One of the main concerns for economists is addressing human needs in light of limited resources.  The four basic economic questions are: What goods needs to be produced? How do resources get used in the production process? Who receives the finished goods? And finally, when do the goods get produced? Answering these four questions is essential for an economy to function properly. In addition, satisfying consumer's tastes whilst minimizing costs in order to achieve efficiency is also essential for economists and business entities, especially with the ongoing industrial revolution and the spread of consumption culture. 

Nowadays, the internet is a powerful tool in deepening consumption, as it opens the market to a growing demand of diversified tastes, “inclusive trade” and more interaction between the final users of a product and its designers. With the high roll out rates of the Internet in the world, the traditional definition of a market, where suppliers and consumers meet in a certain area, is changing radically with particularly phenomenal growth in electronic commerce (“E-Commerce”). Some economists even believe that with this technological evolution, 3D printers will become the “factories of the future”.

 Source: Internet World Stats – www.internetworldstats.com/stats.htm

E-Commerce toward an inclusive trade

In a forum organized by World Trade Organization (WTO) last September in Geneva, it has been highlighted that the rapid growth of E-Commerce is a key factor facilitating “inclusive trade” as increased connectivity helps reduce the disadvantage of distance, thus trade costs. Online trading is increasingly vital for both large and small firms, especially for organizing their production and distribution through global supply chains. For small and medium-sized enterprises, E-Commerce brings new inclusion opportunities as it opens the way to connect to world markets.

In 2015, UNCTAD has estimated that the value of the fast rising business to business (B2B) E-Commerce would amount to more than $15 trillion and business to consumer (B2C) E-Commerce to more than $1 trillion. Thus, they recognized that by allowing small enterprises in developing countries to tap into global markets, the digital economy could generate a new industrial revolution.

However unfortunately, developing countries are not benefiting that much from the ongoing growth in the digital economy. According to the UNCTAD B2C E-Commerce Index 2016, the top 10 positions are all filled by upper-income economies; mainly Europe, Asia-Pacific and North America. Luxembourg ranks first, due to its well-developed financial sector that boosts its secure server ranking. It is also the European headquarters for global e-commerce players such as Amazon, PayPal and Apple. Despite being landlocked, Luxembourg has a well-developed logistics network and is the second highest European ranked country on the UPU postal reliability score. Like Luxembourg, Switzerland also has a strong financial sector, good logistics networks and high postal coverage.

Iceland ranks second due to being the leader in Internet penetration, credit card possession and secure server diffusion. Norway and Finland make up other Nordic countries in the top ten with much the same characteristics: high Internet and credit card penetration and assumed proliferation of web shops. The United Kingdom has relatively high Internet penetration as its B2C Index ranking is reflected by its well-developed e-commerce market, particularly attractive to overseas shoppers. It also has the highest online shopping rate in the world with as much as 85% of Internet users purchasing goods and services over the Internet.

On the other hand, in the Asia-Pacific, two of the three economies in the top ten are notable for having the most reliable postal networks. The Republic of Korea and Japan rank 1^st and 2^nd respectively in the UPU Postal Reliability Score. The following table shows the top 10 economies according to UNCTAD E-commerce Index.

Source: UNCTAD B2C E-COMMERCE INDEX 2016, UNCTAD Technical Notes on ICT for Development, No. 7.

Arab world and knowledge economy

According to Arab Knowledge Economy Report 2015 – 2016 online shopping in the Middle East has witnessed high growth in the past few years, and has subsequently encouraged global investments into the region's e-commerce market.

The region's shift to a knowledge economy is well documented within the report with a crucial emphasis on Arab Digital Cities. According to the report, Dubai ranks among the world's top 10 cities in Digital Governance, topping world capitals such as London, Oslo, Stockholm and Vienna in 2014.

A survey of the official city websites of 100 major cities in 100 countries has ranked Dubai ninth overall, fourth in service delivery and fifth in privacy and security. The survey was released in September 2014 by Rutgers, the State University of New Jersey - Newark.

Source: Internet World Stats – www.internetworldstats.com/stats.htm, * Numbers are for June, 2016

Mauritania, Somalia, Djibouti and Comoros are less than 500 thousand users each.

Information and Communications Technology (ICT) infrastructure as well as noticeable advancements in research and development is evident in the high numbers of patents registered in Saudi Arabia. The dynamic expansion of the knowledge economy is largely a result of the efforts of the countries within the region to shift their dependency from an oil-driven economy. This has led to pioneering initiatives for developing technical advancements in key economic sectors. Its influence has extended towards retail, hospitality and various other business areas.

The six GCC states led the Arab region in terms of ICT indicators in 2015. Bahrain took a commanding lead, registering 74.15 percent in Internet user penetration, while Kuwait registered the highest in mobile subscription penetration with 194.62 percent.

