TWN Info Service on WTO and Trade Issues (Oct17/05)
10 October 2017
Third World Network

Opportunities, costs and risks in roll-out of digital economy
Published in SUNS #8546 dated 5 October 2017

Geneva, 4 Oct (Kanaga Raja) - While the digitalization of economic activities and transactions can help to overcome barriers to more inclusive development, significant divides in the readiness of countries to engage in and benefit from the digital economy enhance the risk of the gaps becoming even wider, with greater income inequality as a result, the UN Conference on Trade and Development (UNCTAD) has said.

This view is put forth by UNCTAD in a Secretariat Note, "Maximizing the development gains from e-commerce and the digital economy", prepared for the first session of the Intergovernmental Group of Experts (IGE) on E-commerce and the Digital Economy, meeting here from 4-6 October.

In its document, UNCTAD said that as the rapid uptake of ICTs (information and communications technologies) and e-commerce is transformational, the move towards the digital economy will create not only opportunities but also costs and risks for developing countries, including Least Developed Countries (LDCs).

"The roll-out of the digital economy also poses a number of potential challenges, costs and risks," it said.

"Digital divides and uneven access to affordable ICTs can lead to an inequitable distribution of the benefits from e-commerce, which may bypass people with little education and/or literacy; micro, small and medium-sized enterprises; people in rural areas and those with limited ability or rights to connect."

"There is concern that widespread use of new technologies, automation and greater reliance on online platforms will lead to job losses, growing income inequalities and greater concentration of market power and wealth," UNCTAD further said.

It becomes increasingly important to enhance understanding of the enabling conditions and implications for the economy and society stemming from digitalization in order to maximize potential benefits and opportunities and cope with relevant challenges and costs, it added.

In some introductory remarks at this first IGE session, Dr Mukhisa Kituyi, Secretary-General of UNCTAD, told the participants that UNCTAD's illustration of the phenomenal growth and of the gaps is only the starting point.

"Your expertise in this meeting should inspire the work not only in our discussions on the next phase of our work, research and policy guidance but (also) the lead-up to the next e-commerce week in late April next year."

"It's our hope also that by your policy-driven discussions at this meeting you will lay useful ground for those in the trade community who are trying to see how best the other members of the Geneva trade hub can optimize opportunities that come out of this expert meeting - this unique phenomenon that we are convening here today," he added.

Dr Kituyi said that the outcome of the meeting is very much awaited by the UNCTAD Secretariat, and that the Secretariat stands ready in whichever way to assist this initiative to grow, to strengthen the intergovernmental pillar and to make ICTs positively impact the realization of Agenda 2030.

Ms Shamika Sirimanne, Director of the UNCTAD Division on Technology and Logistics, made a presentation of the UNCTAD Secretariat Note to kick-start the discussions in the IGE in which she highlighted the new and emerging trends in e-commerce and the digital economy, the development dimension of e-commerce and the digital economy, and the policy implications and the guiding questions as the IGE takes the work forward.

According to the UNCTAD Secretariat Note, information and communications technologies (ICTs) are playing an increasingly important role in the implementation of the 2030 Agenda for Sustainable Development.

In its overall review of the implementation of the outcomes of the World Summit on the Information Society, the General Assembly of the United Nations committed to harnessing the potential of ICTs to achieve the 2030 Agenda, noting that such technologies could accelerate progress in achieving all 17 Sustainable Development Goals.

E-commerce and various digital applications can be leveraged to promote the empowerment of women as entrepreneurs and traders (Goal 5.b).

They can support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro, small and medium-sized enterprises, including through access to ICT-enabled financial services (Goal 8.3). Digital solutions can be leveraged to increase access of such enterprises in developing countries to financial services and markets and enable their integration into value chains (Goal 9.3).

Moreover, e-commerce will become increasingly important in achieving Goal 17.11, to significantly increase the exports of developing countries and double the share of global exports of the least developed countries (LDCs) by 2020.

In the Nairobi Maafikiano, adopted at the fourteenth session of the United Nations Conference on Trade and Development (in July 2016), member States highlighted the growing importance of the digitalization of the economy, including e-commerce (paragraph 52).

