?

I concluded by citing an important statement Microsoft CEO Satya Nadella made during a visit to India last February:

“We measure our success by local economic impact, not market capitalization. If we can create that local surplus, we will earn the permission to operate. That is true in every country—in India, the United States, the UK, everywhere.”

Satya is stating an incontestable truth here. It is impossible to imagine a stable equilibrium in which the rewards of digital transformation go only to a few. A truly global company like Microsoft can only thrive if it contributes more to the local economies where it operates than it receives from them. Yet it’s not a simple matter to quantify what any one company contributes to a country’s GDP—this is a topic that calls for in-depth research. This week I want to approach this question from a broader angle by sharing some existing data points on the contribution of transformative technologies like cloud computing, AI, and 5G to the prosperity of nations. I think these data points will show that this contribution is very large indeed. In future posts, I’ll explore how exactly these technologies can create growth and employment.

Even before the coronavirus pandemic, there was broad agreement among researchers that rapid adoption of these core digital technologies is a key to economic progress. In the recovery phase we are now entering their impact is likely to be even greater. A just-published McKinsey report advises that “Business leaders need to accelerate their journey to the cloud in order to digitize quickly and effectively in the wake of COVID-19.”

But let’s look at some examples of how digital technology contributes to specific regions and countries.

Cloud in the United States

?The US was the first economy to embrace cloud computing, and there is no doubt that the country has enjoyed a head start in reaping advantage from the cloud. A careful macroeconomic study published by the Internet Society in 2019 found that in 2017 alone the cloud economy contributed $214 billion to US GDP and 2.15 million jobs.

AI in Europe

A McKinsey report published in 2019 looked at the potential impact of AI on European economic growth and concluded that:

“Europe could potentially add $2.7 trillion to its economic output by 2030 if it were to develop AI according to its current assets and relative position in digital technology in the world. Innovation is essential to build demand for higher-skill and better-paid jobs and limit potential inequality from the adoption of new-frontier technologies.”

Cloud in Asia-Pacific

A Boston Consulting Group study estimates that cloud computing will add US $102 billion to India’s GDP over the five years from 2019 through 2023.

A broader BCG study for the six APAC countries of Australia, India, Indonesia, Japan, Singapore, and South Korea estimates that with supportive public policies the total economic impact of the cloud could reach US $580 billion during the same five year period while creating 770,000 direct jobs and as many as 2.1 million jobs from second-order effects.

An earlier retrospective study by Deloitte found that the adoption of cloud services by businesses in Australia resulted in a cumulative productivity benefit to the economy of AUS $9.4 billion from 2014 to 2019.

5G in the World

An extremely detailed analysis of the global impact of 5G networks published in 2019 by British analyst firm IHS Markit concludes that 5G will contribute US $2.7 trillion to world GDP over the years from 2020 to 2035. Where today’s LTE/4G networks serve chiefly for personal communication, 5G will evolve into a true general-purpose technology like electricity, the Internet, or the printing press. As a result, 5G will become far more deeply integrated into the world economy. The firm estimates that by 2035 fully 5% of all global sales activity will depend on 5G. That may not sound like a large percentage, but in dollar terms, it amounts to US $13.2 trillion across multiple economic sectors.

How much do countries spend on cloud?

In the examples above we have looked at the impact of digital transformation technologies on the economic output of nations. Another approach to quantifying that impact is to look at economic inputs in the form of IT spending. A fascinating recent study by Gartner compares countries on two related dimensions, the growth rate of spending on cloud services and the share of total IT spending devoted to cloud services. Gartner uses the resulting scatter chart to benchmark cloud spending by 20 leading economies relative to the US. Gartner’s “tracking” countries are those that it believes lag US cloud spending by less than three years. What it calls “lagging” countries are four to six years behind the US, while “resisting” countries are seven or more years behind.

Of course, the fact that a country is spending large sums of money on cloud and other new technologies cannot by itself guarantee an equivalent boost in GDP. Such expenditures must be accompanied by sound business strategies by corporate leaders and supportive policy environments from governments. Nor does the fact that a country is currently spending less than the US mean that it cannot surpass US growth rates. The example of China in the chart above shows that clearly. While China today devotes only a fairly modest 8% of its total IT expenditures to cloud services, the growth rate of its cloud spending exceeds that of all other countries on the chart. In short, what counts is not just a country’s location on the chart today, but also its rate of change. Gartner predicts that China will join the top group of cloud countries after 2023.

The diverse methodologies, timeframes, and technologies considered in the studies I’ve cited here make it challenging to say that a specific technology has contributed exactly so many dollars or euros to the economy of this or that country. Yet it nevertheless seems fair to conclude from these few data points that the potential of these core digital technologies to advance the progress of the national economies where they are adopted is immense. Much more research on this topic is needed, but we have here a solid set of baseline numbers for governments to consider as they devise strategies to ensure that their sovereign interests are well and truly served by the technologies of digital transformation.