Why is e-commerce not benefiting the Arab world?

Sami Mahroum,

DUBAI — For centuries, the streets of Cairo have been adorned with traditional lanterns to celebrate the holy month of Ramadan.

In recent decades, locally produced lanterns have been replaced by cheaper Chinese-made lanterns. Yet due to the disruption of global supply chains caused by the pandemic, Egyptian-made lanterns made a comeback last year. It remains to be seen whether their revival will last.

The story of the Egyptian lantern is just one pixel in a much bigger picture. In the Middle East and North Africa (MENA), new technologies are increasingly facilitating trade within the region and between local markets and the rest of the world.

Digital platforms such as Alibaba, eBay and Amazon have expanded the range of goods and services that can be traded across borders.

Digitization has not only increased the scale, reach and speed of commerce; it has also changed the way companies trade across borders and allocate resources.

Successful local e-commerce platforms are usually a source of pride. But while digital platforms offer consumers a wider variety of goods and services and enable businesses to trade internationally more efficiently, they also subject local businesses to tough, and sometimes unfair, competition.

Experience from the MENA region shows that the introduction of digital trade and e-commerce can have complex implications for the economy of a developing country.

To benefit from greater exposure to international trade through digital platforms, a country still needs to have a comparative advantage in certain industrial sectors, as well as widespread access to advanced digital infrastructure. MENA countries lack one or both.

Most Arab countries primarily trade in fossil fuels (accounting for 56% of the region’s total exports) and other natural and primary resources, which tend to be less positively affected by the rise of digital markets.

Arab countries also produce very few intermediate products for export and are therefore poorly integrated into global value chains.

These weaknesses reduce opportunities for domestic businesses to benefit from digital commerce and e-commerce. No wonder some 80% of e-commerce in the region is concentrated in the six Gulf Cooperation Council (GCC) countries and Egypt.

Certainly, Arab consumers are benefiting from digital markets and the Arab consumer base is rapidly digitizing. Between 2012 and 2017, the share of digital media users in the region grew from less than 10% to over 30%, and this trend has since accelerated with the pandemic.

But this rapid spike in digital adoption has been driven primarily by smartphones with faster internet speeds, primarily in the United Arab Emirates and Saudi Arabia, which together account for 60% of the region’s e-commerce market.

The situation is quite different in the poorest countries outside the oil-rich Gulf states. According to a recent World Bank report, Tunisians in the bottom 40% of the income distribution are expected to spend more than 40% of their income to purchase high-speed Internet access.

And Tunisia is not alone. More than 60% of people in Algeria, Djibouti, Morocco, Syria and Yemen cannot afford fixed or mobile broadband services.

So far, the benefits of e-commerce expansion have been primarily captured by large GCC retailers, their overseas partners, and higher-income cohorts.

And these retailers have expanded their markets with new product selections, both organically and through partnerships.

For example, Souq, a UAE-based digital platform that was acquired by Amazon, and Noon, a digital marketplace operated in partnership with eBay, brought millions of new consumer goods to the MENA market with sites localized websites, product selections and payment methods. .

However, most of the goods sold on these platforms come from overseas sellers, mainly in China. According to the Chinese Ministry of Commerce, China’s exports to Egypt in 2020 totaled $13.6 billion, an increase of 11.8 percent from the previous year, while imports from Egypt to China rose to $920 million, after falling 7.8%.

In this regard, the overall impact of digital marketplaces, especially “aggregators” like Amazon and Alibaba, on Arab states appears to be more negative than positive.

There are a few exceptions. National companies in transportation, real estate services, tourism and entertainment have all been able to leverage digital platforms to their advantage.

In the case of tourism, for example, hotels and tour operators have benefited from the arrival of international online travel booking agencies and search engines such as Wego (Singapore) and Cleartrip (India), as well as brands locals like Almosafer (Saudi Arabia) and Rehlat (Kuwait).

Likewise, digital platforms have boosted the region’s entertainment business. For example, Anghami, a music streaming platform founded in 2012 in Lebanon, is now a NASDAQ-listed company serving more than 75 million consumers.

And Netflix has both harnessed and promoted local content, including its first Arabic-language original series. This has greatly expanded the scope of the industry.

2017 film by Lebanese director Lucien Bourjeily, paradise without anyonewas little known until it became available on Netflix and rose to fame.

However, it is the exceptions that prove the rule. While the Arab consumer base is rapidly digitizing, most of the productive base is not keeping pace.

As a result, an increasing number of businesses in the region are losing their customers to foreign suppliers and service providers.

This trend is not sustainable as local businesses that employ Arab consumers will eventually find themselves driven out of business.

Part of the solution is to address the infrastructure constraints faced by small businesses in the region. These range from access to a reliable electricity supply to electronic payment systems and affordable high-speed internet services. But governments should not stop there.

They will need to work closely with local and international market players to ensure that the new digital commerce with the world is a two-way street.

Sami Mahroum, professor at the Solvay Brussels School of Economics and Management, is advisor to FARI-AI for the Common Good Institute, fellow at the Knowledge Center for Data & Society of the Vrije Universiteit Brussel and author of Black Swan Startups: Understanding the Rise of Successful Tech Companies in Unlikely Places (Palgrave Macmillan, 2016).

Copyright: Project Syndicate, 2022.