Where is Lebanon’s Trade in the Transition to a Digital Economy?

Global opportunities and challenges of digitalization

Photo Credit : Greg Demarque

The world is witnessing a digital transformation with implications evident at all levels of the economy, particularly at the level of trade. New trends are surging, mainstream practices are disrupted, and competition is growing especially with digitalization proving to be linked with greater trade openness and higher profitability.

As per the 2019 World Trade Statistical Review, current trade statistics cannot quantify the level of international trade attributable to digital transactions.  However, according to UNCTAD estimates, e-commerce sales hit USD 25.6 trillion globally in 2018, up 8 percent from 2017, constituting almost 30 percent of global gross domestic product (GDP) that year. It is most likely that this upward trend will continue with the pandemic putting e-commerce at the forefront of retail and accelerating the trend of digital adoption.

In fact, the surge in e-commerce and trade across online channels has pushed companies to move towards the creation of digital offerings that are able to respond to the growing demand where this was and will remain the only way businesses can thrive in this new economic environment and adapt to the trends that are shaping the business landscape.

The shift towards e-commerce was significantly apparent in many regions of the world as stated in a recent OECD brief. In the United States, the share of e-commerce in total retail increased to 16.1 percent between the first and second quarters of 2020 compared to 9.6 percent recorded during the first quarter of 2018. Similarly for the United Kingdom, the share of e-commerce in retail rose from 17.3 percent during the first quarter of 2018 to 31.3 percent between the first and second quarters of 2020. The development is similar for China where the share of online retail in total accumulated retail sales between January and August 2020 reached 24.6 percent, up from 19.4 percent in August 2019 and 17.3 percent in August 2018. This shift also gained relevance in several emerging markets such as Kenya, Bolivia, and Columbia where platforms started adopting new and more competitive business models seizing the opportunities over the long term.

Advantages of faster and more reliable digital trade

Countries that adapted to this digital era were able to realize the benefits associated with digital trade including, among others, the reduction of costs, the cutting of red tape, better integration in global value chains, and enhanced linkages with businesses and consumers globally. This digital revolution was also able to create higher productivity for firms, advance skills for workers, and generate greater consumer welfare and job creation.

However, it is worth mentioning that the gains from digitalization do not materialize automatically and the economic benefits are not directly realized in every country, especially with the rise of various regulatory challenges, complex trade transactions and several policy issues at the level of trade, investment, privacy and security.

Many countries have focused their efforts on strengthening their information and communication technology services to promote innovation and foster the emergence of new services and supply models such as cross border e-commerce, digital payments, cloud computing, etc. The COVID-19 pandemic has also sped up the adoption of digital technologies and services, where digital trade played an essential role in securing the trade flows, albeit virtually.

According to McKinsey’s Global Survey of executives, companies have accelerated the digitization of their customer and supply-chain interactions and of their internal operations by three to four years, and the share of digital or digitally enabled products in their portfolios has accelerated by seven years.

Where is Lebanon in this digital era?

With Lebanon’s main traditional growth sectors severely affected as a result of the compounded crises, the country’s vision settles at structurally changing the economy towards upgrading and increasing the share of its productive sectors, mainly agriculture and industry. In fact, this upgrade requires matching up new technologies with production and delivery systems for a successful outcome of creating growth and value added jobs on one hand and decreasing costs on the other.

The advancement of this process will not only put Lebanon at the path of economic development but will also yield substantial social benefits by leveraging the country’s pool of educated labor force and increasing people’s living standards as a result of higher incomes.

Given the current circumstances, boosting production and e-commerce will additionally allow the country to benefit from the available window of opportunity, i.e., the devaluation of the Lebanese pound, to boost goods and services with high export potential.

Unfortunately, Lebanon’s current economic model is no longer viable and is unfit for the digital era, obstructing the country’s ability to adapt to economic innovation and rapid technological change. As such, digital transformation can help Lebanon improve its economic prospects especially with growth registering a negative 20 percent in 2020 as per World Bank estimates.

In terms of digital adoption, Lebanon captures only 4.7 percent of its digital potential, well below the 8.4 percent average for Middle Eastern countries, highlighting a large untapped growth. The Lebanese e-commerce market is growing moderately. It still lags behind many of its neighbors, despite the fact that Lebanon is ranked 64th worldwide, according to the UNCTAD B2C E-commerce Index 2020.

There are several challenges impeding Lebanon’s ability to realize the benefits of digitalization. These challenges stem from inadequacies at various levels such as broadband connectivity, digital technologies, ICT skills, customs procedures, logistics, digital infrastructures, regulations, etc.

Delving deeper into the hurdles standing in the way of a successful transition, Lebanon’s  ICT infrastructure positions itself as the primary barrier especially through chronic power shortages, high internet subscription fees despite low speeds, a  low  fixed  broadband  subscription  rate and the lack of a fiber optic network infrastructure.

On the other hand, inadequacies at the level of ICT skills stem from the outdated education system and the prominent ‘digital divide’ resulting in the lack of knowledge and awareness on fundamental digital skills needed for the digital economy.

At the level of government, Lebanon ranked 127 out of 193 in the 2020 E-Government Development Index (down from 88 in 2018) highlighting the gap in e-payment systems and the absence of an adequate legislative and regulatory framework that is vital for the transformation.

Tools needed to grasp the opportunities

The main point lies in Lebanon’s readiness to engage and adapt to these fast-paced transformations. Despite several advancements, the country has much work ahead in addressing the challenges hindering Lebanon’s digital trade progress.

As per the latest economic plan published by the Ministry of Economy and Trade, “shifting from a rent based to a productive economic system requires a deep – and sometimes painful – transformation at all levels.” The plan also gives a particular focus to several productive sectors with high potential for export including the industrial and agriculture sectors being sources of national comparative advantages and value creation. As such, Lebanon needs to create an enabling environment for trade, leverage digital technologies and tailor them to the digital era with particular attention given to upgrading these promising sectors and tapping the country’s export potential.

Policy priorities include:

  • Investing in adequate digital infrastructures at the level of logistics, online payments, e-commerce and digital regulations. These investments are imperative to improve digital trade performance;
  • Expanding e-skills by revising the education and training systems, and providing workers and MSMEs with the needed opportunities to upgrade their skills and address changing labor market demands

Designing accommodative trade rules, export promotion and trade facilitation strategies to enhance the integration of SMEs in global value chains, such as the development of online platforms, digital solutions and targeted trainings aimed at building online business skills.

  • Revising and upgrading the existing legal   and   regulatory framework to ensure the success of any potential agriculture or industrial policy. This entails developing laws and regulations aimed at supporting legally-recognized digital interactions and protecting the interests of all actors.
  • Involving all relevant stakeholders including ministries, the private sector, academia and civil society.

What’s next?

Global trade is ever-changing, and the only way Lebanon can develop its economy is by leveraging its comparative advantages and integrating into global value chains. Technological and innovative advancements have posed several challenges forcing Lebanon, like many other developing countries, to create an enabling environment that would foster innovation and allow for the imperative transition into a digital economy.

The Lebanese government has a crucial role to play in pro-actively seeking digital technologies and expanding the use of digital services in trade to the reap the benefits of engaging with global trade partners and businesses and avoid  the risks associated with the poor adoption of these innovations that can be dire for all productive sectors, and citizens.

A holistic approach needs to be put in place and geared towards allowing digital trade to be the backbone of the country’s economic transformation.

Will Lebanon eventually be a “digital” trading partner?

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