This UNCTAD paper discusses the various components of digital infrastructure to de-mystify digital economy and examines the reasons for growth of big-tech firms and the source of their rent-seeking powers.

The extent of digitization of manufacturing is estimated for identified developed and developing countries using world input-output database. The estimated value-added by digital services to manufacturing exports show wide variation between developed and developing countries, indicating the growing digital divide in manufacturing exports.

The paper proposes a ten-point South-South digital cooperation agenda which can help the developing countries to build their digital capacities and digital skills. The importance of ownership of data by the national governments is highlighted along with developing regional digital strategies for supporting national digitalization efforts of the developing countries.

Introduction

The pace of digitization has picked up with the onset of Industry 4.0 or the fourth industrial revolution and with the growing use of digital technologies in traditional manufacturing and service activities. Decisions along the entire value chain of production and distribution have been affected as well as impacting consumer behavior and factor markets, i.e., what to produce, how to produce, where to sell and who to reward.

Digital linkages are intensifying as digital services add a competitive edge to manufactured products by being bundled into their production as well as being increasingly used in their distribution.

Corporations are transforming their business models – companies are becoming global leaders in providing:

• Car services without owning a single car (UBER)
• Accommodation services without owning a single hotel (AirBnB)
• Retail services without holding any stocks (Alibaba)

Disruptions in the existing patterns of production, consumption and investments are invariably affecting international trade and foreign direct investment (FDI) patterns and governments are under increasing pressure to act in order to sustain economic growth, preserve jobs and ensure their firms retain shares in global production, investments and trade.

To meet the challenge, developing countries will need support and cooperation not only from traditional development partners but also from regional neighbours. South-South digital cooperation for industrialization can boost the ability of the South to digitally industrialize and successfully gain from the new opportunities and avenues that digitization offers. It can also help countries mitigate the downside risks. There is therefore a need to add a digital cooperation agenda to the on-going regional integration initiatives in the South, especially in Africa.

Need for South-South digital cooperation for boosting industrialization

For developing countries, especially least developed countries, it is extremely difficult to enter and adapt to digitized industrialization on their own. They will first have to develop their digital infrastructure and incorporate a new component in their existing industrial policies which focuses on digitization of manufacturing processes.

This digital industrial policy, as a part of the existing industrial policy, needs to focus on building digital infrastructure that includes ICT infrastructure along with digital skills; data infrastructure and cloud computing infrastructure. This will allow the countries to progress towards building AI that can assist them in increasing digitization in their manufacturing as well as help them to develop more efficient and cost effective manufactured products using robots, 3D printers and IoT.

This entire process of industrial digitization in a country cannot happen on its own, especially given the limited existing digital capacities of developing and least developed countries. South-South cooperation, in the form of regional digital cooperation, is essential for digital industrialization of the South. This regional digital cooperation can be an additional element in the on-going regional integration processes.

For South-South digital cooperation within the regional blocs, the following 10-point agenda is suggested, where the sequencing and prioritizing needs to be adapted according to the level and pace of digital development of the countries within the region.

South-South 10-point Digital Cooperation Agenda for boosting Industrialization:

1. Building a Data Economy.

2. Building Cloud Computing Infrastructure

3. Strengthening Broadband Infrastructure

4. Promoting E-Commerce in the Region

5. Promoting Regional Digital Payments

6. Progressing on Single Digital Market in the Region.

7. Sharing Experiences on E-Government.

8. Forging partnerships for building Smart Cities

9. Promoting Digital Innovations and Technologies

10. Building Statistics for measuring Digitization

Growing digitization has raised the anxiety of the developing world which stems from lagging digital capacities, weak supportive digital infrastructure and lack of comprehensive knowledge of the digitization process. This study demystifies the digital economy by explaining the various components of digital infrastructure as well as highlighting the unique and inherent features of digital economy that promotes monopolies.

The digital economy is built on digital infrastructure (DI), comprising three closely interrelated components: communication networks; software packages and related capabilities; and data platforms. This digital infrastructure has led to development of artificial intelligence which has enabled the advanced world to produce more efficient and competitiven products, giving rise to big tech firms. Automation, use of robotics, IoT, cross-border e-commerce and remote additive manufacturing (3D printing) are all manifestations of the growing strength of digital infrastructure and rising digital industrialization.

This report was prepared by Unit on Economic Cooperation and Integration among Developing Countries, Division on Globalization and Development Strategies, UNCTAD. The report was authored by Rashmi Banga and Richard Kozul-Wright with helpful comments from Joerg Mayer and Pierguiseppe Fortunato.