How digital transformation is driving economic change

We are living in a time of exciting technological innovations. Digital technologies are driving transformative change. Economic paradigms are shifting. The new technologies are reshaping product and factor markets and profoundly altering business and work. The latest advances in artificial intelligence and related innovations are expanding the frontiers of the digital revolution. Digital transformation is accelerating in the wake of the COVID-19 pandemic. The future is arriving faster than expected.

A recently published book, “Shifting Paradigms: Growth, Finance, Jobs, and Inequality in the Digital Economy,” examines the implications of the unfolding digital metamorphosis for economies and public policy agendas.

The new technologies hold great promise. They create new avenues and opportunities for a more prosperous future. But they also pose new challenges. While digital technologies have dazzled with the brilliance and prowess of their applications, they have so far not fully delivered the expected dividend in higher productivity growth. Indeed, aggregate productivity growth has slowed in the past couple of decades in many economies. Consequently, economic growth has trended lower.

At the same time, income inequality and related disparities have increased, particularly in advanced economies, stoking social discontent and political ferment. Across economies, there is uneven participation in the new opportunities created by digital transformation. Many are being left behind, across industries and firms, the workforce, and different segments of society.

Firms at the technological frontier have broken away from the rest, acquiring dominance in increasingly concentrated markets and capturing the lion’s share of the returns from the new technologies. While productivity growth in these firms has been strong, it has stagnated or slowed in other firms, depressing aggregate productivity growth. Increasing automation of low- to middle-skill tasks has shifted labor demand toward higher-level skills, hurting wages and jobs at the lower end of the skill spectrum. With the new technologies favoring capital, winner-take-all business outcomes, and higher-level skills, the distribution of both capital and labor income has tended to become more unequal, and income has been shifting from labor to capital.

One important reason for these outcomes is that policies and institutions have been slow to adjust to the unfolding transformations. To realize the promise of today’s smart machines, policies need to be smarter too. They must be more responsive to change to fully capture potential gains in productivity and economic growth and address rising inequality as technological disruptions create winners and losers.

As technology reshapes markets and alters growth and distributional dynamics, policies must ensure that markets remain inclusive and support wide access to the new opportunities for firms and workers. The digital economy must be broadened to disseminate new technologies and opportunities to smaller firms and wider segments of the labor force.

Firms, workers, and policymakers face many questions. While digital technologies offer large productivity payoffs, they create new challenges for firms as production processes, sources of competitive advantage, and market structures shift. Is rising industrial concentration, as reflected in the increasing market dominance of tech giants, inevitable with these technologies or can their benefits be shared more widely across firms to lift aggregate productivity and foster more robust economic growth? Regarding the rapid change seen in financial markets, how can the promise of digital innovations in finance be captured while managing risks? Should workers fear the new automation as the nature of work and skill needs change and many old jobs and tasks disappear? How should they adapt? In what ways are technology-driven shifts in business and work causing economic disparities to widen? How should public policy respond?

“Shifting Paradigms” addresses these questions by showing that policies matter. New thinking and adaptations are needed to realign policies and institutions with the digital economy. Areas for attention include competition policy and regulatory regimes, the innovation ecosystem, digital infrastructure, workforce development, social protection frameworks, and tax policies.

Competition policy should be revamped for the digital age. Antitrust laws and their enforcement must be strengthened. The digital economy poses new regulatory challenges that must be addressed, including issues surrounding the regulation of data (the lifeblood of the digital economy), competition issues relating to digital platforms that have emerged as gatekeepers in the digital world, and market concentration resulting from tech giants that resemble natural or quasi-natural monopolies because of economies of scale and network effects associated with digital technologies. As in product markets, policymakers need to ensure that financial markets remain sufficiently competitive and address regulatory challenges relating to the new world of digital financial products, platforms, and algorithms. Also, new frameworks are needed for international collaboration in areas such as regulation of cross-border data flows and taxation of cross-border digital business.