uk aid logo colour for digital small

The Global Economic Governance (GEG) Africa programme was created to strengthen the influence of pro-poor African coalitions at global economic governance for a through policy research and stakeholder engagement.
Enabling markets for digital trade: Surveying the policy instruments © Pixabay
Tuesday, 18 September 2018 10:21

Enabling markets for digital trade: Surveying the policy instruments

Written by 

In our previous blog, we looked at the two broad policy approaches that developing countries could adopt to enhance their digital preparedness: an enabling approach and a digital catch-up approach. Linked to these two approaches are various policy instruments that can be used to steer the policy implementation process.

In this blog, we examine examples of policy instruments associated with enabling markets for digital trade and what has influenced their selection in various countries.

a. Regulatory shaping and infrastructure

Ensuring broad-based access to the Internet is key to the development of a digital culture in developing countries. This is likely to involve a range of measures, including extending service provision to more marginal regions and groups where digital isolation is felt most keenly. Brazil and China made a conscious decision to invest heavily in broadband infrastructure, which has encouraged more online trading activity in these countries and a greater acceptance of the value of digital innovation.

The cost of Internet access is a particular problem in Africa, often due to reliance on foreign servers. Establishing regional servers and cloud computing nodes helps to reduce costs and improve speed. In countries like Kenya and Rwanda, large-scale investment in fibre optics and the creation of dedicated ‘digital zones’ in large cities have put them ahead of many of their counterparts on the continent in terms of digital development. With the digital landscape always evolving, a country’s infrastructure also needs accommodate the latest technologies, such as cloud computing and real-time data transfer.

A core element of digital trade is having the necessary payment infrastructure in place. For example, South East Asian governments have been particularly successful in expanding their micro-finance sectors, linking service providers in integrated payment systems. Still on a financial theme, another area in which policymakers can make a difference is in setting appropriate ‘de minimis’ levels, under which duty is not payable. While the money collected under this arrangement has proved to be an important stimulus to the development of local e-commerce firms in countries like Argentina and Brazil, setting the de minimis levels too low can threaten the viability of exporters in supplier countries. In a regional context, this can be a deterrent to intra-regional trade.

Underpinning the development of infrastructure to drive more digital traffic and trade in a country or region are the checks and balances provided by ICT-related regulations. Regulatory frameworks need to strike a careful balance between curtailing unfettered market activity and inducing inertia due to costly bureaucracy. Getting this balance right can go a long way towards promoting more inclusive economic activity – one of the overarching policy goals throughout the developing world.

b. Creating digital economy ecosystems

A digital economy ecosystem is the combination of capabilities, institutions and governance structures that ensures that digital trade is accessible to as many people as possible and that the benefits are felt throughout the economy.

The firms in a digital economy ecosystem comprise those directly involved in digital activities and so-called third parties which provide services to support core digital platform activities, such as providers of logistics services, financial and payment services, and various forms of business support. Often acting as the interface between digital firms and local regulations, third parties also extend the scope for employment in the broader digital economy.

A key consideration in formulating a digital policy is whether or not to localise digital systems and platforms. When it comes to e-commerce, for example, a lack of localisation can add to the cost and complexity of digital trade as there is neither local language support, nor local payment or logistics services. If wholesale localisation is not an option, a mixed arrangement might be a suitable compromise. In South Africa, for example, international payment provider PayPal and e-commerce platform Shopify have successfully entered the market supported by local players. Local mobile money platforms have been popularised in Kenya, contributing to a growing ecosystem of financial services in that country.

A viable digital economy ecosystem also makes it possible for firms to engage easily with the state. India, for example, runs a B2G (business-to-government) portal aimed at simplifying firms’ licensing and tax transactions. In digitising the interface between taxpayers and the state-run revenue service, which has greatly assisted the tax assessment and collection processes, South Africa has set an example for many other countries.

c. Reducing disbenefits

Many developing countries are concerned about the risks and challenges associated with an expansion in digital trade, which helps to explain the reluctance of some governments to embrace digital technologies – particularly when it has a foreign origin. The threat of international firms taking up monopoly positions in developing country markets is very real. Measures to curtail monopoly activity range from relatively lightweight licensing requirements for foreign firms to more aggressive forms of censure or regulation, such as hefty fines in the face of serious anti-competitive behaviour.

Disbenefits are particularly pronounced in the area of data usage. Weak data practices, such as inadequate or no data protection rules, invariably lead to data being compromised or exploited by entities in other countries. Countries like India, Indonesia and Vietnam have introduced localisation rules whereby certain strategic data must be stored within the country, while other countries use encryption techniques to provide an extra layer of security when data is transferred internationally.

Where the disbenefits of the digital economy are much in evidence, it is generally a sign that market enabling measures – critical though they are ‒ must be skilfully complemented by focused interventions aimed at healing the digital divide as efficiently and as sustainably as possible.