Technology’s impact on GDP could be outsized
Now is the time to double down on tech and achieve what tiny Estonia has managed to realize — but this time, across the whole of Europe.
The aftermath of an indiscriminate tech sell-off may seem like a strange time to make a case in its favor, but economies across Europe need to keep their faith in this sector.
From the United States government’s investment in defense technology in the 1960s, which created the environment for Silicon Valley to thrive, to my own country of Estonia’s decisions in the early 1990s, concluding that its future economic success lay online and with technological innovation, governments have long recognized the opportunity for growth that technology can offer.
However, many tend to assume that progress will be linear, like a journey from Paris to Berlin, each kilometer lasting as long as the previous one. But the growth of software and tech-enabled innovation is exponential. That’s why software that was considered little more than a joke 10 years ago — simply kids building silly apps in their bedrooms — is now considered in the suite of tools society can no longer live without. Europe’s stellar tech successes — Skype, Spotify and Wise — have catapulted from zero users to impacting billions of people around the world.
In this environment, headlines around tech have often focused on levels of venture capital investment and the once soaring market values of individual companies, particularly consumer tech stocks. Soon, however, we will also see the impact of technological transformation on national economies as a whole, in overall GDP figures. It’s already happening right now at the city level in Europe — in London, Lisbon and Berlin — but we don’t measure GDP that granularly. However, there is no doubt that the next stage will bring tech growth into public consciousness on national, regional and global scales.
We know Europe’s overall GDP numbers are generally weak albeit volatile due to the COVID-19 pandemic, current energy costs and other urgent cost-of-living pressures, and the bloc is likely facing a prolonged period of low GDP growth and productivity. Look closer, however, and the numbers for the tech sector can hardly fail to inspire optimism.
The Organisation for Economic Co-operation and Development (OECD) collates sector-by-sector GDP “value added” comparisons for the world’s richer nations. And in constant currency terms, European Union data shows that the Information and Communication sector (ICT) has more than doubled in size since 2002, and is around 25 percent larger than just five years ago. Meanwhile, the sector’s contribution to overall EU GDP has climbed from 4.6 to 8 percent since 2002.
A combination of hefty size and weaker growth in established industries goes a long way in explaining why this impact on GDP is hard to see. Manufacturing, for example, contributes around 18 percent — pretty much unchanged this century. Agriculture, forestry and fishing — another long-established sector seen as critical in terms of policymaking — accounts for around 2 percent of EU GDP, which, much like manufacturing, is unchanging.
The story is similar in the United Kingdom as well, and although tech’s share of GDP is smaller in Britain — at 6.2 percent — the growth is faster. In 2002, ICT’s share of GDP was just 1.9 percent.
But it’s my homeland of Estonia that provides one of the best examples of how tech can have an outsized impact on GDP.
In Estonia — recognized as one of most advanced digital societies — the ICT sector has nearly quadrupled in value since 2002. Where tech accounted for 3.5 percent of GDP in 2002, the latest figure is just shy of 8 percent, and early-stage tech startups alone contribute 1 percent of jobs and 3 percent of the country’s economy. With over 25 percent annual growth anticipated, high-value tech exports are now expected to account for one third of the country’s economy by 2030.
Little wonder, then, that Estonia’s overall GDP is up by nearly a quarter from a decade ago, while the U.K.’s economy is 16 percent bigger, and the EU has only shown an increase of 6 percent.
This is also why governments, as well as investors, shouldn’t lose their faith in tech. Good companies are digitizing, and rising costs will only increase their desire and need to use tech to improve productivity. Policymakers need to get out of the way of both companies and investors — albeit while providing fiscal, regulatory and educational support where necessary.
And with that, what has happened in Estonia could very well start to make a difference in Europe’s biggest economies.
In the start-up world, there’s a concept commonly referred to as MVP — minimum viable product. Think of it as the lowest effort first product that a company can bring to market to get real feedback and income from real customers, and a crucial building block toward creating the best software and hardware.
What if we thought of Estonia as the MVP for Europe’s entire future economy? If the EU economy is growing at 2 percent a year on average, and there are cities or regions that grow at a rate 10 times that, we need a way to export that success right across the Continent.
Along those lines, at Plural, we’re ambitious to change the scale and impact of venture capital investment. As former founders and operators, we want to bring our past experience of building global companies — our scar tissue — to help the next generation of founders.
As economies bear the brunt of an unusual confluence of events, Europe’s technology sector may be experiencing turbulent times. But there’s no doubt it will bounce back strongly, creating jobs and prosperity across the Continent.
Now is the time to double down on tech and achieve the level of GDP impact that tiny Estonia has managed to realize — but this time, across the whole of Europe.