In 2015, five Arab universities appeared on the Shanghai Academic Ranking of World Universities (ARWU). Four Saudi universities achieved a significant milestone by placing on the ranking in its latest issue released in June 2015, placing first on an Arab and Islamic scale.

Both King Saud University and King Abdulaziz University remained among the top 151-200 global universities in 2015, while King Abdullah University of Science and Technology moved from being part of the top 401-500 global universities in 2014 to the top 301-400 in 2015.

E-commerce in the Arab world

The Arab world is witnessing rapid strides towards an information economy. According to Developed by Orient Planet Research, an Orient Planet Group estimates the Internet penetration rate will jump from about 37.5 percent in 2014 to over 55 percent in 2018, or about 7 percent above the estimated world average of 3.6 billion users. The number of Internet users in the Arab World is expected to reach 197 million by 2017, which is a penetration of over 51 percent, and up 32 percent from 2012, according to the first ever Arab Knowledge Economy Report of 2014.

Source: Internet World Stats – www.internetworldstats.com/stats.htm, * Numbers are for June, 2016

Mauritania, Somalia, Djibouti and Comoros are less than 100 thousand users each.

The report states that the Arab countries are heading towards a knowledge economy by improving their education sector through the adoption of new technologies, investment in the Information and Communications Technology (ICT) infrastructure, construction of firm research and development programs, and improvement in the overall business environment. The public-private partnership (PPP) is required to ensure smooth progress in knowledge related indicators and build an entrepreneurial culture that supports innovation.

The UAE leads the Middle East with a global ranking of 38 in overall innovation performance while Dubai is the first city in the region to establish first knowledge clusters, including Dubai Internet City, Dubai Media City and Knowledge Village. The UAE's transformation to a knowledge-based economy is currently a key priority for the country with several innovations seen across prime economic sectors such as oil & gas, construction, healthcare and hospitality.

The E-commerce Market in the Arab World is worth over $7billion, in which the United Arab Emirates account for the biggest share of this, followed by Saudi Arabia and Egypt with online retail markets of $1.5b and $1.4b respectively.

According to a study released by “Payfort”, a Dubai-based online payment gateway, in May 2015, E-commerce in the Middle East was worth $14 billion in 2014 and is expected to total more than $20 billion by 2020 which is growing faster than in any region of the world. The study also outlined that the purchase of goods and services is growing by 45% a year in Arab countries, compared to 20% in Europe and 35% in Asia. Significantly, at least 71% of the Arab e-shoppers are men, except in the United Arab Emirates, in which the majority of the buyers are young women aged between 26-35.

Source: PAYFORT, the State of Payment in the Arab World 2014.

Additionally, the study found that the UAE, Saudi Arabia, Egypt and Kuwait are the biggest Arab online markets, where sales run to several billions of dollars annually. However, one of the difficulties of expanding online business in the Middle East and North Africa is the heavy reliance on cash, instead of debit or credit cards. Cash-on-delivery is the most popular method in many countries and it reached 72% of the total online shopping in Egypt in 2014.

According to the study, the volume of e-commerce in Jordan averages $400 million a year, which is quite minimal compared to the actual potential and volumes elsewhere in the region, especially the Gulf.

With more than 11 million active mobile subscriptions in the Arab world, and internet penetration exceeding 74%, and the fact that some 60% of operating handsets are smart phones, it is not surprising that E-Commerce is bound to grow over the next few years.

In 2014, E-Commerce globally was estimated at $220 billion, albeit 20% of those transactions were made via mobile phones, as opposed to traditional online computer deals. Hence, experts value the mobile market segment alone at $45 billion.

According to the UNCTAD B2C E-Commerce Index 2016 the top 10 developing economies in the UNCTAD B2C E-Commerce Index are Asian Tigers with high Internet penetration and well-developed logistics networks. While Bahrain was already among the top 10 in 2014, newcomers such as Qatar and the United Arab Emirates had been previously underestimated because the Index did not account for post office retrieval of packages.

Kuwait is also a prosperous market for E-Commerce. Common language has spurred E-Commerce in the Gulf with the leading Arabic online shop Souq.com.  It is available for all of the countries with inexpensive one-day parcel delivery.

Note: The 2014 and 2016 indices have different postal methodologies.

Source: UNCTAD B2C E-COMMERCE INDEX 2016, UNCTAD Technical Notes on ICT for Development, No. 7.

How and who’s shopping? 

The leading ways to connect with shoppers across the Arab region is via search engine optimization and social media. Facebook is the leading social channel among Arab online retail brands, with 41% of them using the service. Instagram is also proving popular – with 23% of these companies making use of the photo sharing app.

According to on line LinkedIn bloger; Cassie Owen, across the region, men are going online to shop more than women. For instance in the UAE 59% of online shoppers are male, while Egypt sees the biggest disparity – with 77% of shoppers being male.

