Dynamics of digital economy

Updated 14 Dec 2019

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The writer is a senior economic policy expert and served as minister of state and chairman, Board of Investment in Pakistan.
The writer is a senior economic policy expert and served as minister of state and chairman, Board of Investment in Pakistan.

THE fast pace of digitalisation of economies is having a profound impact on the lives of people, governments and markets. As more and more people adapt to the digital economy, policymakers need to think swiftly and carefully about devising policies that will maximise the benefits of the digital revolution while mitigating the risks of job dislocation.

Digital progress is the result of general-purpose technology that has the flexibility to transform itself as the driver of change for boosting productivity across all sectors. By reducing the cost of information, digital technologies could greatly reduce the cost of economic and social transactions for firms, people and the public sector. Like all revolutions, the current technology revolution is highly disruptive, and economies will have to deal with the challenges of rising inequality, unemployment and privacy concerns.

The digital revolution is well under way and is impacting the parameters of large-scale manufacturing, retail, banking and logistics businesses. Digital transactions are increasing rapidly and have already reached 20 per cent of overall transactions in the developed economies. Digitalisation will have a serious impact on jobs transformation. A study conducted by the McKinsey Global Institute in 2017 predicted that one-third of the US workforce is likely to go through job re-profiling by 2020. We are entering a new marketplace of smartphones, robotics and artificial intelligence. There is no turning back now as digital technology is expected to accelerate its pace in the coming years.

There is no turning back as digital technology is expected to accelerate its pace in the coming years.

For developing countries, there will be pressures on skills delivery, labour migration and productivity. A striking fact is that less-developed economics are quickly adopting these technologies and are taking a lead in the usage of digital technologies including e-payments in Kenya, land registration in India and e-commerce in China. Special attention will have to be given to the potential exclusion of the workforce whose skills have been degraded and the potential threat of further concentration of wealth.

According to an Economist analysis, the wealthiest 10pc hold 82pc of global assets and the bottom 50pc people own less than 1pc. So, the power dynamics will have a profound impact on politics and the job market. It is critical for developing countries to invest in understanding the impact of the digital economy as reorganising the economy around transformational technologies could result in huge gains to offset the costs of dislocation of jobs. Quick expansion of digital adoption could lead to a hollowing out of labour market and rising inequality.

Four drivers of change are expected to influence business growth in the next five years — high-speed mobile internet, artificial intelligence, widespread adoption of big data analytics and cloud technology. According to a survey conducted by the World Economic Forum, 71pc of tasks that were undertaken by humans in 2018 will be reduced to 58pc in 2022. The rest will be done by machines. The education and skills development systems are failing to catch up with the pace of change. While digital economy could accelerate the pace of labour market dynamics by opening new opportunities, it also makes traditional skills obsolete. The change calls for more adaptability, a flexibility among firms and individuals.

As a policy intervention, this calls for stronger lifelong nexus between the industry and training institutions. The focus of public policy in skills development has to move towards ICT skills, science and mathematics, problem-solving and lifelong learning.

Editorial: Digital Pakistan

In Pakistan, where a large number of young populations are preparing to enter the job market, policy intervention to create linkages with advanced curriculum through digital partnerships may lead to catching up with the required skills in a timely manner. More and more online learning platforms are emerging which provide free lectures, problem-solving and mathematics skills. The greater challenge for Pakistan is to reach out to illiterate adults who fear digital change. As one of the most adaptive digital economy, Singapore made this structural shift in 1977 from efficiency-based skills to a knowledge-based skills model.

There is a clear gap between institutions and technology in Pakistan. The governments tend to adopt technologies for service delivery with little emphasis on empowering citizens to hold them accountable. The bureaucratic structures remain patronage-based with a focus on cash transfers, payments and issuance of permits. The policy priority in such conditions should be more to change the incentives for institutional reorientation and coordination. It is easier for countries with digital population registers to target policies across age and income brackets. By reinforcing targeted interventions through digital technologies, governments can start bridging the gap between institutions and technology.

Pakistan also has the comparative advantages of a young, educated population and lower median wages than the West. Academia and industry need to invest in their students and employees by offering relevant training programmes to prepare them for future job markets. Governments could help spur innovation and be a strong support system for the manufacturing sector by creating Special Economic Zones for micro-, small- and medium-sized enterprises, with benefits such as import tax subsidies on equipment and infrastructure subsidies for setting up advanced manufacturing facilities.

Policies on digital safeguards are critical for keeping the cost of doing business competitive and controlling potential polarisation within the labour force. Prof Klaus Schwab of the World Economic Forum says that stakeholders need to adopt an “agile governance” model for regulating technology and making constant adjustments with its evolution. Agile teams that constantly evaluate and fine-tune policies to enable the adoption of new technologies will provide a strategic advantage within governments and organisations hoping to thrive in the fourth industrial revolution. It is crucial to build stronger links between governments that regulate technology, academia that nurtures new technologies, and industry that builds technology.

The full benefits of the digital transformation will not be realised unless countries continue to improve investment climates, invest in appropriate education and health and promote good governance. In countries where these fundamentals remain weak, digital technologies have not boosted productivity or reduced inequality.

The writer is a senior economic policy expert and served as minister of state and chairman, Board of Investment in Pakistan.

Published in Dawn, December 14th, 2019