Developing Countries Losing Out To Digital Giants

By Jomo Kwame Sundaram and Anis Chowdhury
KUALA LUMPUR and SYDNEY, Oct 17 2018 (IPS)

A new United Nations report warns that the potential benefits to developing countries of digital technologies are likely to be lost to a small number of successful first movers who have established digital monopolies.

Jomo Kwame Sundaram

According to the Trade and Development Report 2018 (TDR 2018), subtitled ‘Power, Platforms and the Free Trade Delusion’, while developing countries need to invest more in digital infrastructure, they must also address the ownership and control of data and their use.

Developing countries will need to protect, and extend, available policy space to successfully integrate into the global digital economy. Stronger competition and regulatory frameworks will also require multilateral cooperation.

Digital concentration
Libertarian ‘light-touch’ regulatory frameworks have allowed powerful corporations to largely evade strict regulatory supervision and oversight, expand exclusively into lucrative related areas and limit policymakers’ influence. Digital monopolies have thus profitably ‘mined’ and processed data.

Of the top 25 big technology firms in terms of market capitalization, 14 are US based, with three in the European Union, three in China, four in other Asian countries and one in Africa.

In 2015, the top three big US technology firms had average market capitalization of more than $400 billion, compared to $200 billion in China, $123 billion in other Asian countries, $69 billion in Europe and $66 billion in Africa.
Apple recently became the first company in the world to be valued at more than $1 trillion, matching the combined economic output of Saudi Arabia and South Africa.

Anis Chowdhury

Such concentration and market dominance have ensured lucrative rents for the big players in the sector. For example, Amazon’s profits-to-sales ratio increased from 10 per cent in 2005 to 23 per cent in 2015, while Alibaba’s increased from 10 per cent in 2011 to 32 per cent in 2015!

These trends are largely due to the extraction, processing and sale of data. Digital platforms use their control over data to organize and mediate transactions along value chains. Network effects allow these platforms to expand these ecosystems utilizing feedback-driven processes.

The resulting market power, with stronger ‘property rights’ on the control and use of data, has enabled rentier and other uncompetitive practices. Thus, one cannot but be circumspect about the hype over ‘big data’ and ‘data revolution’. They rarely promote inclusive development, especially when left to ‘market’ or ‘self-regulation’.

Digital democracy?
TDR 2018 recommends active policies to check anti-competitive rent capture by digital platforms, and misuse of data. Antitrust and competition policies, historically concerned with market structure and behaviour, increasingly emphasize maximizing consumer welfare, using price-based measures.

In our increasingly digitized world, consumers receive services in exchange for surrendering their data, at zero nominal prices, i.e., for free. The control and use of such data enables the lucrative rentier activities associated with their use and abuse.

Policy options include stricter regulation of restrictive business practices and breaking up large firms responsible for market concentration. The digital world’s monopolistic tendencies should be regulated, and firms’ abilities to exploit their dominance restricted, e.g., the recent measures taken by the European Union against Google.

Developmental digitization?
For developing countries, the regulatory challenges to realize developmental gains from digitization are greater. Some countries are already using localization measures to develop domestic digital capacities and digital infrastructure.

But in most cases, data are owned by those who gather and store them, mainly digital super platforms, which then have full, exclusive and unlimited rights over the resource.

National data policies should be designed to address four major issues: who can own data, how data can be collected, who can use such data, and on what terms. They should also address the question of data sovereignty, e.g., which data can leave the country, and consequently are not governed by domestic law. South-South and regional cooperation can help small developing countries build their digital skills, capacities and capabilities.

Developing countries need to protect and expand available policy space to implement development strategies that should include digital policies with regard to data localization, data flow management, technology transfers and custom duties on electronic transmissions.

The international community is just beginning to discuss rules and regulations to improve them, before agreement is reached at the World Trade Organization and other multilateral bodies.

A premature commitment to rules with long-term impacts on fast-changing matters should be avoided, especially where powerful business interests remain influential and often dictate the very terms for discourse.

What Accounts For Southeast Asia’s Phenomenal Success?

By Chang Yong Rhee
WASHINGTON DC, Oct 17 2018 (IPS)

Southeast Asia has made extraordinary strides in recent decades.

Growth in per capita incomes has been among the fastest in the world, and last year the region was the fourth largest contributor to global growth after China, India, and the United States. Living standards have improved dramatically. Poverty rates are down sharply.

Chang Yong Rhee. Credit: IMF

What accounts for this record of success?

