Developing countries losing out to digital giants

Khazanah Research Institute senior adviser Dr Jomo Kwame Sundaram: " Malaysia should be both active and proactive in strengthening bilateral ties with China."

A new United Nations report warns that the potential benefits to developing countries of digital technologies are likely to be lost to a small number of successful first movers who have established digital monopolies. 

According to the Trade and Development Report 2018 (TDR 2018), subtitled ‘Power, Platforms and the Free Trade Delusion’, while developing countries need to invest more in digital infrastructure, they must also address the ownership and control of data and their use.

Developing countries will need to protect, and extend, available policy space to successfully integrate into the global digital economy. Stronger competition and regulatory frameworks will also require multilateral cooperation.

Digital concentration

Libertarian ‘light-touch’ regulatory frameworks have allowed powerful corporations to largely evade strict regulatory supervision and oversight, expand exclusively into lucrative related areas and limit policymakers’ influence. Digital monopolies have thus profitably ‘mined’ and processed data.

Of the top 25 big technology firms in terms of market capitalization, 14 are US based, with three in the European Union, three in China, four in other Asian countries and one in Africa.

In 2015, the top three big US technology firms had average market capitalization of more than $400 billion, compared to $200 billion in China, $123 billion in other Asian countries, $69 billion in Europe and $66 billion in Africa.

Apple recently became the first company in the world to be valued at more than $1 trillion, matching the combined economic output of Saudi Arabia and South Africa.

Such concentration and market dominance have ensured lucrative rents for the big players in the sector. For example, Amazon’s profits-to-sales ratio increased from 10 per cent in 2005 to 23 per cent in 2015, while Alibaba’s increased from 10 per cent in 2011 to 32 per cent in 2015!

These trends are largely due to the extraction, processing and sale of data. Digital platforms use their control over data to organize and mediate transactions along value chains. Network effects allow these platforms to expand these ecosystems utilizing feedback-driven processes.

The resulting market power, with stronger ‘property rights’ on the control and use of data, has enabled rentier and other uncompetitive practices. Thus, one cannot but be circumspect about the hype over ‘big data’ and ‘data revolution’. They rarely promote inclusive development, especially when left to ‘market’ or ‘self-regulation’.

Digital democracy?

TDR 2018 recommends active policies to check anti-competitive rent capture by digital platforms, and misuse of data. Antitrust and competition policies, historically concerned with market structure and behaviour, increasingly emphasize maximizing consumer welfare, using price-based measures.

In our increasingly digitized world, consumers receive services in exchange for surrendering their data, at zero nominal prices, i.e., for free. The control and use of such data enables the lucrative rentier activities associated with their use and abuse.

Policy options include stricter regulation of restrictive business practices and breaking up large firms responsible for market concentration. The digital world’s monopolistic tendencies should be regulated, and firms’ abilities to exploit their dominance restricted, e.g., the recent measures taken by the European Union against Google.

Developmental digitization?

For developing countries, the regulatory challenges to realize developmental gains from digitization are greater. Some countries are already using localization measures to develop domestic digital capacities and digital infrastructure.

But in most cases, data are owned by those who gather and store them, mainly digital super platforms, which then have full, exclusive and unlimited rights over the resource.

National data policies should be designed to address four major issues: who can own data, how data can be collected, who can use such data, and on what terms. They should also address the question of data sovereignty, e.g., which data can leave the country, and consequently are not governed by domestic law. South-South and regional cooperation can help small developing countries build their digital skills, capacities and capabilities.

Developing countries need to protect and expand available policy space to implement development strategies that should include digital policies with regard to data localization, data flow management, technology transfers and custom duties on electronic transmissions.

The international community is just beginning to discuss rules and regulations to improve them, before agreement is reached at the World Trade Organization and other multilateral bodies.

A premature commitment to rules with long-term impacts on fast-changing matters should be avoided, especially where powerful business interests remain influential and often dictate the very terms for discourse.

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