Just do IT: World Bank’s ‘alternative’ development model

The World Bank’s much trumpeted ‘alternative’ model of growth – the utilisation of low-cost, skilled labour in the developing world for the export of IT and IT-enabled services (IT-ITES) to the West – has found a receptive audience amongst certain African politicians and policymakers. Drawing on evidence from the development of the IT-ITES industry in India, Jyoti Saraswati argues that the costs of adopting this model will far outweigh any benefits that might be engendered by it.

The World Bank is certainly no stranger to failed policy prescriptions. But there is a widespread belief that its latest offering – an ‘alternative’ model of development centred on the utilisation of low-cost, skilled labour in the developing world for the export of IT and IT-enabled services (IT-ITES) to the West – is a recommendation which has the potential to deliver growth.[1] But has the World Bank really broken its hoodoo and formulated a model suited to the domestic conditions found in many African countries? Or does it promise to be merely the latest entry in a catalogue of disappointment.

THE ALLURE OF BANGALORE

Cast your mind back to the turn of the century. Globalisation was the buzzword, and discourse on its effects had started to permeate every discipline. Development studies was no exception. Two globalisation-related notions in particular enjoyed high purchase amongst scholars and policymakers within the development community. The ‘death of distance’ argued that, with advances in telecommunications technology, geography was being rendered increasingly insignificant in determining trade patterns and investment flows in services. Related, the ‘flat world theory’, popularised by the New York Times columnist Thomas Friedman, argued that as a result of the ‘death of distance’ the citizens of the developing world could now compete over jobs and wages with people in developed countries on a much more level playing field than ever before. [2]

According to Friedman, the Indian IT-ITES industry was the definitive physical embodiment of the flat world. The glass-and-steel buildings of Bangalore and other Indian software hubs, housing many of the world’s finest software firms as well as front-desk and back-office operations of most of the Fortune 500, were held up to be shining examples (quite literally) of the flat world. Friedman argued that it was a growing recognition of India’s hardworking, highly-skilled yet low cost labour force that convinced TNCs to relocate many of their service-based operations from the developed world to India. Building on the case study of India’s IT-ITES industry, development agencies began to ponder whether other developing countries could, like India, also successfully attract services-based TNC investment.

The turning point from conjecture to prescription came in 2001 when the World Bank-affiliated International Finance Corporation released what would become a highly influential report. Leapfrogging? India’s Information Technology Industry and the Internet, penned by Robert Miller, while concentrating on the Indian IT experience and its relevance for the country’s on-going and wider development, also raised the issue of its applicability to other developing countries. Miller’s analysis of this issue was admirably measured, noting that the differences in technical and scientific manpower and ability between India and most other developing countries meant that emulation would not be straightforward. Nevertheless, for states wishing to follow in India’s software footsteps, Miller advised a narrow focus on the provision of telecommunications and human infrastructure and ensuring the strong protection of property rights.

Whereas Miller had expressed caution in terms of the wider applicability of the Indian IT-ITES industry, other persons at the World Bank and its affiliates did not. Instead, there quickly developed a concerted attempt to ‘sell’ Bangalore and the wider Indian software and service industry as an exciting new model of development open to all low and middle-income countries. Put simply, they claimed that an IT-ITES industry could ‘rapidly transform a country’s economy and improve people’s lives’. [3] Moreover, they posited that developing countries could ‘claim a slice of the global IT-ITES business’ through relatively straightforward policy initiatives. [4] Key was creating a ‘supportive ecosystem’, comprising cyber-parks with fast and reliable international telecommunications links and reliable power supplies, plus incentives to investors such as waivers on import duties for IT-ITES exporters, energy subsidies, tax holidays, and the cutting of red tape regulation.

KENYA’S GREAT LEAP FORWARD?

