Digitalization, which has started in the Middle East, is going to present both opportunities and hazards. It is likely to generate new political, economic and security risks for this region. Having realized that national economies driven only by commodities such as oil cannot sustain themselves, many Middle Easter counties are now prioritizing the growth of service-driven private sectors. This is why digital technologies are making an entry into this region.

The Middle East has already shown much digital penetration. In terms of users of the Internet, this region scores much ahead of other regions. Use of smartphones in places like Bahrain, Qatar and UAE is more than 100%. Much of this growth can be attributed to social media. Cross border data flow between this region and the world has also increased many times in the past 10 years. But McKinsey’s Digitalization Index suggests that the region has not yet exploited the advantages of digitalization particularly in the areas of business and government departments.

How has digitalization benefitted the Middle Eastern region?

Governments in this region are keen to maximize the digital economic output. Programs for this purpose in UAE, Qatar and Saudi Arabia have encouraged the growth of smart cities and ecommerce. According to Gartner, it is expected that governments in the Middle East will be spending about $11.6 billion for IT resources. There may be many opportunities for the Middle Eastern region both in private and public sectors in the post digitalization stage. But there are also significant risks and problems for this region’s security and governance.

For those countries in the Middle East which are eager to move to service-oriented growth incorporating digitalization is necessary. So, ecommerce for instance is one such business area which will grow with such a change. It will also offer the women of these region new employment opportunities. Digital as a Service offering will also become popular. Internet-enabled devices, cloud computing and 3D printing for example will help to automate business activities and industry operations. This in turn will also benefit the region’s construction and energy sectors. Here, as much as 40% of tasks can be automated with digitalization. This will also positively impact the growing banking sectors in Qatar, Bahrain and Jordan where digitalization can automate payments and customer interactions. This is the reason why big players like IBM, SAP and Oracle have now entered the Middle Eastern market. McKinsey is hopeful that this increase in productivity will improve the company bottom line by nearly 50% in the next five years and this will directly help in the economic development of this region by accelerating diversification from gas and oil.

What are the challenges of digitalization in the Middle East?

  • There will however be certain key challenges to digitalization. Regional consumer demands may be strongly in favor of digitalization but investments will continue to depend on business confidence related to high oil prices. The reduced oil prices in the Gulf over the last few years have stopped the public sector and private sector from giving up resources for IT projects. This is why the pace of digitalization still seems uncertain.
     
  • The climate of Middle Eastern business adds to this uncertainty. In comparison to East Asia or US, this region does have venture capital funding to make the startups profitable. There are many family-run businesses and state-affiliated companies which discourage local businessmen from starting companies that can challenge the industry’s operations.
     
  • Besides these factors, there are also political roadblocks. The governments here cannot trust third parties with data. So, digital solution usage is obviously less as you will have to depend on third party storage.  The governments are typically majority investors for private businesses and this is why this distrust is prevalent in their private sectors too. Moreover, the region has diverse laws concerning data security and data sharing, and it depends on many factors like industry-specific locations, free trade zones etc. This means there are compliance related risks too for both digital technology suppliers and users.
     
  • Another important effect of digitalization can be seen in their labor. Youth unemployment is almost 30% and regional unemployment 54%. The region has a huge youth population and almost 100 million is expected to join work by 2020. But this is accompanied by dearth of digital knowhow and talent. This is why governments through the region are taking measures to improve technical education hoping that this will resolve the unemployment problem.
     
  • There is another key problem due to digitalization. Digitalization can bring in short term hazards for regional labor markets. Workers can easily be displaced from positions which can now be completely automated. There may be a cut in wages for jobs that are partly automated. This is going to impact the energy-construction sectors that employ many workers from the non-Gulf Arab nations who send their salaries back to their home countries. If the region cannot offer safety nets and skills training to its workers, public anxiety can be expected to grow.
     
  • Public sector digitalization can be very useful but only 6% of countries here have elements which are needed to have smart governments. For instance, the Smart Dubai program which Dubai promotes to develop a smart city infrastructure that can offer public services electronically. The other nations only share the same dream; Bahrain and Qatar wish to restructure their governments through digital services. But the truth is that these governments are already affected by problems of corruption, fluctuating energy prices, growing demand for subsidies, frauds and wastage. Digitalization may help to ease these troubles. Using software for automating HR operations of the government and using mobile apps for delivering social services can reduce need for government staff as well as overhead costs. The easy accessibility to information can enhance citizen satisfaction. Such benefits will also extend across nations given the fact that this region gets a lot of refugees from Syria and Iraq. Digital payments can help refugees get monetary aid and aid providers can limit incidents of fraud and theft.
     
  • Another major risk arises from the region’s governments ties with the Internet. Governments have today become very preoccupied with controlling online information. Governments often restrict sharing and accessing of public data for fear that it may be used against them. The governments are also fearful of outsourcing their valuable data to third parties and this can inhibit large-scale digitalization. Side by side, the culture of censorship and surveillance by governments may also discourage global IT firms from coming to this region.
     
  • Increase in digitalization will also bring with it increased cyber security risks. In recent years, this region’s private and public financial, healthcare and defence sectors have all been targets of cyber attacks. Saudi Arabia has been most impacted by ransomware.

However, it looks like digitalization is here to stay and there is shift in the Middle Eastern region towards building huge data center facilities to meet the growing regional demands for cloud technologies.