Global Trends by Martin Khor

Monday 5 November 2018

Developing a national digital economy policy

Last week the Prime Minister launched Industry 4.0.  We need a detailed digital economy policy, while guarding against proposals in some trade agreements that restrict the policy options and measures that are needed.


Many governments are now working on establishing a national policy on the digital economy.   They correctly believe that the forces of computerisation, robotics and artificial intelligence are fast changing production and consumption systems. 

The old ways of doing things are being “disrupted” and if we don’t change with the times, we will be left behind.  

In Malaysia, there are already significant responses adapting to the digital revolution.  Various government agencies are encouraging small enterprises and universities to make use of digital tools to advance their business and activities.   Companies and banks are also taking their own measures.  But much more needs to be done. 

Last week, Prime Minister Tun Dr Mahathir Mohamad officiated at the launch of the country’s Industry 4.0 policy formulated by the Ministry of International Trade and Industry.  It is a four-prong strategy to boost Malaysia’s manufacturing sector, and is a response to the call for digital transformation of manufacturing and related services.

There should be a follow up, specifically for developing a national policy on the digital economy. In doing so, we should be aware that discussions are taking place in various countries and institutions.

There is realisation that in the new economy, “data is king”.    Data is seen as the new oil.  It fuels the digital economy, and is its most valuable resource. Data is the raw material for the digital-based industry.  Those that access to data and use it to effect cam have control over digital-based activities.  

Billions of pieces of data are being collected by the digital-based companies and entities, to make profiles of millions or billions of people, which they can in turn target for the promotion of product s and ideas.

Masses of people can be persuaded to buy certain products, visit certain countries, or vote in elections for certain candidates or parties. Collected data also provide information for identification, medical records, banking, security, and so on. 

In the commercial world, companies increasingly prefer to advertise through internet rather than the old media, threatening the survival of newspapers.  Goods are bought online.  The winners are internet-based giants like Google, Facebook and Amazon, who make billions from adverts and sales. 

Many local companies in developing countries like Malaysia that use the old systems lose out, especially if they have to pay taxes while the online companies don’t.  Thus, the calls for imposing digital taxes, so that there is more of a level playing field.  

Some developing countries, notably China and recently India, have taken measures to develop their own companies and also to protect their security, through a number of measures that are elements of a national digital policy.

One such policy is “data localisation”, or a regulation that data generated through online activities have to be retained inside the country.  This means that data collected by international tech giants like Google and Facebook, or credit card companies like Visa and Mastercard, have to be retained in computer data storage centres located in the country and not abroad.

The objectives include to protect data security (at least to some degree), to counter the high market concentration and anti-competitive practices in the digital economy, to get the global tech companies to invest in data centres in the country, and to develop local tech companies.

Linked to this are measures to regulate cross-border data flows.  The free flow of data across countries are benefitting the global tech companies.   “In the context of data as a raw material for the virtual world, the free flow of data without government regulation will have adverse consequences for establishing data-based business in developing countries in the future,” says Abhijit Das, director of the Delhi-based Centre for WTO Studies.

The trade agreement CPTPP (Comprehensive and Progressive Trans Pacific Partnership) has a chapter on e-commerce that prohibits or restricts member governments from having data localisation policies or from regulating cross-border data flows. 

The CPTPP also restricts governments from requiring that companies selling computer software in their countries allow access to their source code as a condition for the sale or use of the software or products containing the software.

With such a prohibition, governments may not be able to access the source code, except in a few listed circumstances.   Prohibiting access to or transfer of source code has the effect of discouraging the diffusion of software technology, perpetuate technology dependency and deepen the digital inequities by further entrenching the already established players in developing countries’ markets, according to a paper by R S Neeraj of the Centre for WTO Studies.

Another issue is the prohibition of government regulations on electronic authentication methods.  Many governments have guidelines or regulations, for example on the use of online banking to protect the safety of consumers.       

However, under the CPTPP, maintaining official regulations would be difficult because of a clause that the companies should be able to decide how secure their electronic transactions should be, except for one chosen category of transactions that can be regulated.

Some developed countries are also advocating that similar clauses be included in the RCEP (Regional Comprehensive Economic Partnership), where negotiations are still on-going.

And there are also strong pressures to have an E-Commerce agreement in the World Trade Organisation.

The global technology companies that dominate the digital business are of course eager to maintain their dominance and prevent new rivals.  

However, developing countries that are trying to embark on their own digital industrial transformation should have the space and freedom to make use of policy measures to develop their own digital strategies.  This could combine making use of the technologies of the existing tech giants while also developing our own digital technological capacities.

Thus, we should keep an eye (or both eyes) open on trade agreements that have a bearing on what we can or cannot do, and negotiate to keep open our options to formulate policies that allow us to participate in and benefit from the digital industrial revolution.