2. The Middle East and North Africa’s digital paradox and why it matters

On the demand side, the hypothesis is that greater trust in government and institutions is essential for increasing digital payments use, and that trust can be enhanced using a two-pronged approach. The first is to ensure a regulatory environment that enables secure digital transactions, effective data governance, and data privacy protections. The second is to create secure opportunities that induce people to use and become familiar with digital money—such as digital social protection payments in lieu of cash transfer payments and digital options for paying for government-provided services. Other e-governance mechanisms may also be available to increase use of digital payments.

The rest of the chapter is organized as follows. The second section presents the digital paradox that characterizes the Middle East and North Africa region’s economies. The third section discusses the role of trust as an important determinant of adoption of digital technologies. The fourth section discusses the regulatory environment as an enabler of digital technology adoption. The fifth section concludes with some reflections on policies.

2. The Middle East and North Africa’s digital paradox and why it matters

A digital paradox characterizes digital technology use in the Middle East and North Africa region: for its countries’ levels of development, measured according to per capita GDP, the region has an excess in the use of social media (defined as number of Facebook accounts) and a deficit in the use of digital payments (defined as the number of individuals who have made or received a digital payment). This is evident in econometric regressions that benchmark countries in the Middle East and North Africa region against countries in other regions. Although per capita social media use of countries in the Middle East and North Africa outperforms that of other countries at comparable levels of per capita GDP, the use of digital payments of countries in the Middle East and North Africa underperforms that of the comparator countries (Figure 1). The econometric estimations indicate that, on average, the Middle East and North Africa region’s excess number of active Facebook accounts relative to where it should be given the region’s per capita income level, is about 11 percent. In contrast, on average, the region’s deficit in terms of the population’s experience with making or receiving a digital payment is about 15 percent. Without wider diffusion of digital payments use, the Middle East and North Africa’s digital economies will progress slowly.

The Middle East and North Africa region’s characterization regarding its use of digital technology for social versus economic purposes, is unique to the region and applies to all countries in the region regardless of per capita GDP (with the exception of Iran). Whatever the reasons for slow growth of the Middle East and North Africa’s digital economy, it is not merely a question of insufficient ICT infrastructure coverage, slow Internet speed, or insufficient access to the Internet (Cusolito et al. 2022). Getting to the root causes of this paradox and overcoming them is the only way that countries in the Middle East and North Africa can expand their digital economies and reap the gains they offer.

Digital tools such as the Internet, associated user applications, and other ICTs, offer tremendous gains because they are general purpose technologies (GPTs). Like other GPTs such as electricity, telephones, and railroads, digital economy technologies are usable in all sectors and boost economic connectivity—whether physical or virtual. As GPTs improve, they reduce costs and spur innovations beyond their initially imagined applications in many sector products and processes (Jovanovic and Rousseau 2005). In so doing, they engender widespread gains throughout the economy. The economic benefits of GPTs tend to increase as they become widely adopted across the population. For example, digital platforms are viewed as having turbocharged GPT characteristics, particularly network externalities that serve as a driving force of efficiency and productivity gains (Evans and Schmalensee, 2016).