Digital Economy during COVID-19

The COVID-19 pandemic had disrupted both supply and demand sides of an interconnected world economy. Lockdowns, travel and trade restrictions affected nearly all aspects of cross-border economic activity. Global supply chains were forced to acclimatize. Foreign direct investment became slowed. Trade was hit hard as demand fell. Financial vulnerabilities were heightened. Overseas migration and worker remittances were severely disrupted. And tourism, important to many of the region’s economies, was particularly hard hit.

As this global pandemic has slowed down the progress, it surge as more and more have turned to digital communications for ‘work from home’ contexts. It is more essential now that the virtual world to communicate with one another, inform ourselves, access goods and services, work and conduct business. Though the internet has become an important global public utility; however there is still unambiguous disparities in who can make full use of its benefits. Developed countries can easily avail its advantages. The developing and under-developed countries are disadvantaged, with limited to no broadband access or skills in the digital régime. Though internet accessibility is a contributing factor to those disparities, it is not only an indicator of socio-economic disparities between countries but a contributing factor to those inequalities.

As has been stated, the digital divide is quickly becoming the new face of inequality. The 2030 Agenda for Sustainable Development’s pledge to leave no one behind is becoming synonymous with leaving no one offline.

There are similar trends when it comes to data. Cross-border data flows that comprise the digital economy are now geographically concentrated within a few regions. The same regions that house major companies specializing in data and digital technology.

Consequently, not every country has equal access to the data value chain. Often, Least Developed Countries are less able to access, collect and make use of raw data, let alone create data products or use them in a commercially viable manner. Meanwhile the profits of select companies working in the digital sector have skyrocketed during the pandemic, further compounding existing wealth inequalities.

The second challenge relevant to data flows is its governance and regulation. The flow of digital traffic affects every aspect of our lives i.e. from politics, to the economy, to our personal privacy and security irrespective of whether through online forums, social media, or commercial transactions.

Yet current approaches to data governance are inadequate in scale and are fragmented across regions. There is no universal set of standards on how we should govern the digital space.

As digital platform markets expand in Asia, there will be expected disruptions in trade, finance, and investment, among other areas. However, while technology could be disruptive, it also ushers in positive and inclusive development impacts. For instance, the diffusion and application of existing digital platforms have the tremendous potential to substantially raise rural and agricultural productivity, increase access to health and education, and greatly improve living standards. These new emerging technology platforms could also enable economies to pursue a different innovation pathway and develop more appropriate systems for their particular needs. How Asian economies manage this digital transformation will determine their economic fortune, dividing the winners from losers. Governments should help shape how platforms lead to better outcomes. They need to lead collective efforts to understand this new market behavior and identify policy and regulatory needs based on sound fundamental principles. Governments should formulate plans for utilizing digitization, facilitating innovation, and developing a digital business start-up ecosystem. They should also focus on dissemination of digitization plans, up-scaling the value chain, and facilitating agglomeration economies. As software, apps, and data are core to digital platforms, government should invest in basic internet or broadband technology to encourage app accumulation and the flow of data. Governments also have a role in acquiring essential technology by forging partnership with the private sector through smart policies and effective but light touch regulations. Adopting a harmonized and clear definition and measurement of indicators in the digital market is an important first step. Presently, obtaining information from digital platforms is a big challenge because of their complexity, cross-sector and cross-border activities, and rapid growth amid vastly changing goods and services. Improving the visibility of digital platform through a well thought-out taxonomy of indicators and data collection method is crucial to understanding their socioeconomic impact, tax implications, and link to growth and development. It is essential that national statistical agencies work with platform companies to obtain key information by using and expanding on traditional and alternative data sources. Planning and coordination among key institutions are critical. Innovation and digital platforms require new forms of public policy and public–private partnerships. It demands multi-sector support and coordination especially in areas of regulation, taxation and accounting, investment in materials and infrastructure, dissemination of knowledge, and training and education. A flexible policy and regulatory environment can nurture growth and innovation. Regulating technologies that are quickly developing and continuously changing is difficult. It may be more effective to use policies to enhance an ecosystem that supports innovation-driven entrepreneurship to bolster the competitiveness of domestic enterprises in the digital space. This requires governments to improve access to entrepreneur finance, enact competition policies to mitigate rent-seeking behavior, and improve education systems to incorporate entrepreneurship besides technical skills. Policies to protect intellectual property, consumers, and the privacy of personal data are crucial, as are those promoting effective cyber security. Regulators must protect public interests while ensuring that legislation or regulations do not have a chilling effect on innovation. Implementing light touch regulatory approaches on technologies that involve the processing of data, alongside more general data protection legislation is helpful. Likewise, policies that encourage innovation to manage the harmful impact of digital technology and the digital economy (e.g., devices and the packaging materials used in e-commerce) on the environment and those that deal with the adverse health outcomes of users (e.g., physical and mental health issues) must be considered as well. These could take the form of best practices guidelines, issuing warnings and advisories, providing official speeches, interpretations, and meetings with regulated parties.

