Digital Revolution – Real Challenges

Introduction

How can we measure the ‘digital economy’? We guarantee that the architects behind those GDP, employment, and industry performance statistics you monitor do not (yet) have the answers. The same is true for the analyst modeling the expected returns of a portfolio investment that competes with, relies on, or is a product of the fundamental innovations (semiconductors, microprocessors, computers, telecommunication devices, the internet … ) and corresponding digital products and services (digital platforms, mobile apps, digital platforms…) that are the foundation of the ‘digital revolution’.1

Mass adoption of digital technologies only began in the early 1990s, with economic and social consequences eventually emerging during the 2000s, and the disruptive aspects of these technologies still years later to the delight and dismay of many the investment manager. Experts do not yet even agree on how the digital revolution fits into the broader history of technological revolutions, muchless how to measure it!2

The lack of a generally accepted definition of the digital revolution not only underscores its novelty but is symptomatic of the velocity of technological change we’re living through. The digital transformation is prompting revolutionary changes in technology, society, economics, and political agendas globally with observable consequences within the time span of a single generation.

In this article, we discuss how even as we’re awash in data like never before, we lack a reliable method to capture the economic transformations of the digital age. We also seek to shed light on the data and methods playing a part in measuring this latest revolution and conclude with some simple observations about how through this revolution competitive conditions are casting uneven routes to prosperity globally.

Digitalization: Easy to See, Hard to Measure

At the dawn of the digital era in 1987 the economist Robert Solow famously said that the computer age was everywhere except for productivity statistics. The Solow Paradox reflects the fact that productivity and growth (i.e. returns on assets) failed to keep pace with the growing adoption of digital technologies and increasing R&D investment by US companies during the 1970s and 1980s.

Three decades later, the challenge Solow described persists. We still have no generally accepted method to measure the size or reach of the digital economy. To be fair, digital realities are unfriendly to traditional economic measurements.

The digital revolution is associated with new products and services appearing every year or less. That would imply that the entire statistical approach to calculating the size and growth of economies (i.e. GDP) could evolve equally fast to account for every new product or service the world dreams up as opposed to every several years (or longer), as is standard practice.

Complicating matters further, many digital services are offered for free and/or in exchange for data generated by the users of these free digital services. Zero price means zero value added; it cannot be measured using traditional national accounts methodology.

Do we need to mention any more complications? Let’s do it, just to drive home the point. Many digital products and assets are intangibles, such as search engines and social media platforms. We must also account for the differing impact of the digital sector on different types of consumers: for households as well as for industries that rely on digital products to cut costs, increase productivity, and generally remain competitive. And let’s not ignore the transnational nature of digital platforms that makes a lot of digital products and services invisible to national statistics offices and tax authorities.

Attempts (and Deficits) to Measure the Digital Economy

It should come as no surprise that the combined conceptual constraints and evolving understanding of the digital economy have resulted in a data deficit in terms of measuring this newest technological revolution. And, yet, measurement is critical given its growing and transformative consequences not only in our daily lives but also for how households, businesses, and governments interact within an economy.

Let’s explore three divergent approaches to measuring the digital economy.

Approach 1: Measure the Technology

Gather up every measure available for core technologies and track digitization itself. The OECD identified more than 30 indicators to monitor and assess the size and penetration of the digital economy – from smartphones and broadband internet to e-commerce and mobile money metrics to patents in artificial intelligence technologies.3

While helpful in estimating the speed and relative level of digitalization across countries and industries, the scale and influence of the digital sector on a given economy is still unclear under this approach.

Approach 2: Measure the Sector

Following the logic used for national accounts, we could instead estimate the value added generated by the ICT sector and the contributions of the sector to GDP as a proxy for the digital economy.

UNCTAD estimates of value added generated in the ICT sector show that on average the size of the ICT sector (including ICT manufacturing, telecom, and computer services) has been relatively steady over the last decade at about four percent of global GDP. But this is not the full story.

For example, the ICT sector in the United States and China, which together account for almost half of the global ICT sector (measured in PPP terms), accounts for roughly five percent of GDP when measured directly. But if you account for the  use of digital technologies by different economic activities beyond the ICT sector, estimates of the digital economy expand to 22 percent of GDP for the United States and to 30 percent for China.1

The huge spread in estimates demonstrates that direct measurement of ICT sector value added generated fails to give us the whole picture while upperband estimates are less reliable and heavily based on expert judgment.

Approach 3: Consider Consumers

What if instead we try to measure the contribution of the digital economy to consumer wealth? Earlier this year economists from MIT published a working paper in which they suggested measuring the digital economy through adjustments to GDP based on the so-called “consumer surplus” concept. Consumer surplus exists when the maximum price a consumer would be willing to pay for a good or service exceeds its actual price.4

Many digital products and services are offered for free or at extremely low prices. MIT researchers conducted a digital survey of consumers and found that the median US consumer would pay around $150 per year to use Wikipedia, which would add over $40 billion to US GDP. Even paid video-streaming services such as Netflix, Hulu, and HBO, could generate a consumer revenue five to 10 times larger than what users pay now, according to the survey results.4

If Wikipedia’s ratio between the median price forgone and wealth is applied to other popular digital products, the cumulative wealth generated for US consumers by popular digital services alone could bring in an additional $9 trillion, or over 40 percent of US GDP. While this number seems far-fetched on a practical level, the message is clear – consumers derive greater value from digital services than their payment for those services currently suggests.

Looking Ahead, Consideration Required for Digital Equality

The digital revolution is the product of decades of R&D investment and innovation that promises the leaders, China and the United States, the opportunity to derive economic rents for years to come while other countries will absorb a larger share of the cost of technological disruptions.

Managing the consequences of and return from digital inequality, like measuring the digital economy, has no immediate solution. And, frameworks suggested by international institutions to do so are (so far) discouraging. Recommendations provided by credible institutions including the G-205 and the World Economic Forum6 come down to the development of digital infrastructure and measurement of ICT infrastructure readiness as a proxy for countries’ success on the path of digital transformation. But one has to ask, and we’ll leave you to consider: If developing countries open their markets to the largest of Western and Chinese ICT companies by providing ready-to-use ITC infrastructure, who stands to gain the most? And, how do we manage those gains to bring us closer to digital equality?

References

  1. Digital Economy Report, 2019. UNCTAD, September 2019. Link
  2. Robert D. Atkinson and John Wu (May, 2017). “False Alarmism: Technological Disruption and the U.S. Labor Market, 1850–2015” Information Technology and Innovation Foundation. Working Series. Link
  3. Toolkit For Measuring The Digital Economy. OECD. November 2018. Link
  4. Erik Brynjolfsson, Avinash Collis “How Should We Measure the Digital Economy?” Hutchins Center Working Paper №57. January 2020. Link
  5. G20 Leaders’ Communiqué. Antalya Summit, 2015. Link
  6. ICT for Economic Growth: A Dynamic Ecosystem Driving the Global Recovery. World Economic Forum, 2009. Link

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