As per the World Bank, the digital economy contributes more than 15% to the global GDP and has grown two and a half times faster than the physical economy in the last decade. The COVID-19 pandemic fastened the adoption of the digital economy into people’s quotidian lives. Most households in the world had to digitize themselves either to avail services of food, grocery, and medicines delivery or meet their children’s educational needs and attend work meetings. We saw essential events of our collective lives moving to private digital platforms. The massive uptake of digital platforms brings with it a unique set of opportunities and challenges. We will look at five factors that will influence the digital transformation journeys of the new world economy. How policymakers attune their policies to these emergent factors would determine who gains the momentum.
First, the fast adoption of digital platforms have made people’s lives more productive but has brought forward issues of misinformation, fake news, illegal data mining and privacy violation of users. Some policymakers have tried to address these concerns through appropriate privacy legislation and technical interventions. We will detail a techno-legal approach that can be adopted.
Second, the policymakers realized that the most crucial material of the digital infrastructure is the semiconductors. Only a handful of countries have domestic manufacturing facilities to produce semiconductors. The pandemic disrupted the supply chains of semiconductors which impacted almost all sectors of the economy with the rare exception of agriculture allied sectors.
Third, the semiconductor facilities were built over decades through multi-stakeholders investments in research and development in chip design and fabrication; and human resource capabilities. The policymakers must develop workforce and capacity-building plans to upskill people to bring forth innovations in chip design.
Fourth, the pandemic was a push factor for people to use digital technologies, which made people dependent on private digital platforms. The Indian policymakers developed indigenous digital public infrastructure which reduced the cost of access to the digital economy pulling in hundreds of millions towards community-owned digital platforms.
Fifth, international collaboration is critical for having trusted and diversified digital value chains to de-risk the domestic economy from geopolitical factors and develop global interoperable networks.
1. Privacy Protection and Users Safety Through Techno-Legal Approach
Digital platforms are dominated by big technology platforms, and they have a monopoly on the way users access search engines, operating systems, e-commerce platforms, cloud infrastructure and social media platforms. Due to the sheer volume of data of users on their respective platforms, the technology corporations monetise the data and target users with advertisements. Social media platforms and search engines take the largest share of advertising revenues, which makes the digital economy prohibitive for small and medium businesses in local territories. These platforms monetise access, discoverability and customer acquisition in the digital economy.
The Competitive Commission of India (CCI) imposed two penalties of ₹1338 crores and ₹936 crores on a big technology corporation for abuse of its dominant position in the mobile devices ecosystem and its play store and in-app payments, respectively. To understand the core issue of these problems, we need to look at the revenue model of technology firms. In our review, we found that the technology companies operate primarily through intraoperability where a centralized platform controls the network, decides standards and specifications, and attracts different players in the ecosystem to participate. This gatekeeping gives them asymmetrical returns and market power to attract millions of customers using loyalty programmes, discounts and incentives. Everyone follows the standards and specifications the central platform sets and formulates their product development and marketing strategies to fit the platform's policies. However, the structure, design and development of these standards are not open to scrutiny due to their private ownership. The CCI has questioned this revenue model of technology companies, which leads to abuse of dominant position in the market.
On the legislative side, the EU digital legislative strategy consisting of the General Data Protection Regulation (GDPR), the Digital Services Act and the Digital Markets Act paves the way for an equitable level playing field for small and medium businesses and set the benchmark for privacy protection legislation in the world. In India, the Digital Personal Data Protection Bill (DPDP) has been envisaged to balance enterprises' interests and protect users’ privacy. As was the case with GDPR, the EU’s draft Artificial Intelligence (AI) Act is best placed to regulate the growing deployment of AI in our quotidian lives and bring forth a coherent strategy to develop responsible principles and test cases for AI use. The EU’s approach has pioneered the regulatory sandboxes and legislative processes that put users' safety at the core of the digital economy.
On the technical side, in India’s case, her success in the digital economy is based on the deployment of technical specifications using the principle of optimal ignorance, where privacy by design is embedded in the architecture of an emerging technology using Data Empowerment and Protection Architecture (DEPA). Using DEPA, users have access to give consent on the processing of their data using e-KYC for seamless transfer of their financial, health, commercial and skills data. The EU and India approach shows a techno-legal approach to ensure compliance from big technology companies and give technical solutions to users through a DEPA-like mechanism.
2. Domestic Manufacturing of Semiconductors
The pandemic-induced supply shocks and associated costs on the overall economy pushed policymakers worldwide to think about domestic manufacturing capabilities in their locations. The Indian policymakers came up with an investment of $10 billion in the Production Linked Incentive (PLI) scheme for semiconductor chip manufacturing in 2021. The EU and USA introduced the national subsidy scheme for resilient semiconductor manufacturing through the EU Chips Act and CHIPS Act, respectively. These nation-states have committed $30 billion and $53 billion respectively, to strengthen the semiconductor industry.