They called on UNCTAD to strengthen its work on these issues (paragraph 55 (u)) and to assist developing countries in this regard (paragraph 55 (v)).

In addition, member States decided that the Trade and Development Board would operationalize the creation of two new intergovernmental groups of experts, one of which focused on e-commerce and the digital economy (paragraph 100 (r)).

In the terms of reference for the new Intergovernmental Group of Experts on E-commerce and the Digital Economy, agreed upon by the Trade and Development Board on 5 April 2017, member States decided that its policy focus would be on maximizing the development gains from e-commerce and the digital economy, and addressing associated challenges, and thus strengthening its development dimension.

According to the Secretariat Note, with regard to expected outcomes, the Intergovernmental Group of Experts should produce agreed policy recommendations drawn from the discussions for the consideration of the Board; a report produced under the responsibility of the Chair of the Group of Experts, to inform discussions at the Board; and a decision on topics and guiding questions for subsequent sessions, including the provisional agenda.

At its first meeting, the Intergovernmental Group of Experts should also decide on appropriate organizational and working modalities.

[While e-commerce and digitalisation are being promoted as tools to enhance capabilities and competitiveness of micro-businesses (small and medium enterprises - SMEs), a panel session at the Public Forum at the World Trade Organization last month suggested that what the micro-business representatives perceive as their need seemed to have little to do with the e-commerce agenda.

[At a panel session sponsored by ETSY, described as an e-commerce platform for micro-businesses, Mr. Richard Hill, a civil society activist (President of the Association for Proper Internet Governance and Member of the JustNet Coalition), asked the representatives of SMEs what was their need and the problems they faced, and what they expected from the WTO.

[The response from the SME representatives surprisingly had little to do with the e-commerce agenda that a group of developed countries and some of their allies from the developing world are promoting for the upcoming WTO ministerial conference in Buenos Aires in December - a work program, leading to negotiations and disciplines.

[The SME representatives at the panel session said that they needed simplified customs procedures and forms, a platform for getting information on how to facilitate international transactions, speedy enforcement against counterfeiters, and efficient shipping solutions for "exotic" countries, namely those not on main shipping routes. SUNS]

TRENDS IN E-COMMERCE AND THE DIGITAL DIVIDE

The UNCTAD document noted that the digital economy is evolving in all parts of the world, but at different speeds.

"On the one hand, the digitalization of economic activities and transactions can help to overcome barriers to more inclusive development. On the other hand, significant divides in the readiness of countries to engage in and benefit from the digital economy enhance the risk of the gaps becoming even wider, with greater income inequality as a result," it said.

E-commerce is a fairly well-defined concept. According to the OECD definition of the term, e-commerce refers to purchases and sales conducted over computer networks, using multiple formats and devices, including the web and electronic data interchange and the use of personal computers, laptops, tablets and mobile phones of varying levels of sophistication.

E-commerce may involve physical goods, as well as intangible (digital) products and services that can be delivered digitally. Payments and delivery can be made offline or online.

E-commerce is part of the broader concept of the digital economy, for which there is still no internationally agreed definition, said UNCTAD.

However, in this context, it refers to the application of digital technologies for the conduct of economic activities within or between national economies. The digital economy encompasses both the production and use of digital technologies, goods and services.

The evolving digital economy is emerging from a combination of technologies, which are beginning to become more pervasive across various parts of the economy. These include improved broadband connectivity, cloud computing, advanced robots, big data and the Internet of Things.

According to UNCTAD, the underlying technologies and processes have far-reaching implications for the organization of work, production and trade, extending the organizational and geographic fragmentation into formerly indivisible knowledge-intensive business functions and job categories.

"At the same time, the new digital economy is only in its infancy. It will only fully arrive if and when all of these features mature, become integrated and are widely used. Moreover, various factors, such as data security risks, data localization pressures, and data collection and privacy concerns may slow or even derail its development."

"Digital divides remain wide," said UNCTAD, pointing out that developing countries and LDCs lag behind in terms of fixed-broadband penetration, household access to ICT and Internet use.

While mobile-cellular penetration reached over 90 per cent in developing countries, mobile broadband stood at just above 40 per cent, and fixed broadband was still below 10 per cent. Moreover, only 40 per cent of the people in developing countries in 2016 used the Internet, compared with more than 80 per cent in developed countries.

