Inside the Information Society: Policies for the digital economy

Last week I looked at the big picture on the digital economy, in the light of UNCTAD’s latest Information Economy Report. This week: some of the issues the digital economy raises for policymakers at a national and local level.

Let’s make four assumptions

First, it’s fair to say that the digital economy’s becoming more important with each passing year. UNCTAD estimates that it now accounts for 6.5% of world GDP. Two things matter about this. First, that it’s growing; and second, that it’s not yet that big a percentage of the whole.

Second, the digital economy differs from one sector to another. At its heart lies the ICT sector; around that, digital/platform businesses like Amazon and Uber; next, other sectors (such as precision agriculture and financial services) that are increasingly digitalised (make increasing use of digital resources/systems); beyond them, others that aren’t yet substantially affected. The book trade’s impacted more than copper mining. See the diagram in last week’s blog.

Third, digitalisation changes business models, but not economic fundamentals. Supply and demand, capital and labour, economies of scope and scale, competition and monopoly: all of these underpin digital business models as much as they underpin those that were pre-digital or are non-digital. The detail may be different going forward, but transformation isn’t total. Continuity’s as important as discontinuity.

Fourth, experience in different countries and different markets will be different. They have different resources, economic backgrounds, competitive advantages and disadvantages. Digitalisation won’t iron out the differences between Singapore and Serbia, or Belarus and Bangladesh. Context matters crucially.

And alter two assumptions

There’ve been two assumptions in much of the literature about digital economies that need rethinking, though.

Too much of the literature has focused only on the opportunities which digitalisation offers business. Those are important, but they’re only half the story. There are losers as well as winners in rapid economic change; collateral damage as well as beneficial outcomes; unforeseen consequences as well as those we hope for. Change changes things, in other words. Policies which focus on opportunities rather than on the whole picture, and all its outcomes, won’t succeed.

And we need to reach beyond the idea that government should simply ‘get out of the way in order to support business’. Good government is about building social and economic frameworks that balance the needs of diverse stakeholders in pursuit of common good. When governments ‘support business’ they should do so on that basis, not accept whatever the most powerful business voices want. Business interests are, in any case, diverse. What local start-ups need is unlikely to be top priority for global corporations.

So what do local markets need?

Discussion of the changes being wrought by the digital economy is, thankfully, becoming better nuanced, with more attention paid to local markets, local impacts and local experience. A good example of this was an Oxford seminar last week on Development Implications of the Digital Economy, which brought together academics and policy practitioners.

Five themes that emerged from this seemed to me particularly interesting. Each raises questions for scholars, policymakers and civil society practitioners (as well as businesses).

First, the relationship between global platforms and local businesses. Network effects are really powerful in the digital economy: the more users there are on a network, the more valuable it is and the more likely to acquire more users. The world’s most valuable and (arguably) powerful companies are global IT businesses. It’s hard for local businesses in any country to gain market share in any market that interests those companies. How can local governments support their local businesses?

Second, and related, the role of innovation. Large-scale innovation requires enormous capital investment. Forget the rhetoric: start-ups cannot set their sights on being the next Google. If they thrive, it’s likely to be because they meet a niche requirement, often one that’s local. Innovation hubs may or may not help with this: experience is mixed, some strongly positive, some not, suggesting much depends on how well they fit with local circumstances. What local hubs and businesses report, though, is that the challenges they face are as much non-digital as digital, to do with local circumstances rather than IT per se.

Third, employment in the digital economy, and especially the gig economy, is diverse, developing and uncertain in its impact. That impact may be very different in different places – undermining employment standards where these have been highly regulated but improving employment opportunities where they’ve scarcer and less regulated. Like digitalisation generally, gig work too should not be seen as only opportunity. Losers matter, including those who can’t get jobs in either traditional or gig employment.

Fourth, what should be regulated and how should that be done? Digital businesses rely on standards and regulation in some areas, where it benefits them, but often disdain it in others (like employment rights). If there’s a problem here, it’s not with regulation itself  but with appropriate versus inappropriate regulation. Protecting consumers and employees, promoting competition, preventing environmental harm, managing an equitable tax regime are all things governments should do – as well as enabling innovation that fosters prosperity and social welfare.

Fifth, the impact of the digital economy on equality and inequality. Advocates of the Information Society assumed it would advance equality. There’s growing evidence that it hasn’t, yet at least, and that it may, so far, be concentrating wealth and polarising jobs. Whichever’s true, it’s impact on equality is important for the public interest and for policy.

Each of these deserves its own blog post (and it’s likely each will get one in due course).

What do policymakers need?

There’s increasingly lively debate about what policymakers need if they’re to make decent decisions. Here are three priorities that I would stress.

First, joined-up government. Developing local economic capacity isn’t something that can be left to government departments with a specific mandate, especially not where digital capacity’s concerned. If governments want their digital economies to work, they need to plan and act holistically. Education matters as well as infrastructure. Legislation needs to be in place to protect data and permit online transactions. The impact of policies needs to be understood across the board.

Second, data, and the analysis and understanding that go with them. Most governments know far too little about the digital economy in their countries, and some businesses aren’t keen to help them out with numbers. Policymakers need to know more about what is happening (today and trend), including impacts on employment, income distribution and other economic sectors. They need proper analysis, including serious foresight analysis, not the hype propelled by some big-name consultancies.

Third, a willingness to listen, learn, adapt. We’re past the stage when the digital economy lies in the future. There’s more experience now in all countries, in all sectors, from small as well as larger businesses: some positive, some negative. Policymakers need to seek it out and learn from it – including stakeholder engagement that reaches beyond enthusiasts and those with vested interests. And, as the digital economy is constantly changing, this is a process that requires constant listening, constant learning and the willingness to adapt policies that aren’t working or have become outdated.

For this they need support from other stakeholders, two in particular.

Global IT businesses should collaborate with national governments and firms to support local ICT ecosystems because those ecosystems have value in themselves, not just for their immediate commercial interest (and they should willingly pay taxes, which support education and enterprise development for those ecosystems).

International development agencies should support governments’ efforts to develop appropriate policies and enabling environments for their countries, which address the whole impact of digital economies, not just their opportunities. The aim’s long-term development, not snatching at low-hanging fruit.

Next week, what should we do to measure the Information Society effectively?

Image: GotCredit used under Creative Commons license.

More about David Souter.


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