It is a difficult exercise to manufacture the semiconductors as domestic manufacturing is limited to Japan, Taiwan, China and South Korea. The Taiwanese companies have had strong interlinkages with the US research establishment for decades, leading to seamless integration with the global supply chains. Similarly, South Korea is a treaty ally of the USA and China is a manufacturing powerhouse. For other nation-states, domestic manufacturing of chips is a long-term strategy that would require partnering with countries with significant amounts of critical minerals like silicon especially the USA, China and Russia and technical know-how like Taiwan, South Korea and Japan.
The nature and scope of these technology transfers is a complicated exercise in the current geopolitical scenario, especially when there are strong currents of geopolitical tensions and protectionist trade policies. Each state wants the manufacturing in their territories or in a trusted partner. These policy choices would make technology transfers prohibitive. The nation-states that can build sustainable partnerships would gain momentum as the raw materials and expertise is limited to specific geographies. We think the trajectory and partnership mechanisms of semiconductors would follow the processes deployed in the transfer of military technologies. These would be long-term investments requiring sustained technology transfers in a trust-based manner. The nation-states that can deploy their local industries to aid these manufacturing units would become part of the larger supply chain. The next factor would be investments in research, development and capacity building of a new workforce.
3. Investments in Capacity Building
To evaluate a nation’s capabilities in this new economy, it is essential to look at the levels of deployment of public expenditure; quality of human resources, regulatory architecture and private sector participation in the respective domain. To measure a country’s capabilities in scientific research and innovation, it is important to look at the following four metrics:
● Percentage of Gross Domestic Expenditure on Research and Development (GERD)
● Number of researchers per million population
● Number of patents filed in STEM (Science, Technology, Engineering and Mathematics) and emerging technologies.
● Private Sector Expenditure on Research and Development
Different countries perform differently on these metrics as per their unique development needs and relative strengths. However, in our review of the evidence, any country which has remained in the top five on these metrics across years gets asymmetrical returns in institutionalising research capabilities. The USA and China have fared remarkably well on these metrics.
In chip design, fabrication and workforce planning, nation-states have to streamline their research plans by moving further up in these metrics. In India’s case, India’s GERD has increased from $5.25 billion in 2007- 08 to $15 billion in 2017-18 in absolute terms but has remained in the range of 0.6-0.8 % of GDP since 1996. However, if we look at the data of lower-middle-income countries as per , India is at 2nd position after Vietnam, showcasing the efficiency of its spending expenditure as India has improved its ranking from 81 in 2015 to 46 in 2021 in the index.
The number of researchers per million population has been on a constant rise from 110 in 2000 to 255 in 2017. Still, India ranks 3rd when one looks at the number of PhDs awarded in science and engineering fields after the USA and China. On patents filed and private sector participation, India does perform well but can do much better. We think that the nation-states that invest heavily in developing research-intense ecosystems in partnership with local industry, academic institutions and international organizations with appropriate trade partnerships would have an edge.
4. Digital Public Infrastructure
The pandemic pushed people into the digital ocean, but the Indian policymakers had already developed safe boats through the digital public infrastructure approach. With the increasing share of digital services in the overall economy, there were two options in front of Indian policymakers–incentivising the private sector platforms or promoting publicly owned government platforms– which were successfully deployed in the USA and China, respectively. However, in the mid-2010s, technologists and public officials developed a third option, Build for India, especially considering that India had a bottom-heavy unprivileged household population unlike the USA and China.
The major concern of any developing country with a large size of underprivileged population is to provide equitable access to social welfare efficiently. With the success of the Indian software industry to deliver sophisticated software solutions worldwide, the Government of India launched a digital identity project to provide every Indian citizen with a unique digital identity with biometrics to plug leakages in the welfare governance architecture in India.
The involvement of the Union Government ensured that the citizens at large trusted the enrolment process for the unique digital identity as the transparency and accountability standards for a public authority are quite high compared to private platforms and state-led platforms in USA and China, respectively. The Unique Identification Authority introduced identity paperless Know Your Customer (eKYC), which opened the floodgates of innovation and efficiency in India and has transformed government, businesses, society, and startups. By 2021, India had enrolled 1290 million citizens on Aadhaar (Unique Identification Platform) and 99% of eligible Indians have a unique identity.
Onboarding 1.29 billion citizens on a digital platform in a democratic setup without the incentives of private platforms and coercion of authoritarian systems is a feat in itself. The purpose of digital identity was to check identity fraud and document forging to provide direct benefits to the target citizens and plug all leakages in the system. To do this, it was essential to provide bank accounts to all citizens. There were efforts from different governments and the Reserve Bank of India to provide zero deposit accounts. Still, the cost of acquisition and authentication of customers was messy and involved patronage through middlemen. The Aadhaar-based eKYC made it possible to open bank accounts in a matter of minutes with the government's backing. In 2014, just over 50% of Indian adults had a bank account, but as per the latest estimates, more than 99% of households have access to banking facilities. The digital interventions solved identity and financial inclusion challenges. These were government-led efforts with private expertise. The next puzzle was access to mobile telephony and payments.
