Letter IEDI n. 904–Challenges of the Digital Age: Unctad policy suggestions for emerging countries
Digital technologies have been transforming the way people communicate, learn, work and shop. For developing economies, digitization brings the expectation of opening new sectors, promoting new markets, and boosting innovation and productivity gains, all necessary to raise the living standards of society.
But for the digital world to deliver on its development promises it will be necessary that governments in emerging countries adopt an ambitious infrastructure and skills training program. This should be combined with a comprehensive strategy and a broad range of policies to address potential adverse effects on market structure, innovation and the distribution of the benefits of digitization.
This is the view supported by the United Nations Conference on Trade and Development (UNCTAD) in a chapter of its latest annual report under the title "Power, Platforms and the Free Trade Delusion". Today's Letter IEDI brings the main elements of this discussion on the opportunities and challenges that the progress of digitization places on developing countries in terms of policy options.
According to UNCTAD, in today's globalized environment, where gains from technological progress and economic openness tend to be captured by only a fraction of society, there is a risk that the spread of digital technologies will further concentrate the benefits on a small number of economic agents, both within and across countries.
Given the cross-border nature of digitization and the combination of network effects and rent-seeking behavior of large digital companies, developing countries will have to face some critical challenges, such as the adoption of regulatory and competition frameworks, besides the control of data usage, which are the main fuel of the digitized economy.
According to the report's authors, another important challenge for emerging economies will be the use of new digital technologies for local development, in order to enjoy growing value added in the activities of manufacturing and services.
Digitization and the consequent erosion of the boundaries between the industry and services can shorten global value chains (GVCs), customize production, enable smaller scales and greater profitability, and allow the design, production and post-production segments of the process to be more closely intertwined. This can both open new manufacturing possibilities for developing countries and reduce some of those currently available.
Against the "digital utopia" of those who only see unlimited opportunities in digitization, Unctad warns that developing countries will need to preserve and possibly expand their available policy space to effectively manage their integration into the global digital economy. For this reason, the institution recommends they embrace a strategic vision when adhering to trade and investment agreements, especially those seeking deep integration among nations.
Contemporary international agreements are going far beyond trade restrictions at the border and are increasingly focusing on domestic rules and regulations. As a result, they can not only reduce the scope for national policies, but can also produce adverse results for social welfare in the signatory countries; to mitigate these effects, Unctad advocates greater regional cooperation among emerging countries.
Boosting the positive benefits of a digital world requires, according to Unctad, that ambitious and comprehensive policies be used in a coherent way. To do so, the Institution recommends the following policies:
1. Construction of digital infrastructure, a necessary condition for progress in a digitized world, including, for example, energy and telecommunication connections.
2. Development of digital capabilities, promoting digital education in schools and universities, improving the digital skills of the existing workforce, financing digital entrepreneurship etc.
3. Digital industrial policy, to improve the use of digital technologies and services in production, as well as to build digital skills in all sectors.
4. Comprehensive innovation policy, including digital startups, to prevent innovation gains from flowing out of the country.
5. Regulatory policies for digital platforms, to take advantage of e-commerce, because the existing connection to foreign platforms will only provide more data to the super-platforms, strengthening them even further and facilitating their greater access to domestic markets.
6. Data control and regulation policies, because data are the fuel of the digital age, making it fundamental to ensure an equitable distribution of the gains from data generated within national borders.