In LDCs, connectivity has improved. Mobile cellular subscriptions, in particular, soared from an average of only 5 per 100 people in 2005 to as much as 73 in 2016. Among world Internet users, LDCs also saw improvement, from 0.6 per cent in 2005 to 3.7 per cent in 2015.

"Nevertheless, the prominence of developing countries in the online world is significant and growing. As much as 70 per cent of the world's Internet users in 2015 lived in developing and transition economies. Nearly 90 per cent of the 750 million people that came online for the first time between 2012 and 2015 were from developing economies."

Large divides remain between and within countries, such as between rural and urban areas, women and men, young and old. Similar divides exist between firms of different size and in different industries.

Particularly large divides remain in access to and use of broadband.

Developing countries, especially LDCs, are at a disadvantage in several ways. First, broadband penetration is generally low. Second, those with broadband access tend to enjoy relatively low download and upload speeds, limiting the kind of activities that can be used productively over the Internet. Third, taking into account income levels, the use of broadband services tends to be more costly than in more advanced economies.

"To achieve a more inclusive digital economy, renewed efforts will therefore be needed to bridge these divides," said UNCTAD.

Official statistics relating to the leading e-commerce markets, including both business-to-business and business- to-consumer e-commerce, suggest that global e-commerce reached $25.3 trillion in 2015.

Business-to-consumer sales amounted to just over $2.9 trillion, about 10 per cent of the overall global estimate. In turn, business-to-business sales exceeded $22 trillion, almost eight times the business-to-consumer value.

China boasted the world's largest business-to-consumer e-commerce market ($617 billion), followed closely by the United States of America ($612 billion).

The United States, however, reported the largest business-to-business market, worth more than $6 trillion, well ahead of Japan ($2.4 trillion).

"Except for China, no developing or transition economies were featured among the top 10 e-commerce markets in 2015."

Although global e-commerce is dominated by the developed countries and China, the highest growth is observed in the developing regions, especially in Asia.

In most developing and transition economies, people buying online form a relatively small proportion of all Internet users, ranging from below 3 per cent in many LDCs, to 60 per cent in Singapore in 2015.

Unlike social networking, where activity rates are relatively high among Internet users in developing countries, the percentage of Internet users that engage in online shopping is generally lower in developing countries than in developed countries.

According to UNCTAD, this may reflect limited purchasing power but also other mitigating factors such as lack of trust; limited shopping options, including content in local languages; and poor delivery services.

Most e-commerce is domestic in nature. Although few countries currently report official data on cross-border e-commerce, available information is relatively consistent. For example, in both Canada and Spain, about 80 per cent of measured e-commerce sales are made to domestic customers.

According to UNCTAD estimates, the global value of cross-border business-to-consumer e-commerce amounted to $189 billion in 2015, which is equivalent to about 7 per cent of domestic business-to-consumer e-commerce, based on the value of overseas online purchases by consumers in major countries.

Other UNCTAD data for the same year show that some 380 million consumers made a purchase from overseas websites.

"With regard to the share of firms receiving orders online, the shares of small firms are consistently smaller than those of large firms. Thus, an increase in the overall proportion of businesses that receive orders online does not guarantee that small and medium-sized enterprises will benefit equally."

According to the UNCTAD document, various measures of the production and usage of digital technologies, goods and services show a growing importance of the digital economy in the overall economy.

Global value added of the information and communications services sector grew by an estimated 12 per cent between 2010 and 2015 to $3.4 trillion, equivalent to 4.6 per cent of global gross domestic product (GDP), and ICT goods manufacturing generated value added of about $1.7 trillion in 2014.

Thus, the combined information and communications services and ICT manufacturing sectors are responsible for an estimated 6.5 per cent of global GDP. Some 100 million people worldwide are employed in ICT services, representing about 1.5 per cent of total global employment.

Between 2010 and 2015, telecommunications, computer and information services exports grew by 40 per cent to $467 billion, which corresponds to one tenth of all commercial services exports. Trade in ICT goods stood at just over $2 trillion in 2015, amounting to 13 per cent of global merchandise trade.