Younger web users are helping drive the e-commerce market too. In all the markets analysed, 26-35 year olds are more likely to make purchases online than any other age group. In Egypt, a massive 50% of digital shoppers are 26-35 year olds.

Regional vs. sectorial tendency

According to Payfort's State of Payments 2016 report, Saudi Arabia and UAE were the fastest growing markets for online payment transactions, with a 23% average growth across the region.

The report tracks online payment transactions in the airline, travel, e-commerce (online shopping) and entertainment sectors. It shows strong growth in online shopping across different sectors, with transactions in the airline sector increasing by 18 percent from 2014 to 2015, in the travel sector by 39 percent, in the e-commerce sector by 31 percent and in the entertainment sector by 34 percent. The region’s largest markets; Egypt, Saudi Arabia and the UAE led most sectors in terms of volume and year-on-year growth, with the exception of the entertainment sector, where the UAE had about ten times the volume of online shopping transactions in 2015, compared to its nearest country competitor.

The acceptance ratio across the region, indicating consumer acceptance to pay online, continues to grow. Egypt, Jordan, Kuwait, Qatar, Saudi Arabia and the UAE all now have more than 50 percent acceptance for online payments, with Saudi Arabia and the UAE having the highest percentages, at 58 percent and 71 percent respectively. Jordan on the other hand lags further behind since only 50 percent of its population are online.

Airline bookings and business-to-business marketplaces saw the highest acceptance rates in Saudi Arabia and the UAE, with e-commerce proving most popular in Egypt, travel services in Kuwait and Jordan, travel and entertainment in Lebanon and airlines, entertainment and B2B marketplaces being most accepted in the State of Qatar.

However, the report shows that there are some clear differences between consumer habits and preferences from country-to-country. For example, the top two product categories bought online in the UAE are flight tickets and clothes, whilst in Egypt they are mobile phones and utility bills. In Kuwait and Saudi Arabia the top two items purchased are flight tickets and utility bills.

The role the Internet plays in consumer shopping remains varied, with 17 percent of shoppers stating that they complete their entire shopping journey online and 67 percent relying on online research. Nine out of ten consumers surveyed said that they check product reviews online before making an online purchase.

Meanwhile, trying to encourage consumers to use online payment options can have its challenges and many of these stem from consumer resistance to new payment methods and technologies. Cash-on-delivery remains the preferred method of payment for 51 percent of Arab shoppers: a percentage that soars to 70 percent in the case of online shoppers in Egypt.

Credit card adoption across the region varies greatly between countries, with Kuwait and the UAE having the highest penetrations of 97 percent and 89 percent respectively. Qatar and Saudi Arabia have about 45 percent adoption and Lebanon just 15 percent credit card penetration. Amongst those consumers that pay online, most consumers registered a significant level of confidence in payment security and confidentiality, although much less confidence in online privacy.

Obstacles to E-Commerce

The participant at the WTO forum underlined that the right conditions must be in place for E-Commerce to flourish. A number of speakers cited barriers that can hinder digital trade, including a lack of broadband infrastructure, secure payment solutions, logistics and digital entrepreneurship. Furthermore, the role of government is crucial in helping electronic commerce flourish. Experts stressed that the necessary infrastructure, including adequate access to broadband and quality mobile connections, must be in place to eliminate the ‘digital gap’ between communities. Also legislation that facilitates e-commerce is vital as well.

According to a study released by “Payfort” regional instability is the biggest barrier to growth. A significant trust deficit in peaceful countries in the region, such as Jordan, is also getting in the way of expanding business online. However, e-commerce in Jordan is unlikely to witness a boom, unless steps are taken to boost the public trust in paying online. Some 70-80% of Jordanian e-commerce transactions are cash-on-delivery, which is a major obstacle to increasing e-shopping volume since the need for delivery people to carry cash is a major risk.

Another drawback is add-on fees for logistics and the usually hefty customs tolls levied by governments. Some sites are adding fees for customs duties, which vary from shipment to shipment and country to country. In Jordan, buyers only pay customs and duty if their orders exceed 100 Jordanian dinars ($140).

However, there are challenges stemming from the lack of clear-cut regulations and online security. Governments should do more to promote this industry by developing a comprehensive regulatory framework to cover the legal aspects of electronic commerce in the internal market. For instance after sales service needs to be improved, such as allowing to return merchandise bought online more easily.

Future prospects

According to the leading online payment service provider in the Arab world “Payfort”, “State of Payments in the Arab World” report, the Arab region saw a 23 percent increase in online payments during 2015, led by strong growth in Saudi Arabia and the United Arab Emirates, showing 40 percent and 24 percent year-on-year growth respectively. Meanwhile, the report forecasts that the volume of online payments could increase nearly three times by the year 2020 to reach more than US$69 billion of transactions per annum.