The Internet is making some people poorer

What good is the Internet if you can’t read?

That’s not a question many Americans think about, but in developing countries such as Ukraine, Nigeria, Nicaragua and Cambodia, there’s growing concern about being left out of the digital revolution—not just because it started someplace else, but also because those not riding the digital wave sometimes get swamped by it.

An exhaustive new report by the World Bank assesses the winners and losers of the digital revolution -- not by occupation or education level, but by country. Not surprisingly, advanced nations such as the United States and most of Europe are capturing most of the benefits of digital technology. In theory, that new technology ought to be lifting up developing countries, too, as it trickles out to them. Instead, however, the bank’s report finds that income inequality may be worsening in poorer nations, as those with digital-era skills pull ever further away from those without.

“Although [digital] technologies are becoming widespread, the economic payoffs are not,” the report reads. “The poor almost exclusively use only mobile phones not connected to the Internet. And even if they do have access to the Internet, they lack the skills to use it productively, with many unable to read in the first place.”

The Internet is nearly universal in the U.S. economy, so it may come as a surprise to learn how much of the world remains unconnected. Nearly 60% of the world’s population does not have access to the Internet, for instance. Of the world’s 7.4 billion people, only about 15%, have high-speed Internet access. More have cellphones, which are the basis for connectivity in many poor countries, even if they’re not smartphones.

Countries losing the most from the digital revolution are those that lack the “analog foundation”—things like business-friendly policies, accountable government and ready capital—that allow companies and individuals to optimize the value of technology. So the countries faring worst are those that usually rank poorly on openness and transparency, such as Venezuela, Russia, Ukraine, Nigeria, Iraq and Afghanistan. But many other countries that ought to be up-and-comers instead show signs that digital technology is having a net negative impact on workers, with Poland, Mexico, Hungary, Estonia and Bahrain topping that list.

Excluded from the digital economy

The problem in such places is an intensified version of a phenomenon many Americans are familiar with: technology is displacing many lower-skill jobs, without creating other jobs to replace them. In the U.S., we have safety-net programs meant to ease the burden of economic displacement: unemployment insurance, food stamps, job retraining in many areas, Obamacare for people who lose company-provided health insurance. Those types of programs—imperfect, to be sure—are supposed to provide a bridge during hard times and help people refocus their careers in more productive directions. In countries without such programs, new technology that puts people out of work can push prosperity even further out of reach, often with no way to claw back.

In rigged economies that favor apparatchiks and the well-connected, digital technology can tilt the playing field even more than usual by widening the gap between favored operators and outsiders. “Because the economics of the Internet favor natural monopolies,” the World Bank report says, “the absence of a competitive business environment can result in more concentrated markets, benefiting incumbent firms.” Imagine, for example, that a state-run energy firm in Russia has full access to the Internet, but a competitor that lacks the Kremlin’s blessing doesn’t.

The solutions are familiar, and also improbable: Encourage the more repressive nations of the world to open up, allow more competition and improve Internet connectivity for their citizens. Let more information in and empower the little guy. In developed nations, make it easier for people who lose their jobs to move where the jobs are, perhaps through mobility subsidies. Improve education.

Authorities everywhere are just now beginning to grapple with the second- and third-order consequences of the digital revolution, more than 20 years after it first became apparent a new kind of gold rush was on. Economists typically point out that every kind of technological progress destroys old jobs, while creating new ones; most of the time, living standards rise and it’s a net gain for humanity.

But as President Obama and many others have pointed out, it can be painful along the way and living standards sometimes fall permanently for the losers. Finding compassionate, effective and affordable ways to lift up those economically harmed by innovation has always been a challenge, and it remains one that even digital technology hasn’t yet solved.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman .