How digital transformation is driving economic change
We live in an age of exciting technological innovation. Digital technologies are driving transformative change. Economic paradigms are changing. New technologies are reshaping product and factor markets and profoundly changing business and work. The latest advances in artificial intelligence and associated innovations are pushing the boundaries of the digital revolution. Digital transformation is accelerating in the wake of the COVID-19 pandemic. The future is coming faster than expected.
A recently published book, “Shifting Paradigms: Growth, Finance, Jobs, and Inequality in the Digital Economy,” examines the implications of the ongoing digital metamorphosis for economies and public policy agendas.
Digital transformation: promises and pitfalls
New technologies are very promising. They create new avenues and opportunities for a more prosperous future. But they also pose new challenges. While digital technologies have dazzled with the brilliance and prowess of their applications, they have so far not fully delivered the expected dividend in terms of productivity growth. Indeed, overall productivity growth has slowed over the past two decades in many economies. Consequently, economic growth has been on a downward trend.
To realize the promise of today’s smart machines, policies must also be smarter.
At the same time, income inequality and related disparities have increased, particularly in advanced economies, stoking social discontent and political turmoil. Across economies, participation in the new opportunities created by digital transformation is uneven. Many are being left behind, across industries and businesses, the workforce and different segments of society.
Firms at the technological frontier have separated themselves from the rest, gaining a dominant position in increasingly concentrated markets and capturing the lion’s share of profits from new technologies. While productivity growth in these firms has been strong, it has stagnated or slowed in other firms, weighing on overall productivity growth. The increasing automation of low- and medium-skilled tasks has shifted the demand for labor to higher-level skills, hurting wages and jobs at the bottom of the skill ladder. With new technologies favoring capital, win-win business outcomes, and higher-level skills, the distribution of income from capital and labor has tended to become more unequal, and income has shifted from labor to capital.
One of the main reasons for these results is that policies and institutions have been slow to adapt to the ongoing transformations. To realize the promise of today’s smart machines, policies must also be smarter. They need to be more responsive to change to fully capture the potential gains in productivity and economic growth and tackle growing inequalities as technological disruption creates winners and losers.
As technology reshapes markets and alters the dynamics of growth and distribution, policies must ensure that markets remain inclusive and promote broad access to new opportunities for businesses and workers. The digital economy must be expanded to spread new technologies and opportunities to small businesses and broader segments of the workforce.
Businesses, workers and policy makers face many questions. Although digital technologies offer significant productivity gains, they create new challenges for businesses as production processes, sources of competitive advantage and market structures evolve. Is increasing industrial concentration, as evidenced by the growing dominance of tech giants in the market, inevitable with these technologies or can their benefits be shared more widely among companies to increase overall productivity and foster economic growth more robust? Faced with the rapid evolution of financial markets, how to capture the promise of digital innovations in finance while controlling the risks? Should workers fear new automation as the nature of work and skill requirements change and many old jobs and tasks disappear? How should they adapt? In what ways are technological changes in business and work leading to widening economic disparities? How should public policies react?
Reshaping policies for the digital age
“Shifting Paradigms” addresses these issues by showing that policies matter. New thinking and adaptations are needed to realign policies and institutions with the digital economy. Areas of focus include competition policy and regulatory regimes, innovation ecosystem, digital infrastructure, workforce development, social protection frameworks and fiscal policies.
Competition policy must be redesigned for the digital age. Antitrust laws and their enforcement need to be strengthened. The digital economy poses new regulatory challenges that need to be addressed, including issues of data regulation (the engine of the digital economy), competition issues related to digital platforms that have emerged as gatekeepers in the digital world, and market concentration resulting from technology. giants that resemble natural or near-natural monopolies due to the economies of scale and network effects associated with digital technologies. As with product markets, policymakers must ensure that financial markets remain sufficiently competitive and address the regulatory challenges associated with the new world of digital financial products, platforms and algorithms. In addition, new frameworks are needed for international collaboration in areas such as regulating cross-border data flows and taxing cross-border digital activities.
The innovation ecosystem needs to be improved. Aging patent systems should be adapted to the new innovation dynamics of the digital economy, better balancing patentee interests with wider technology promotion and dissemination. Public research and development programs should be revitalized to foster technological progress that serves broader economic and social goals rather than the interests of narrow groups of investors. Policymakers need to correct biases in tax systems favoring capital over labor that create incentives for “over-automation” – which destroys jobs without improving productivity.
The digital infrastructure base needs to be strengthened to broaden access to new opportunities. This requires increased public investment and frameworks to encourage more private investment to improve digital access for underserved groups and areas. The digital divide remains particularly wide in developing economies. Stronger digital infrastructure and literacy will be crucial for these economies as technological change forces a move away from growth models based on low-skill, low-wage manufacturing.
Investment in education and training programs should be boosted and redirected to emphasize skills that complement new technologies. This will require innovation in the content, delivery and funding of these programs, including new models of public-private partnerships. With the rapidly changing demand for skills and the growing need for upskilling, reskilling and lifelong learning, the availability and quality of continuing education should be significantly increased. The potential of technological solutions such as e-learning tools must be exploited. Persistent inequalities in access to education and (re)training must be addressed. While the gaps in basic capabilities between income groups have narrowed, those in higher-level capabilities that will ensure success in the digital economy are widening.
Labor market policies and social protection systems need to be realigned with the changing economy and the nature of work. Policies need to take a more forward-looking approach aimed at improving the ability of workers to access new and better jobs rather than seeking to protect existing jobs made obsolete by technology. Unemployment insurance schemes should better help workers adapt to change, retrain and move to new jobs. Workers’ compensation systems, covering benefits such as pensions and health care, which have traditionally been based on formal, long-term employer-employee relationships, will need to adapt to a labor market characterized by transitions more frequent employment opportunities and more diverse working arrangements (including a gig economy). Institutions that give workers an adequate voice are also important, as technology changes the balance of power in the marketplace. How social contracts provide opportunity, risk sharing and security needs to be rethought in the digital age.
Enabling broader business participation in the innovation economy, broadening the diffusion of new technologies and building complementary workforce capabilities can generate both stronger and more inclusive economic growth. Reforms in these areas can reduce inequality and economic insecurity more effectively than tax redistribution alone. By fully grasping the promise of digital transformation, growth and inclusion agendas become one.