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Tuesday, 18 September 2018 10:29

The digital catch-up approach: Surveying the policy instruments

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As a complement to our previous blog in which we looked at a range of policy instruments to support the enabling-market approach to digital policy formation, this blog delves into some of the instruments that developing countries can use when adopting a more interventionist policy approach – the ultimate goal being ‘digital catch-up’.

Digital catch-up involves a planned approach to building a digital culture – one that relies more on active policy interventions and does not depend only on the enabling environment. If applied skilfully, the digital-catch-up approach should reveal missed opportunities and fill capacity gaps. It can be equated with a levelling of the digital playing field between large and small, experienced and less experienced, and well-resourced and disadvantaged.

We will consider some of the policy instruments used to drive digital catch-up.

a. Building the technology linkage

Many developing countries are not short of entrepreneurs who are willing and able to experiment with digital technologies and even build businesses that successfully capitalise on the growing demand for digitally enabled products and services. However, entrepreneurs often lack the necessary linkages – with technology partners, with providers of support services and with the market at large – that would enable them to grow their businesses into viable, value-driven concerns that would put them in a position to compete internationally. This is where the state can play an important role.

Strategies that developing countries have introduced in recent years include establishing centrally run innovation hubs that allow ideas to ferment and expertise to be shared, setting up investment funds to support small business expansion, and introducing training initiatives to help MSMEs adapt and add value to the fast-changing digital economy. Another linkage that many developing countries have exploited is the networks that they have built up with the diaspora. Not only can the wider diaspora be tapped for their experience and skills, they often constitute a source of investment for the home country. In countries like China and India, policymakers have actively campaigned for the return of nationals who have gained valuable experience abroad in areas such as data management and artificial intelligence (AI).

b. Promoting learning and localisation of digital technologies

Policymakers in the developing world are faced with a conundrum: how to strike the right balance between, on the one hand, opening their markets to more experienced digital firms with a view to leveraging their knowledge and technologies and, on the other hand, offering sufficient protection to local firms to stimulate local initiative and build a stronger revenue base at home. The ‘right’ approach is usually dictated by which way the economic and political headwinds are blowing.

There are different ways in which the state can protect local firms. A blunt policy instrument would be to prevent certain international firms from gaining access to the local market, which, by default, helps local firms. However, this typically suppresses competition and hampers skills and technology transfer. However, China is a good example of a country that, by effectively blocking international competition in its digital sector, built the technology giants, Alibaba and Baidu, which today are a formidable match for Microsoft and Google.

A more subtle policy instrument is the imposition of import duties on products with a digital element or tax on payment transactions involving an international service provider. Foreign competition is allowed, but it is regulated and therefore, to an extent, discouraged. Countries also rely on a plethora of localisation laws which, depending on how onerous they are, might encourage consumers to source digital content and related services locally.

Another means of inducing technological development at the local level is for the state to offer tax relief to those firms that support localisation initiatives. For example, Brazil offers tax concessions to digital sectors that achieve a certain level of exports of digital services of local origin.

c. Leveraging digital in the wider economy

The actual impact of digital firms can be quite low. These firms tend to have small staff complements and employees are generally drawn from more skilled and affluent groups. This exacerbates inequality in the sector.

Policy interventions can help to bridge this divide in the employment market and ensure that the benefits of the digital sector are spread more evenly throughout the economy. This can be done through active ‘leveraging’ of digital resources and regulations. China, for example, has leveraged its localisation policy aimed at building Chinese digital giants and then provided support to these enterprises to enable them to diffuse digital knowledge and to build physical and human capacity for the benefit of other economic sectors. This is in tune with China’s broader goal of migrating from low-cost production to innovation.

Clearly, the digital economy is not to be taken lightly, nor underestimated. Understanding and leveraging the power of the digital economy is the only way that the developing world will be able to keep up in the digital race and make significant strides in improving its inclusive growth and development prospects.