The digital economy is also evolving, with new features assuming growing importance. Key technologies and applications that are of particular relevance to the organization of production and trade include advanced robotics, artificial intelligence, the Internet of Things, cloud computing, big data analytics and three-dimensional (3D) printing.

The UNCTAD document noted, for example, that worldwide shipments of 3D printers more than doubled in 2016 to over 450,000 and are expected to reach 6.7 million in 2020.

In terms of consumption of 3D printing, 40 per cent of such systems were installed in 2012 in North America, compared with 30 per cent in Europe, 26 per cent in the Asia–Pacific region and 4 per cent in the rest of the world.

According to the International Federation of Robotics, sales of over 250,000 robots were at their highest level ever in 2015.

DEVELOPMENT DIMENSION, OPPORTUNITIES AND CHALLENGES

The UNCTAD Secretariat Note said there is growing interest in the development implications of e-commerce and the digital economy.

The impact of digitalization on industrial activities, foreign direct investment, trade and sustainable development is the focus of several international policy dialogues and processes.

The decision by UNCTAD member States to set up - for the first time - an intergovernmental group of experts on e-commerce and the digital economy is illustrative of this. Also for the first time, the Group of 20 issued a ministerial declaration on the digital economy in April 2017.

E-commerce is also featured at the World Trade Organization in discussions related to the next ministerial conference to be held in Buenos Aires on 10-13 December 2017.

UNCTAD said: "A number of digital applications will be helpful in addressing various Sustainable Development Goals. However, as the rapid uptake of ICTs and e-commerce is transformational, the move towards the digital economy will create not only opportunities but also costs and risks for developing countries, including LDCs".

In terms of opportunities for economic growth and development, the application of ICTs can bring down transaction costs and enable the remote delivery of more goods and services. For example, automating customs declarations has helped to reduce clearance and transit times, it said.

Access to ICT platforms and devices may enable a seller in a developing country to reach more potential customers in domestic and foreign markets in more targeted ways, often at lower cost than through traditional channels.

In addition, suppliers that rely more on e-commerce may be able to reduce the delivery costs, especially for electronically-provided content. This has an impact on global value chains, as more inputs can be digitally delivered, which in turn facilitates the management of fragmented production networks.

Greater ICT use can enhance the productivity of enterprises. The potential for such productivity gains remains far from fully exploited in most developing countries. In addition, the digital economy offers opportunities for entrepreneurship, innovation and new job creation.

"For example, there are thousands of e-commerce start-ups throughout developing countries. However, many of them have yet to become profitable and reach significant scale," said UNCTAD.

"The roll-out of the digital economy also poses a number of potential challenges, costs and risks. Digital divides and uneven access to affordable ICTs can lead to an inequitable distribution of the benefits from e-commerce, which may bypass people with little education and/or literacy; micro, small and medium-sized enterprises; people in rural areas and those with limited ability or rights to connect," said UNCTAD.

Other challenges to maximizing the benefits of e-commerce are: (a) Unreliable and costly power supply; (b) Limited awareness of how to implement and use ICTs; (c) Insufficient or inconsistent laws and regulations; (d) Limited or deficient transport and logistics infrastructure; (e) Inexistence of online or alternative payment facilities; (f) Limited purchasing power; (g) Cultural preferences for face-to-face interaction; (h) Reliance on cash in society.

Increased digitalization is likely to have disruptive effects on jobs and skills. It may lead to new types of jobs and employment, change the nature and conditions of work, alter skills requirements and affect the functioning of the labour markets, as well as the international division of labour. In addition, whenever the pace of technological innovation increases, so does the strategic importance of skills.

"There is concern that widespread use of new technologies, automation and greater reliance on online platforms will lead to job losses, growing income inequalities and greater concentration of market power and wealth," said UNCTAD.

Increased scope for computerization, automation and the use of artificial intelligence in both manufacturing and knowledge-intensive services exposes more occupations and tasks to the risk of disappearing, even as output and productivity rise, and bring relatively greater returns to capital, potentially driving further job losses.

"The effects of the digital economy are expected to disrupt complete industries, as well as the ways firms are organized."

For example, ride sharing is already transforming individual mobility, and autonomous vehicles may become part of the mainstream market in the near future (some are already on the road in some developed countries). Services from help desks to education and training, and payments and banking can already be delivered with automated systems and mobile applications.