Sub-Saharan Africa, with certain similarities to India in terms of endowments, appeared to be particularly well-suited to the model. For example, much of region, like India, suffered from decrepit roads, rail, and ports, which had served as major impediments to more traditional models of development based around investment in light industry and export-led growth. But such deficiencies were far less obtrusive to the export of services, as India’s IT-ITES success had demonstrated. Moreover, like India, most of the countries in the region were producing large numbers of technically skilled persons, most of whom faced a future of underemployment in the domestic economy or emigration to the West. It was believed that a large IT-ITES industry would be better able to utilise such a workforce. Third, most of these graduates were fluent in a major Western language, be it English, French or Portuguese, based on their experiences of colonialism. This was useful in much back-office work and integral to front-desk operations such as call-centres. Thus, much of the World Bank’s promotional material and activities were directed towards Sub-Saharan Africa. [5]

In the region, Kenya has been by far the most enamoured with the Indian IT-ITES industry and has gone furthest in ensuring the ‘supportive ecosystem’ as outlined by the World Bank. [6] In 2006, President Mwai Kibaki launched the Kenya ICT Strategy, Collaboration and Outsourcing initiative. [7] The following year, the Kenya ICT Board was established ‘with a key mandate to market the country to TNCs as a global outsourcing destination’.[8] And in 2008, the government’s Kenya Vision 2030 even placed IT-ITES as one of six key economic pillars of development (alongside of, and of equal weighting with, such important sectors as agriculture, financial services, trade, manufacturing and tourism). Moreover, the Kenyan government has backed up the rhetoric with substantial action. It has been one of the major investors in fibre-optic infrastructure on the continent. [9] And while foreign investment in IT-ITES operations were already legible for the various tax holidays and subsidies offered by the country’s numerous Export Processing Zones (EPZs), plans for an array of specially constructed cyber-parks – with the $10 billion Konza Technology City as the flagship – have been swiftly drawn up and are in the process of being implemented.[10]

KONZA, THE WHITE ELEPHANT

It is now five years since the Kenyan government embarked on its ambitious project to establish the country as a major global IT-ITES hub. Yet despite a string of government initiatives based on the World Bank’s recommended policy template, and backed up by massive investment, the results have been less than spectacular. In its most recent evaluation of the IT-ITES industry in Kenya, the World Bank regretfully conceded that the country’s IT-ITES exports ‘have yet to fully emerge’. [11] This is putting it mildly. Foreign investors have shown little interest in establishing IT-ITES export units in Kenya. The few ITES exporters in Kenya are predominantly small, local firms with negligible exports due to problems breaking into foreign markets.[12] Moreover, and related, employment generated by the IT-ITES industry thus far has been limited. Using the most recent estimates for 2012, the industry employed just 4000 people. [13] To put this into context, just one Indian software service firm – TCS – added 4000 IT-ITES jobs to its workforce every month between 2007 and 2012. [14]

One would presume that such paltry figures would have precipitated a period of reconsideration regarding the viability of the model and the accuracy of World Bank claims. But the limited success thus far does not appear to have discouraged the Kenyan government. Indeed, it appears to have had quite the opposite effect. Investment is increasing, projected figures of future IT-ITES employment are growing exponentially, and the rhetoric has become increasingly bombastic. Moreover, those who argue that the project is unlikely to work – or that such emphasis is misguided and scarce resources could be better allocated elsewhere – have been dismissed as impatient, short-sighted, pessimistic and even racist. [15] The Kenyan government appears to believe that Konza and other such parks will, eventually, reap an IT-ITES bonanza.[16] What is more, this is a view that continues to be supported by the World Bank.[17]

The Indian experience suggests that this prediction is misplaced and that Konza Technology City is more likely to be a very expensive white elephant than the foundation stone for a rapid expansion in the Kenyan IT-ITES industry. This is because FDI in IT-ITES into India emerged as an outcome of the success of the Indian IT-ITES industry, rather than its initiator. Miller’s claim that ‘software exports, the earliest harbinger of a more widespread IT expansion, began only in 1985 when Texas Instruments established its subsidiary in Bangalore’ is, to put it bluntly, wrong. [18] Software exports from India began in 1974, facilitated by the Indian state’s 1972 Software Export Scheme and carried out by Tata Consultancy Services (TCS) which remains to this day India’s largest, and the world’s fifth largest, software services firm. FDI in IT-ITES only began arriving in India en masse from 2000 onwards, once Indian firms had demonstrated the viability of the country as an export platform for IT-ITES.[19] This implies that IT-ITES FDI into Kenya will not simply arrive due to an increasingly ‘supportive ecosystem’. In addition, it suggests that if Kenya wishes to develop an IT-ITES sector, it would be better off concentrating on helping local IT-ITES start-ups penetrate regional markets than attracting the back office and front desk operations of major TNCs. And this is a task which does not require a multi-billion dollar cyber-city.