There were simmerings of massive disruptions happening in the telecom industry, and the change had to come. As per the World Bank, the cost of acquisition of a customer had substantially reduced from $25 to less than $1 due to the e-KYC facility. This disruption in the telecom market gave the incentives for telecom companies to disrupt the mobile internet market as there was massive digital adoption waiting to happen. And it happened as new players in the telecom industry used the ‘e-KYC’ framework to establish a user's identity and could use economies of scale to offer affordable internet. In 2023, India has more than 840 million internet users, out of which 90% are using the internet on mobile phones , with one the lowest data costs in the world
Indian policymakers had a unique vision that the digital rails be made into public goods, which ensures that access to digital services can’t be exclusive to upper echelons of Indians. They followed this principle of interoperability to make digital payments democratic by making the underlying technology open source and interoperable with collective ownership of the private-public sector. A case in point is the Unified Payment Interface (UPI) in India where the peer-to-peer payment technology has been made open source, and the merchant discount rate has been abolished from payments in India. The result is that UPI has clocked more than 9.41 billion transactions in a single month of May '23. This ensures that the underlying transaction data is not monopolized by one corporation or platform but is available as a public good with privacy by design and law.
India’s case demonstrates that a large, diverse country can deploy digital public infrastructure in payments, identity, e-commerce and health. Therefore, there needs to be an emphasis on global standards and partnerships to develop global digital public goods and infrastructure.
5. International Collaboration
The partnerships between like-minded countries play a pivotal role in shaping the global digital economy, defining standards, and ensuring security in cyberspace. The interconnectedness of today's world economy, especially in the digital realm, emphasizes the need for shared frameworks and protocols, making international collaboration more crucial than ever. It is instrumental in developing global standards for technologies that form the backbone of the digital economy. A great example of the same standard is 5G technology which is reshaping the digital landscape and propelling a new generation of services and applications. The development and deployment of this technology require harmonising standards, frequency bands, and protocols across borders, making international cooperation a crucial factor.
Several countries, with their distinct strengths and capabilities, contribute to the development and global deployment of this technology. For instance, a country with advanced digital infrastructure can offer insights into network deployment and spectrum usage. Another with robust software capabilities can contribute to network virtualization and security. Taking a more specific lens, Russia and India have demonstrated such synergistic collaboration. For instance, the joint venture between India's Reliance Jio and Russia's Rostelecom to explore 5G technology trials stands as a testament to the tangible benefits of such collaborative efforts.
At the same time, international collaboration plays a crucial role in managing supply chain risks. An example of this can be seen in the semiconductor industry, which experienced severe disruption during the COVID-19 pandemic due to its concentrated supply chains and was only stabilised as part of a concerted effort by the international community.
Regulating cross-border data flows is another arena demanding international cooperation. Here again, Russia and India serve as interesting examples. With Russia's Federal Law on Personal Data and India's impending Personal Data Protection Bill, both nations are evolving their frameworks to balance the seamless flow of data and data privacy protections. Furthermore, their collaborative efforts as key members of BRICS, in proposing an alternative data-sharing mechanism, exemplify an innovative approach to managing cross-border data flows.
International partnerships are critical in reducing the digital divide. As per the Broadband Commission's 2022 report, approximately half of the world's population remains offline, significantly impeding their access to vital digital resources and services. This issue is of paramount importance to nations worldwide, emphasising the necessity of global cooperation to mitigate this disparity and ensure digital inclusivity.
The G20 Digital Economy Task Force (DETF) is an example of a platform for fostering international cooperation. The DETF concentrates on several aspects of the digital economy, including the digital divide, and encourages member countries to share their successful policies and initiatives. Member nations have developed a toolbox of digital policies to address the digital divide, demonstrating a concrete manifestation of international collaboration.
Particularly noteworthy is the global push for Public-Private Partnerships (PPPs) in addressing the digital divide. These partnerships enable the leveraging of private sector resources and innovation for public sector goals, effectively addressing the digital divide's multifaceted challenges. The Global Connect Initiative, a collaborative effort involving multiple stakeholders, including countries, private entities, and nonprofits, aims to bring an additional 1.5 billion people online by 2025.
These factors would be instrumental in the evolution of the digital economy - privacy protection, domestic manufacturing, investment in workforce skilling and research and development, setting standards for global digital public infrastructure, tackling security threats, managing supply chain risks, regulating cross-border data flows, and reducing the digital divide. As the digital economy evolves, the nation-states that navigate these stormy waters would be better suited to grow in an inclusive and equitable manner.