The Two Sides of the Digital Economy

Last month the World Bank released its flagship World Development Report entitled "Digital Dividends."

The report is appealing because it does more than simply celebrate all the ways that digital technology has made the world a better place. It also laments and warns against outcomes where the digital economy becomes divisive and exclusionary.

Unlike Professor Pangloss in Voltaire's Candide, the World Bank does not believe that all is for the best in the best of all possible worlds. While few would argue with the good news, the less good news is often not so well understood.

First the good news. According to the report, more than 40 per cent of humanity has access to the internet. Internet use has tripled from 1 billion to 3.2 billion people just in the last decade. Mobile phones are owned by more people in the poorest households than those that have running water, electricity and modern sanitation.

The digital economy has connected people, business and governments in multiple ways, creating a host of new production opportunities, expanded consumer choice, and the scope for entrepreneurship and self-employment. Small enterprises with very few personnel can reach numerous customers in any number of locations through internet platforms.

As the report emphasizes, at its best information and communications technology is a source of growth via increased trading opportunities, productivity, competition and employment.

Among the drivers of increased trade are lower transactions and capital costs, improved information flows, and product and process innovations. Digitisation and the development of algorithms to perform routine tasks increase productivity. Lower entry costs and more readily available information foster competition, which in turn spurs innovation.

Direct employment in information and communications technology activities does not involve large numbers, but activities enabled by it create many more jobs. It has been estimated that each information and communications technology job in the United States creates five additional jobs. In China, the e-commerce sector has reputedly generated 10 million jobs in related services, accounting for 1.3 per cent of overall employment.

Dozens of governments have developed e-government platforms, with facilities for interactive communication. These can be used to transact regulatory obligations, disseminate information, and communicate with citizens for a variety of purposes.

All this suggests that the digital economy is a valuable vehicle for development and one that reduces inequality in a world where inequality is on the increase.

But not necessarily so, according to the World Bank.

While the digital economy can have all the positive benefits enumerated above, the absence of what the World Bank calls an analogue policy foundation means that reality lags behind the promise.

If 40 per cent of the population has access to internet, it follows that 60 per cent does not. They are excluded and further marginalized precisely because of the rich opportunities offered by digital technology. What is needed to address exclusion, argues the World Bank, is a sound business climate, adequate human capital, and good governance.

The economics of the internet suggest a tendency towards monopoly, not so much in the case of hardware, but with software platforms such as Google and Amazon. The sources of potential monopolistic power reside in incumbency advantages linked to information, economies of scale and lock-in effects linked to complex customised operating environments.

Vested interests, a poor regulatory environment and bad governance can sustain and reinforce these barriers to entry. Labour-saving technology can reduce employment opportunities. Lagging or underfunded education hampers skill development, intensifying the struggle between capacity and technological sophistication. Technology then further emphasises skill differentials and deepens inequality.

As for e-government, the same exclusions based on digital access and skill levels arise. Another problem in some jurisdictions is linked to the quality of governance. Instead of serving the citizenry, the personal information requirements needed for digital interaction can be used for control and repression.

Nobody is arguing for arresting the progress of the digital economy or that its huge benefits should be compromised. Rather, the argument is that the benefits fall short because policy failures mean they are poorly shared.

This article first appeared in the South China Morning Post on February 17 as The Digital Economy is a Blessing and a Threat.

The views expressed in this article are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.