The exploitation of data enables new industrial models (“Industry 4.0”) and, more broadly, underpins the emergence of a new kind of economy – the data-driven economy – based on the specific characteristics of the essential capital of this age: data.

For developing countries, it opens up new opportunities for convergence, including by leapfrogging intermediate infrastructures of the industrial age, drawing on the vast knowledge spillovers from the internet, taking advantage of the new markets enabled by digital platforms, and exploiting production possibilities enabled by digital technologies. However, it also throws up daunting challenges related to technology, governance and international cooperation.

Which measures and policies are crucial to adopt in the Global South to effectively leverage the digital transformation for its development?

The technological challenge

For the Global South, the initial experience in the data-driven economy will, on several grounds, likely be divergence as the technological and income gaps with the most advanced countries widen.

First, the digital transformation will enable the industrialisation of learning as innovation becomes increasingly driven by machine learning. This will accelerate the pace of change in the data-driven economy, which will naturally widen gaps across numerous dimensions of economic performance.

A second factor promoting initial divergence is investment costs. The assembly of data is a library function, which is a cost centre; it is the exploitation of data that creates profit centres. The developing world is only starting to play catch-up in making the foundational investments. Related to this, the accelerating shift of the research frontier steadily increases skill requirements, calling for substantial investment in skill upgrading.

Further, the data-driven economy builds on the intellectual property-driven knowledge-based economy. Intellectual property generates rent and excludes competition, and the Global South will tend to be a rent payer, not a rent earner, and for many technologies may be effectively sidelined as a producer.

The governance challenge

The digital transformation opens up seemingly unbounded scope for market failure, government failure and social dysfunction.

Market failure is predicted because the data-driven economy powers the emergence of superstar firms through the combination of economies of scale and scope, network externalities and pervasive information asymmetry. Government failure is predicted because it facilitates surveillance (including through collaboration with big tech) and thus expands the coercive power of governments. Social dysfunction is predicted by the fragmentation of understanding that is implicit in a “post-truth,” “alternative facts” information environment and by the collapse of civility in the online world.

The governance challenges posed by the data-driven economy are thus immense; for the Global South, these are amplified by the development gap.

The international cooperation challenge

At the very outset in the data-driven economy, strategic rivalry emerged in the form of digital trade wars; this has escalated into an all-out trade war between the United States and China. This rivalry among the great digital powers is spilling over into the Global South in at least two major theatres: the rollout of new telecommunications technologies (e.g. 5G networks) and the digital chapters of trade agreements.

Issues of alignment have arisen. The threat of decoupling and conditionality of technology use give rise to the possibility of different standards and lack of interoperability between different systems, and create challenges for developing countries through lock-in effects for technology application.

As for the trade agreements, developing countries face large information and power asymmetries vis-à-vis the advanced countries in negotiating, especially given that there is no established way to assess the value proposition of commitments on data.

Recommendations

Despite all the challenges, the Global South may nonetheless still benefit from the technological revolution as consumer and user of diffused technology. Moreover, developing countries will have niches in which they can develop competitive advantage, particularly where their lack of legacy infrastructure reduces the cost of adopting new technologies and such adoption faces less vested interest resistance.

Several concrete strategic recommendations can be made for the Global South in this context:

• Emphasize technology acquisition through every means possible, by leveraging knowledge and information spillovers: through the use of open platforms and free software, inflows of foreign direct investment, professional migration and academic exchange.
• Focus private sector development on digitally enabled micro-, small- and medium-sized enterprises, exploiting population size and knowledge about local market peculiarities.
• Aim to leapfrog traditional technologies in adopting solar-electric, internet-based urban systems.
• Avoid premature rural-urban migration that would both undermine the development of smart sustainable cities and also drain the countryside of the labour force needed to sustain agricultural development.
• Formulate a comprehensive plan for governance of the digital economy, detailing measures on investment promotion, infrastructure prioritisation, market regulation and privacy. Thinking the issues through is almost as important as implementation.
• Consider the long-term implications of conditionality of cooperation with a given international partner, including on investment, technology transfers, data localisation and usage, licencing, etc.
• Be cautious and not rush into binding international commitments, which might lead to a lock-in of the advantages of the global big tech companies, given the constantly evolving rule-making environment.

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This article has been prepared for the Enhanced Integrated Framework policy series on aid for trade and is based on the policy brief Leveraging the Digital Transformation for Development: A Global South Strategy for the Data-driven Economy, published by the Centre for International Governance Innovation in April 2019.

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* Dan Ciuriak is Senior Fellow at the Centre for International Governance Innovation, Ottawa, Canada. Maria Ptashkina is an Economics PhD candidate at University Pompeu Fabra, Barcelona, Spain.

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This policy series has been funded by the Australian Government through the Department of Foreign Affairs and Trade. The views expressed in this publication are the author’s alone and are not necessarily the views of the Australian Government.