Digital Economy’s Expansion Is Driven By Digital Data

Mobile money service providers outside Kampala International University, Uganda. M-Pesa is popular in East Africa. PHOTO | COURTESY | LARRY MADOWO

Accra, Ghana, September 8, 2019//-The digital economy continues to evolve at breakneck speed, driven by the ability to collect, use and analyse massive amounts of machine-readable information (digital data) about practically everything.

These digital data arise from the digital footprints of personal, social and business activities taking place on various digital platforms, according to the 2019 Digital Economy Report produced by the United Nations Conference on Trade and Development (UNCTAD).

Global Internet Protocol (IP) traffic, a proxy for data flows, grew from about 100 gigabytes (GB) per day in 1992 to more than 45,000 GB per second in 2017.

And yet the world is only in the early days of the data-driven economy; by 2022 global IP traffic is projected to reach 150,700 GB per second, fueled by more and more people coming online for the first time and by the expansion of the Internet of Things (IoT).

The development and policy implications of data collection and use depend greatly on the type of data involved: personal or non-personal; private or public; for commercial or government purposes; volunteered, observed or inferred; sensitive or nonsensitive. An entirely new “data value chain” has evolved, comprising firms that support data collection, the production of insights from data, data storage, analysis and modeling.

Value creation arises once the data are transformed into digital intelligence and monetized through commercial use.

…and digital platforms

Platformization is the second driver. In the past decade, a plethora of digital platforms have emerged around the world using data-driven business models, and disrupting existing industries in their wake.

The power of platforms is reflected in the fact that seven of the world’s top eight companies by market capitalization use platform-based business models.

Digital platforms provide the mechanisms for bringing together a set of parties to interact online. A distinction can be made between transaction platforms and innovation platforms.

Transaction platforms are two/ multi-sided markets with an online infrastructure that supports exchanges between a number of different parties. They have become a core business model for major digital corporations (such as Amazon, Alibaba, Facebook and eBay), as well as for those that are supporting digitally enabled sectors (such as Uber, Didi Chuxing or Airbnb).

Innovation platforms create environments for code and content producers to develop applications and software in the form of, for example, operating systems (e.g. Android or Linux) or technology standards (e.g. MPEG video).

Platform-centred businesses have a major advantage in the data-driven economy. As both intermediaries and infrastructures, they are positioned to record and extract all data related to online actions and interactions among users of the platform.

The growth of digital platforms is directly linked to their capacity to collect and analyse digital data, but their interests and behaviour depend greatly on how they monetize those data to generate revenue.

Geographically, the development of the digital economy is highly uneven

Digital developments will have implications for virtually all the SDGs, and will affect all countries, sectors and stakeholders.

At present, the world is characterized by a yawning gap between the under-connected and the hyper-digitalized countries. For example, in least developed countries (LDCs), only one in five people uses the Internet as compared with four out of five in developed countries.

This is just one aspect of the digital divide. In other areas, such as capabilities for harnessing digital data and frontier technologies, the gap is considerably wider.

For example, Africa and Latin America together account for less than 5 per cent of the world’s colocation data centres. If left unaddressed, these divides will exacerbate existing income inequalities.

It is therefore essential to consider how developing countries may be affected by this (r)evolution in terms of the creation and capture of value, and what should be done to improve the status quo.

The economic geography of the digital economy does not display a traditional North-South divide. It is consistently being led by one developed and one developing country: the United States and China.

For example, these two countries account for 75 per cent of all patents related to blockchain technologies, 50  per cent of global spending on Internet of thing (IoT), and more than 75 per cent of the world market for public cloud computing.

And, perhaps most strikingly, they account for 90 per cent of the market capitalization value of the world’s 70 largest digital platforms.

Europe’s share is four per cent and Africa and Latin America’s together is only 1 per cent. Seven “super platforms” – Microsoft, followed by Apple, Amazon, Google, Facebook, Tencent and Alibaba − account for two thirds of the total market value.

Thus, in many digital technological developments, the rest of the world, and especially Africa and Latin America, are trailing considerably far behind the United States and China.