Openness to overseas trade and investment is a big part of the answer. Malaysia and Thailand have established themselves as global manufacturing powerhouses, churning out cars, consumer electronics, and computer chips.

Indonesia and the Philippines are among the world’s fastest-growing large, domestic-demand-led emerging markets. Singapore is a major financial and commercial hub.

Frontier economies such as Cambodia, Lao P.D.R, Myanmar, and Vietnam are exiting from decades of central planning after joining the Association of Southeast Asian Nations (ASEAN) and integrating with regional supply chains, particularly in China.

Sound economic management has also played a vital role. To be sure, the Asian crisis of 1997 was a setback, but Southeast Asia bounced back quickly and emerged stronger. Banks were restructured and financial regulation strengthened. Local currency bond markets were deepened to reduce dependence on volatile capital flows.

Rising prices and credit growth were brought under control as some countries moved toward adopting inflation targets and so-called macroprudential policies, which are designed to monitor and prevent risks to the financial system.

As a result, the region weathered the global financial crisis, but it will need to further strengthen its economies to handle short-term challenges, such as rising interest rates in the United States and other advanced economies, growing trade tensions, and slowing growth in China. It all adds up to greater uncertainty and more market turbulence for increasingly interdependent economies that have accumulated more debt.

In the longer term, though, more fundamental forces will test ASEAN leaders and populations. While Southeast Asia has significantly narrowed the gap separating it from the world’s richest nations, further progress is not preordained. The region cannot afford to rest easy; rising to the next level will call for a mutually reinforcing set of bold reforms.

Shifting demographics loom large among the coming challenges. In recent decades, the number of workers grew faster than the number of dependents, providing an impetus to economic growth. That demographic dividend is now starting to wane.

The working-age population continues to grow in Indonesia and the Philippines, but it is projected to shrink rapidly in other countries, including Thailand and Vietnam. Simply put, Southeast Asia risks growing old before it grows rich.

In response, Southeast Asian nations will have to beef up their pension systems and social safety nets to care for the growing ranks of older citizens. Bringing more people into the labor force, especially women, will help keep the growth engine humming.

With notable exceptions, such as in Vietnam, female labor participation rates remain low across Southeast Asia. Providing child care and flexible working arrangements can encourage more women to work.

Waning productivity growth is another obstacle. More advanced ASEAN economies are starting to lose some of their competitive advantage as wages rise. At the same time, automation and robotics are reducing demand for relatively unskilled labor; increasingly, manufacturing will require fewer, better-educated workers.

To move beyond middle- income status, the region will no longer be able to depend on the existing growth model of labor-intensive manufacturing for export.

Advances in artificial intelligence and machine learning, while creating opportunities, present additional challenges. Workers will need education and training to prepare for the jobs of the digital age. Governments should also improve the business environment by investing more in research and development and upgrading roads, ports, and broadband infrastructure.

Of course, all this requires money. Taxes as a proportion of GDP, at 13 percent, are below the global average of over 15 percent. That will have to change if the region is to finance essential investments, unlock productivity growth, and prepare for an aging population.

But raising more money won’t be enough: strong policies and institutions will be needed to make sure that precious taxpayer money is spent wisely.

As trade patterns and technology reshape the competitive landscape, Southeast Asia will have to rely more on domestic demand and less on sales of goods outside the region. To that end, further integration will be needed.

ASEAN has significantly reduced tariff barriers to trade in manufactured goods; it should further reduce trade costs and open its markets more fully to trade in services and the movement of labor.

The goal of completing an ASEAN trade in services agreement by 2025 will be a big step. If living standards are to rise further, the region cannot rely indefinitely on low-wage, low-skill service jobs in corner shops and restaurants; it will have to train more scientists and programmers, as well as professionals such as home health aides to care for the elderly. Investing more in its people and opening markets to expertise and technologies from abroad would advance that goal.

Of course, we must always remember that the goal of rapid growth is to improve living standards for the many, not the few. To be sustainable and command broad social support, economic policies must ensure inclusive growth. Governments should strengthen social safety nets, encourage competition, and challenge entrenched interests.

The region has made huge strides since the founding of ASEAN more than half a century ago, but significant challenges remain. Thankfully, with the right policies, Southeast Asia can rely on the creativity, resilience, and dynamism of its people to meet those challenges. The IMF has been an important partner in the region’s development, and it stands ready to continue serving its Southeast Asian members in the future.