IT boost for economic growth

Total world trade in IT services crossed $1 trillion in 2023 – and it is growing. IT services are now 14 per cent of all services trade, a big jump from 4.0 per cent in 2010.

A few economies dominate the trade. Ireland and India lead with $236 billion and $111 billion each in exports. In the second tier are the US, China, UK and Germany whose exports ranged between $48 billion and $90 billion. Buoyed by policy reforms and foreign funding, exports from Pakistan, though way behind others, have grown in recent years. They doubled from $1.3 billion in 2019 to $2.7 billion in 2023. Yet, there is a long way to go for our IT sector, considering its promise for an economy of our size.

The data above is from the World Trade Organization. They classify IT as telecom, computer and information services. Among these, computer services is key. It underpins digitalization and is at the base of ‘New Age Industries’. Computer services includes software and its maintenance. The latter makes possible e-commerce and fintech transactions and also the use of AI and cloud computing. Telecom includes data and voice telephony as well as online data retrieval and processing. Information services include access to databases and news transmission.

My recent columns focused on industrialisation for exports and jobs. Today’s looks at how to boost our IT sector, which could transform our economy. Its real benefit comes in the shape of productivity gains in all areas. In turn, that raises the ability to produce and export higher-value goods and services. It also boosts the overall competitiveness of the economy. The IT industry must build on its still modest e-commerce and fintech success and gradually move up in value with new technologies. That would propel the economy forward.

Pakistan’s IT sector has shown some promise recently. Between 2015 and 2022, it attracted about $850 million in foreign funding. During this period our exports grew by an average of 24 per cent annually. Yet, the sector is small compared to many economies. During the same years, India and China attracted $136 billion and $837 billion in investment. And the high rate of export growth is on a small base.

Pakistan’s IT sector consists of small firms. Over 80 per cent of the firms have exports of below $100,000 annually, mostly in the low value-added applications. The whole IT ecosystem limits the industry’s expansion. Access to finance, hiring of a skilled workforce, and connectivity are major hurdles.

As per the SBP, credit for the IT sector is “one of the lowest among emerging markets”. This must change. A sector that mostly has small young firms cannot meet banks’ collateral criteria. Banks have not transitioned into managing the risks of funding start-ups. The SBP recommends using a start-up’s intellectual property or cash flows as collateral. Pakistan also does not have a robust system of credit scores. The government may either have a fund for credit guarantee or offer tax incentives for equity investors of IT start-ups.

Nor are our VCs sufficiently developed. In fact, financing from Pakistan plays a very small role in the IT industry. Foreign investors led the recent spate. But IT firms need funds at the idea stage. Even foreign equity takes interest in the later stages. Less than a quarter of financing is at the idea stage.

Pakistan must encourage venture capital that can nurture start-ups with early or ‘angel’ funds. In a field that thrives on innovation, Pakistani promoters are largely on their own to fund their business in the early stages, before they access credit.

Global practices show that technology venture capital in a country grows with tax and regulatory incentives. The government of Pakistan may offer low capital gains tax, incentives for leveraged buyouts and tax incentives for private projects in new technologies. The latter include cloud computing, AI and blockchain.

Another top challenge for firms is to find skilled workers. Many qualified young professionals entering the IT workforce do not come up to the industry’s standards. Some estimates show that just ten per cent of new graduates can be hired. Their ability is below the digital skills needed. For a sector whose main input is skilled people, Pakistani investors are at a big disadvantage.

As per the HEC, in 2022 about 210,000 students were enrolled in information and communication technologies in Pakistan. That compares unfavourably with 3.5 million and 2.6 million ICT students in 2020, in China and India. Even if we set the numbers aside, the quality of the graduates is a bigger challenge. We must urgently interest leading world trainers in improving software skills in Pakistan. They may do so through bootcamps or by training our teachers. MOOCs could also be an option. I understand that Huawei has recently begun a major effort in this regard. It is for us to ensure that our trainees come up to or exceed Huawei’s standards.

Digital connectivity too is a major concern ‘both in terms of access and usage’, per the SBP. It is stifling the sector’s growth. As a percent of per capita income, the price of equipment and internet services are high in Pakistan compared to India, Bangladesh and Sri Lanka, and much higher than in advanced economies. World Bank data shows that 33 per cent individuals in Pakistan had access to the internet in 2022. This figure was 43 per cent for India, 45 per cent for Bangladesh and 50 per cent for Sri Lanka. As multiple high tax rates contribute to prices and lower usage, the government must correct the situation.

The World Bank highlights Pakistan’s restrictive digital trade policy, with tariffs, data flow controls, and limited content access. Pakistani firms also face hurdles in domestic and international markets. The government must address foreign compliance, enhance intellectual property protection, reduce power costs, and upgrade IT infrastructure to compete regionally.

These are major barriers to the growth of our IT industry. They lead to low use of IT services. Coupled with a lack of digital literacy, they curb demand and limit market size. For our IT industry to scale up, it is important to expand the domestic market. Here firms may test their new ideas before exporting.

The government must play its part in boosting the size of the home IT market. It is an easy win. More demand would boost the IT industry and make it more competitive globally. Besides, it would enable the government to better serve the citizens. The government must also intervene with policies that drive IT consumption by domestic businesses and individuals. Likewise, industrial growth, if it happens, will increase demand for IT services to the benefit of both sectors.

Across the board in all indicators, Pakistan compares poorly with other countries. In 2021, Pakistan ranked 97th out of 113 countries in the ADB’s Index of Digital Entrepreneurship Systems. We are especially behind others in the category of institutions, skills and finance.

Pakistan ranked 92 out of 100 countries in the Global Skills Report 2023 published by Coursera in 2023. This is so even though Pakistanis are at the top in the surge for those seeking professional certificates from Coursera. They have to pay for the certificate. Also, at about 650,000, it is the top country for STEM enrollment with Coursera. This shows a huge national demand to learn and grow. The government must capture this spirit of our young people and invest to improve basic learning outcomes.

Pakistan ranks low on global technology and e-government indices, with poor performance on the UN’s E-Government Development Index and UNCTAD’s Frontier Technology Readiness Index. Unlike Pakistan, Azerbaijan's Technopark law offers tax and residence benefits for IT companies, a model Pakistan's SEZs could emulate for growth.

According to the SBP, Pakistan is far behind peer economies in online checking of account balances. The overall account ownership and mobile money account ownership are also low compared to regional averages and income groups. Pakistan’s low rank, 116 out of 152 nations, in UNCTAD’s Business-to-Consumer E-commerce Index, 2020, also shows us lagging. This index tracks individual access to the internet and secure servers.

To increase exports, Pakistan must move aggressively to IT-enabled services. This will expand the market for our architects, engineers and accounting firms. Also, freelance teachers, medical aids and IT workers will access more users.

The opportunities for Pakistan to transform the economy through IT are limitless. It is for us to realise them, and it is possible to do so with will and leadership.

The writer is chair and CEO, Institute for Policy Reforms. He has a long record of public service.