For centuries, the streets of Cairo have been festooned with traditional lanterns to celebrate the holy month of Ramadan. In recent decades, the domestically produced lanterns were replaced by cheaper ones made in China. Yet owing to the pandemic’s disruption of global supply chains, Egyptian-made lanterns made a comeback last year. But whether their revival will last remains to be seen.

The Egyptian lantern story is just one pixel in a much larger picture. Across the Middle East and North Africa (MENA), new technologies are increasingly facilitating trade within the region and between local markets and the rest of the world. Digital platforms like Alibaba, eBay and Amazon have expanded the range of goods and services that can be exchanged across borders. Digitalisation has not only increased the scale, scope and speed of commerce; it has also changed the way businesses trade across borders and allocate resources.

Successful local e-commerce platforms are usually a source of pride. But, though digital platforms provide consumers with a greater variety of goods and services and allow businesses to trade internationally with greater efficiency, they also subject local businesses to tough, and sometimes unfair, competition.

The MENA region’s experience shows that the introduction of digital trade and e-commerce can have complex implications for a developing country’s economy. To benefit from greater exposure to international trade via digital platforms, a country still needs to have a comparative advantage in certain industrial sectors, as well as widespread access to advanced digital infrastructure. MENA countries lack one or both.

Most Arab countries trade primarily in fossil fuels (accounting for 56% of the region’s total exports) and other natural and primary resources, which tend to be less positively affected by the rise of digital markets. Arab countries also produce very few intermediate products for export, and thus are poorly integrated in global value chains. Such weaknesses reduce the opportunities for domestic businesses to benefit from digital trade and e-commerce. No wonder some 80% of e-commerce in the region is concentrated in the six Gulf Cooperation Council (GCC) countries and Egypt.

To be sure, Arab consumers do benefit from digital markets, and the Arab consumer base is digitalising rapidly. Between 2012 and 2017, the share of digital media users in the region increased from less than 10% to more than 30%, and this trend has since accelerated with the pandemic.

But this rapid spike in digital adoption was mostly driven by smartphones with faster internet speeds, predominantly in the United Arab Emirates (UAE) and Saudi Arabia, which together account for 60% of the region’s e-commerce market. The situation is quite different in poorer countries outside the oil-rich Gulf states. According to a recent World Bank report, Tunisians in the bottom 40% of the income distribution would need to spend more than 40% of their income to purchase high-speed internet. And Tunisia is not alone. Over 60% of people in Algeria, Djibouti, Morocco, Syria and Yemen cannot afford fixed or mobile broadband services.

So far, the benefits of expanded e-commerce have been captured primarily by large GCC-based retailers, their foreign partners and higher-income cohorts. And these retailers have been expanding their markets with new product selections, both organically and through partnerships. For example, Souq, a UAE-based digital platform that was acquired by Amazon, and Noon, a digital market operated in partnership with eBay, have brought millions of new consumer goods to the MENA market with localised websites, product selections and payment methods.

The bulk of the wares sold on these platforms, however, comes from overseas sellers, mostly in China. According to the Chinese Trade Ministry, China’s exports to Egypt in 2020 totalled $13.6 billion, an 11.8% increase from the previous year, whereas imports from Egypt to China stood at $920 million, having fallen by 7.8%. In this respect, the overall impact of digital markets, particularly ‘aggregators’ like Amazon and Alibaba, on Arab states appears to be more negative than positive.

There are some exceptions. Domestic firms in transport, real estate services, tourism and entertainment have all been able to leverage digital platforms to their advantage. In the case of tourism, for example, hotels and tour operators have benefited from the arrival of international online travel booking agencies and search engines like Wego (Singapore) and Cleartrip (India), along with homegrown brands such as Almosafer (Saudi Arabia) and Rehlat (Kuwait).

Similarly, digital platforms have given a boost to the region’s entertainment business. For example, Anghami, a music-streaming platform founded in 2012 in Lebanon, is now a Nasdaq-listed company serving more than 75 million consumers. And Netflix has both tapped into and promoted local content, including its first Arabic-language original series. This has vastly expanded the industry’s reach. Lebanese director Lucien Bourjeily’s 2017 film, Heaven Without People, was little known until it became available on Netflix and shot to fame.

Still, these are the exceptions that prove the rule. While the Arab consumer base is digitalising fast, most of the productive base is not keeping pace. As a result, an increasing number of businesses in the region are losing their customers to foreign suppliers and service providers. This trend is unsustainable, because the local businesses that employ Arab consumers will eventually find themselves driven out of business.

Part of the solution is to address the infrastructure constraints facing small businesses in the region. These range from access to reliable electricity supplies to electronic payment systems and affordable high-speed internet services. But governments must not stop there. They will need to work closely with local and international market players to ensure that the new digital trade with the world goes both ways.

This article was originally published by Project Syndicate. Read the original article.