THE GREAT ESCAPE

Interestingly, Kenya’s failure thus far to attract FDI in IT-ITES may in fact be a blessing in disguise. This is due to the odd, indeed counterintuitive, relationship that exists between a state’s success in attracting FDI in IT-ITES and the rates of IT diffusion across the country (where IT diffusion is understood as the uptake information technology by firms, schools and other institutions). Many would presume, quite naturally, that success in IT-ITES exports would boost IT diffusion. But the development of the IT-ITES industry, in particular one based on FDI inflows, may actually come at the expense of IT diffusion in the country. As IT diffusion has far broader developmental returns – by increasing the productivity and competitiveness of local firms across a range of sectors – than even the largest IT-ITES industry, to sacrifice the former for the sake of the latter undermines development.

Again, it is India which provides the best example of this. With the intake of IT-ITES FDI in India, pressure grew for the protection of software property rights. This agenda was successfully pursued by Microsoft in particular, which was able to exert significant political influence in New Delhi and in state governments with IT hubs such as Karnataka (home to Bangalore) and Andhra Pradesh (Hyderabad), via its omnipresent position on the Executive Council of the National Association of Software and Service Companies (NASSCOM), the Indian IT-ITES industry’s association.[20] However, as software piracy is the chief mechanism by which IT diffusion in a poor developing country is facilitated, India’s zealous enforcement of software property rights at the behest of foreign capital has had a deleterious effect on the rate at which information technology has been taken up. Thus, while the IT-ITES industry in India was growing annually at double-digit rates, the country’s international ranking in IT diffusion was plummeting, from an already low 136th in 1997, to 146th in 2003.[21] And within India, states with major Indian IT-ITES hub shave seen their IT diffusion rankings fall vis-a-vis other Indian states with small or no IT-ITES hubs. [22]

LEARNING THE RIGHT LESSONS

Drawing on the empirical evidence from the Indian IT experience, this article has explained why Kenya’s attempts to emulate the Indian IT-ITES industry have thus far failed. Moreover, it has shown why this failure may be a blessing in disguise as the ‘supportive ecosystem’ demanded by the World Bank for IT-ITES success would likely impede IT diffusion. The concern, however, is that Kenya and other African states, in pursuing the Indian IT-ITES dream, may continue to both heavily invest in fibre-optic infrastructure and tighten property rights in software in the hope that this will, eventually, bring in foreign investors. While this is unlikely to attract high levels of FDI, it may well hinder the uptake of IT amongst firms.

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* Jyoti Saraswati is the author of Dot.compradors: Power and Policy in the Development of the Indian Software Industry (Pluto, 2012) and co-editor, with Ben Fine and Daniela Tavasci, of the forthcoming Beyond the Developmental State: Industrial Policy into the 21st Century (Pluto, 2013). He teaches on the Business and Political Economy Program at the Stern School of Business, New York University.