Upgrading of education and labor market policies will help spread the benefits of digital platforms more widely. Digital platforms hold great promise to solve critical problems in education and learning, especially as the COVID-19 pandemic has eased more than 1.5 billion students out of face-to-face learning at one point when the countries closed their educational institutions. Governments should improve technology service in public education by addressing obsolescence in hardware and software. Creating an ecosystem for skills development and training to prepare workers for the digital future by improving access to connectivity, devices, and learning environments is crucial. This way, workers can easily access education and training materials to allow them to reenter the labor market at different levels. Developing arrangements for online quality assurance and online credentials such as micro-credentials, digital badges, among others will be helpful. To support start-ups, experiential entrepreneurship education among students and faculty may also be relevant as digital platforms create a pool of human resources with skills and expertise that are useful in many work settings. Governments may also use social media for citizen education and engagement. Strengthening of the social protection system and making it portable and flexible to be applicable to a wide range of work arrangements is important to protect digital workers’ welfare. Software and data management, and competition are crucial. Within the realm of digital platforms, competition has become indispensable and essential to ensure its continued development and accessibility on all fronts. The quickly evolving nature of this sector and consequent tendency to entrench incumbents underscore the need to lower barriers to entry to simultaneously promote consumer welfare and safeguard a level playing field among players of all sizes. Certain tools such as intellectual property rights implemented on fair, reasonable, and nondiscriminatory terms can serve as incentives for businesses to innovate and preclude the exclusive ownership of dominant players’ assets, such as interfaces or software. From a competition lens, open ecosystems serve to benefit all sides of a platform because of increased component compatibility, network effects, economies of scale, ease in entry, and intra-ecosystem competition. In closed structures or highly concentrated systems, interoperability and multi-homing create access points and integration and combat abuses of market power. However, the former requires careful and timely intervention to avoid distortions and to protect user privacy, particularly with regard to data-sharing policies. The same circumspection is integral to the harmonization of universal criteria of transferability and translatability policies for a trustworthy data ecosystem. The best practices in other jurisdictions on pro-competitive data access policy include securing consumers’ control of personal and machine generated data, setting standards for data portability, accountability, and accuracy, and prioritizing consumer centric policies. Despite advances in technology and digital platforms, a large segment of the population is still left behind. Many in Asia still lack access to power, clean water, or infrastructure that supports communication and information sharing, creating a digital and economic divide. To narrow these divides, the key ingredients are the provision of material access; infrastructure investments; and education and training to remove barriers pertaining to location, age, gender, culture, skills, and trust. Some key infrastructure, trade, and logistics reforms are needed to reap the benefits from the digital economy. The first is to improve infrastructure connectivity and services which would deliver affordable mobile communications, access to broadband and the internet, and set the foundation for interoperable systems. It is also important to improve trade and logistics systems, and interoperability among land, sea, and air transport to expedite the movement of goods and services. Reforms to speed customs clearance and border procedures are also important. There is a need to broaden e-payment availability options and to harmonize different national norms and standards while reducing risk of fraud and establishing consumer protection. Attracting FDI, venture capital and equity, and working with established businesses could supply the needed financing for technology and innovation start-ups. Funding for investment to support technology adoption in the region is important. With limited fiscal and financial resources in the region, a comprehensive approach to raise finance for technology is important.