For consumers, there are also potential risks from automation, big data and artificial intelligence. The analysis of prior shopping and purchasing histories, in the context of millions of prior purchases from shoppers with similar habits, can give firms a high level of detailed information with potentially negative impacts on consumers' bargaining power.

For users of connected applications that transmit data to various online platform owners, the loss of privacy and bargaining power constitutes an added risk. While many smartphone applications - for example, easy-to-use map navigation, music streaming services and online purchase and reservations services - are free to use, the price consumers have to pay is giving firms and application developers detailed information about their whereabouts, preferences, relationships and personal habits, sometimes without knowing it.

"Companies can combine information and assumptions about users collected from their online activity with information from public sources and data brokers to assemble dossiers on users with nearly 100 variables (job title, parents' birthdays and so forth), for example, to help them (sell) target advertisements," UNCTAD pointed out.

For companies, organizations and Governments, increased vulnerability to hacking, identity or other personal and financial information theft, larceny and even industrial espionage and sabotage can result from connecting private communications networks, industrial systems and public infrastructure to the Internet and/or in the cloud.

There is a trade-off: weighing the potential negative consequences from ignoring such risks against losing out on potential benefits when taking the risks seriously.

"Against this background, it becomes increasingly important to enhance understanding of the enabling conditions and implications for the economy and society stemming from digitalization in order to maximize potential benefits and opportunities and cope with relevant challenges and costs. Given the anticipated transformative impact, effects will differ between countries at different levels of development, as well as between different stakeholders," UNCTAD argued.

IMPLICATIONS FOR POLICY AND SOME GUIDING QUESTIONS

As more business activities are increasingly affected by digitalization, it becomes important for Governments to consider how to harness e-commerce and the broader digital economy for sustainable development, said UNCTAD.

It posed three guiding questions included in the terms of reference for the Intergovernmental Group of Experts on E-commerce and the Digital Economy: (a) What do developing countries need in order to build competitive advantages through e-commerce and the digital economy? (b) What can developing countries do to strengthen their physical and technology infrastructure? (c) How can developed countries partner, in the most impactful way, with developing countries to maximize opportunities and address challenges relating to e-commerce and the digital economy?

"A good starting point for developing a strategy towards harnessing the digital economy is to recognize the cross- cutting impact of digitalization. Seizing opportunities and addressing challenges requires the involvement of several different ministries and interaction with other, non-State stakeholders, such as the private sector, academia and civil society."

Governments have a central role in creating an environment that is conducive to maximizing sustainable development opportunities and in ensuring that the environment supports the relevant development objectives of a country, said UNCTAD.

"Digital policies should be coherent and well integrated with each country's national development agenda, as e-commerce and other digital applications may support different economic and social objectives, such as higher productivity, improved competitiveness, improved access to information, transparency of regulations, and more inclusive and equitable development."

Clearly defined objectives and recognition of possible concerns are a first step to formulating relevant policies.

The UNCTAD document also said that a lack of relevant statistics is a serious obstacle to mapping the use and impact of e-commerce and other aspects of the digital economy. The situation is particularly weak in developing countries, especially in LDCs.

This makes it difficult for policymakers to formulate and implement evidence-based policies aimed at harnessing the digital economy. Improving data availability should be a priority for Governments.

Noting that there are still significant digital divides to be overcome, UNCTAD said that there are different ways for Governments to strengthen the digital infrastructure.

Policy frameworks and regulations should secure an open, transparent and fair telecommunications market to enable more domestic and foreign investment. Measures to make broadband use more affordable may include infrastructure sharing, effective spectrum management and avoidance of high taxes and import duties on ICT equipment and services. It is also important that community networks reach people in rural or remote areas who are currently unconnected.

UNCTAD also said that in view of the rapid pace at which the digital economy is evolving and the current major digital and other divides between, as well as within countries, more effective support to developing countries to engage in and benefit from the digital economy is urgently needed.

"To scale up the contribution of e-commerce and the digital economy to sustainable development, a holistic, cross-sectoral and multi-stakeholder approach will be required," UNCTAD said, adding that one way to capitalize on existing knowledge and maximize synergies with development partners is to tap into the eTrade for All platform.