Some of the current trade frictions reflect the quest for global dominance in frontier technology areas.

What is value in the digital economy?

The expansion of the digital economy creates many new economic opportunities.

Digital data can be used for development purposes and for solving societal problems, including those related to the Sustainable Development Goals (SDGs).

It can thus help improve economic and social outcomes, and be a force for innovation and productivity growth. Platforms facilitate transactions and networking as well as information exchange.

From a business perspective, the transformation of all sectors and markets through digitalization can foster the production of higher quality goods and services at reduced costs.

Furthermore, digitalization is transforming value chains in different ways, and opening up new channels for value addition and broader structural change.

But positive outcomes are far from automatic. Just because digitalization has the potential to support development, any value realized is unlikely to be equitably distributed.

Even if individuals, firms and countries do not − or only partially − take part in the digital economy, they can still be adversely affected indirectly.

Workers with limited digital skills will find themselves at a disadvantage vis-à-vis those who are better equipped for the digital economy, incumbent local firms will meet stiff competition from digitalized domestic and foreign ones, and various jobs will be lost to automation.

The net impact will depend on the level of development and digital readiness of countries and their stakeholders. It will also depend on the policies adopted and implemented at national, regional and international levels.

Impacts on value creation and capture can be considered across several economic dimensions (e.g. productivity, value added, employment, income and trade), for different actors (workers, micro, small and medium-sized enterprises (MSMEs)), platforms and governments), and for different components of the digital economy (core, narrow and broad in scope).

Measuring value in the digital economy is difficult

Measuring the digital economy and related value creation and capture is fraught with difficulties.

Firstly, there is no widely accepted definition of the digital economy. Secondly, reliable statistics on its key components and dimensions, especially in developing countries, are lacking.

Although several initiatives are under way to improve the situation, they remain insufficient, and are struggling to cope with the rapid pace of evolution of the digital economy.

Depending on the definition, estimates of the size of the digital economy range from 4.5 to 15.5 per cent of world GDP.

Regarding value added in the information and communications technology (ICT) sector, the United States and China together account for almost 40 per cent of the world total.

As a share of GDP, however, the sector is the largest in Taiwan Province of China, Ireland and Malaysia.

Global employment in the ICT sector increased from 34 million in 2010 to 39 million in 2015, with computer services accounting for the largest share (38 per cent).

The share of the ICT sector in total employment rose over the same period, from 1.8 per cent to 2 per cent.

Within the ICT sector, computer services are the largest component, with a 40 per cent share of total value added. The global computer services industry is dominated by the United States; its share of that industry’s value added is almost as big as that of the combined total of the next nine largest economies. India has the largest share among developing countries in this context.

Computer services, which is the only subsector that is growing across all regions, is one of the main drivers of employment in the sector.

Value added in ICT manufacturing is highly concentrated in East Asia (led by China), and the scope for more developing countries to extract value from this sector is likely to be limited.

In the past decade, global exports of ICT services and services that can be delivered digitally grew considerably faster than overall services exports, reflecting the increasing digitalization of the world economy.

In 2018, digitally deliverable service exports amounted to $2.9 trillion, or 50  per cent of global services exports. In LDCs, such services accounted for an estimated 16 per cent of total services exports, and they more than tripled from 2005 to 2018.

The Digital Economy Report (DER) (formerly known as the Information Economy Report) this year examines the scope for value creation and capture in the digital economy by developing countries.

It gives special attention to opportunities for these countries to take advantage of the data-driven economy as producers and innovators – but also to the constraints they face – notably with regard to digital data and digital platforms.

This topic is timely, as only a decade remains for achieving the sustainable development goals (SDGs).

Digital disruptions have already led to the creation of enormous wealth in record time, but this is highly concentrated in a small number of countries, companies and individuals.

Meanwhile, digitalization has also given rise to fundamental challenges for policymakers in countries at all levels of development. Harnessing its potential for the many, and not just the few, requires creative thinking and policy experimentation. And it calls for greater global cooperation to avoid widening the income gap.

Culled from the 2010 Digital Economy Report https://unctad.org/en/PublicationsLibrary/der2019_en.pdf

 

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