The pandemic also exposed several risks to global supply chains such as the geographic concentration of production and overstretched supply chains of critical goods like medical supplies, and intermediate products, particularly active pharmaceutical ingredients and food ingredients.

Going forward, the increasing digitalization of global services can facilitate the post-pandemic recovery. Prior to COVID-19, the services sector was already an important part of the economy and international trade. For instance, services accounted for about 65% of global gross domestic product (GDP) in value-added terms and almost a quarter of global trade in the past 5 years. There was also an increasing pattern of trade in services in developing Asia, particularly in East Asia and Southeast Asia. The services sector was the primary destination for over two-thirds of FDI flows, with its share of global FDI stock more than double that of manufacturing. Services was also the largest and fastest growing employer, contributing to higher female labor force participation and wages. More importantly, it was a key contributor to productivity growth; as multifactor productivity increased due to innovations.

Most consumers shifted to mobile and online platforms to purchase food and household items, also relying on expanding digital payment systems. Businesses adopted contactless transactions online, through mobile payment applications, and pick-up or home delivery of ordered goods. Similarly, work from home arrangements, online education, tele-health services, online meeting platforms, and recreational streaming services also gained traction during the pandemic. This increasing digitalization of global services can continue to support global economic recovery.

Rapid technological progress will strengthen global connectivity. While global trade and commerce decelerated due to rising uncertainty and weak global growth, digital connectivity worldwide is progressing at high speed. Rapid progress in infrastructure and transactional technology is creating faster and cheaper connections worldwide.

This includes digitally enabled knowledge-intensive services, software, and technologies that help connect firms and consumers through digital platforms and internet services, communications and transportation networks, cloud computing and storage, artificial intelligence, machine learning, and social media. It is likely that these connections will increase further as technological progress continues. There are also several challenges related to data-intensive businesses. Digital platforms have become powerful business entities due to their first mover advantage and strong network effects. Their virtual presence often “in the cloud” allows them to skirt regulations and taxation. They are also able to employ underutilized assets and a workforce often with little employment or social protection

One key concern about the negative impact of globalization has to do with rising inequality, as higher wage premiums are accorded skilled labor. It is thus essential to strengthen investment in education and skills development and enhance financial inclusion to improve people’s access to economic opportunities, particularly for unskilled and informal workers. Improving education and training quality; especially for technical and vocational education—is also critical. Leveraging on digital technology to enhance productivity in agriculture, fishery, and services can also benefit low-income households. For advanced economies, strengthening the middle-class welfare system will help spread the benefits of globalization more broadly across society. Compensatory benefits and social assistance are also important to ensure that vulnerable members of society can access the financial resources to deal with and adjust to some of the economic challenges that accompany globalization. Flexible labor market policies that foster labor mobility can also be helpful while strengthening social protection, and skills training programs are crucial to support displaced workers between jobs and help them retrain and move on to other gainful employment. Promoting better governance standards could also help spread the benefits of globalization more widely. By promoting greater accountability and efficiency, good governance saves resources and improves government service delivery to the poor. Similarly, greater transparency and accountability minimizes leakages and improves targeting for social protection programs, thus making the redistribution of benefits more effective. Greater participation and consensus building also ensures that everyone is consulted and considered when making decisions that will affect the greater good.

The author, Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. Mr. Shaikh could be reached at [email protected]

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