NOTES
[1] The IT-ITES industry comprises IT services and IT-enabled services (ITES). IT services refers to the writing or maintenance of specific software programmes while ITES refers to the back-office and front-desk operations facilitated by IT and telecommunications. Front-desk operations include, most prominently, call-centres. Back-office operations encompass various data-entry and data-processing activities.
[2] Friedman, Thomas (2005) The World is Flat, New York, Farrar, Straus and Giroux
[3] World Bank (2011) http://tinyurl.com/cezcfxm, accessed 18 November 2012
[4] World Bank (2011) http://tinyurl.com/cezcfxm, accessed 18 November 2012
[5] For example, to ensure suitable human infrastructure, in 2008 the World Bank launched the New Economy Skills for Africa Program (NESAP). NESAP focused on providing technical assistance to fine-tune the aforementioned policies for individual countries, capacity building through knowledge-sharing and south-south learning, and facilitating new partnerships between companies, learning institutions, and industry associations.
[6] Other than Kenya, the African governments most interested in replicating the Indian IT model were, Ghana, Senegal, Nigeria, Tanzania, Mozambique and Madagascar, all of whom signed up to NESAP.
[7] Kenya ICT Board (2012) http://tinyurl.com/dxqnb7d, accessed 18 November 2012
[8] Kenya ICT Board (2012) http://tinyurl.com/dxqnb7d, 18 November 2012
[9] Kenya ICT Board (2012) Kenya Business Process Outsourcing Handbook, Nairobi, Kenya ICT Board, p.3, http://www.ict.go.ke/images/guide_book.pdf , accessed 18 November 2012
[10] The Konza Technology City, self-titled as Africa’s Silicon Savannah, is to be the flagship2000 hectare site devoted to creating Africa’s first ‘technopolis’. For more information, see the Konza Technology City website at http://www.konzacity.co.ke
[11] World Bank (2012) Deepening Kenya’s Integration in the East African Community, Washington D.C., World Bank, p.38, http://tinyurl.com/d483ezy, accessed 18 November 2012
[12] Dihel, N., Fernandes-Magarida, A., Gicho, R., Kashangaki, J. and Strychacz, N. (2011) ‘Africa Trade Policy Notes: Can Kenya Become a Global Exporter of Business Services?’, Washington D.C., World Bank, http://tinyurl.com/cw9sdt2, accessed 18 November 2012
[13] Omondi, George (2012) ‘Kenya: BPO Firms Suffer from Worsening Job Losses in the West’, Business Daily,15 February, http://allafrica.com/stories/201202160548.html?page=2 , accessed 18 November 2012
[14] Based on the 2007 workforce figure of 89,419 workforce in Varma, Dinesh (2008) ‘Inkling of Changing HR Mandate at TCS’, The Hindu, 7 July, http://tinyurl.com/cxc2gqp, accessed 18 November 2012, and the 254,000 figure in 2012 from TCS website itself, http://tinyurl.com/c4jb2cy, accessed 18 November 2012
[15] As evidenced from the comments page for Carstens, Martin (2012) ‘Konza Technology City: Does Kenya Really Need It?’, Memeburn, 28 March, http://tinyurl.com/cwhcebr accessed 18 November 2012
[16] Moreover, the Konza Tehcnology City appears to have grabbed the attention of policymakers and politicians in other African states. Ethiopia and Malawi appear to have started to follow suit in developing their own multi-billion dollar cyber-city ventures.
[17] Dihel, N., Fernandes-Magarida, A., Gicho, R., Kashangaki, J. and Strychacz, N. (2011) ‘Africa Trade Policy Notes: Can Kenya Become a Global Exporter of Business Services?’, Washington D.C., World Bank, http://tinyurl.com/cw9sdt2, accessed 18 November 2012
[18] Miller, Robert, (2001) Leapfrogging? India’s Information Technology Industry and the Internet ,Washington D.C., International Finance Corporation, p.15
[19] Moreover, while hundreds of foreign firms established IT-ITES subsidiaries in India from 200 onwards, the massive scale of FDI can be attributed to large-scale investment by just three firms – IBM, Accenture and Cap Gemini – all of whom were facing growing competition from the rapidly growing Indian software firms such as TCS, Infosys and Wipro and saw scaling up operations in India as the best way to offset their rivals’ competitive advantage. That the direction of FDI by TNCs is driven by offsetting the competitive advantage of rival firms is referred to as the Hymer-Kindleberger theory based on the work of political economists Stephen Hymer and Charles Kindleberger. The Economist was the first major international outlet to identify the emerging challenge from Indian software firms to the established business service behemoths of the West – see Economist, (2004) ‘The Remote Future’, 19 February
[20] The membership criteria of NASSCOM allows TNC subsidiaries engaged in the IT-ITES industry in India to become fully-fledged members. And as subsidiaries are not independent of their firm’s headquarters, this essentially allows TNCs themselves to become members.
[21] Using data from the United Nations Commission for Trade and Development (UNCTAD) available at http://tinyurl.com/bnjzpef, accessed 18 November 2012
[22] Das, Bhibunandini, (2010) ‘Across Indian States: Diffusion and Determinants of Information and Communications Technology,’ PhD Workshop, Chennai, 19 March, http://tinyurl.com/bszjakj, accessed 18 November 2012