Policy to Support Digital Trade & the Digital Economy

This post is written by Christopher Foster and Shamel Azmeh (University of Manchester). It was originally posted on the GEG Africa blog

The global economy is experiencing important technological shifts with the rise of digital technology a key driver. These changes are likely to intensify in the coming years with new technologies that are emerging such as artificial intelligence, cloud computing, and autonomous vehicles.

For developing and emerging economies, the digital economy provides an opportunity to achieve economic and technological catching-up through using digital technologies and building capacities. But, technological shifts may also widen the technological divide with advanced economies weakening the position of developing economies in global value chains and making ongoing catching-up efforts ineffective.

To explore these issues further, we have recently be undertaking research which aims to offer direction in terms of constructing overall policy strategy in developing and emerging economies, in partnership with the Global Economic Governance Africa project, focussing on South Africa.

Policy models for digital

Drawing on our analysis of digital policy, we highlight two important directions that countries have taken around digital policies. This model extends a previous working papers by Bukht & Heeks produced as part of the DIODE project.

Broader liberal strategies for enabling markets for digital trade highlight the importance of developing the national regulation and conditions to maximise diffusion and impacts of digital products and services into the country. This includes, for instance, creating conditions to attract foreign digital firms and ensuring that benefits are evenly distributed by increasing the digital participation of marginalised groups.

On their own, however, market enabling policies might not necessarily produce the desired economic objectives in terms of technology learning and localization. As such, we also consider a more selective approach which we refer to as digital catch-up policy. This second approach is more interventionist and strategic in nature and it requires higher political capital and knowledge in the policy-making process.

As shown below, the two directions are not mutually exclusive and potentially can be complementary.

The cases of Brazil and Indonesia

To expand and think about implications of such a policy model, we undertook two case studies of Brazil and Indonesia. These studies provide insights for how policy makers can regulate and deal with the challenges of the emerging digital economy.

Overall, directions of digital policy in these two countries have lots in common. Both countries already have core digital regulation and infrastructure in place and policy makers are working to refine policy to ensure that it fits with the rapidly evolving needs of the digital economy and digitalisation.

Moving beyond solely market enabling policies, we see that both countries focus on a number of strategic areas through interventionist policies. Not all of these initiatives have been effective and some carry costs, but in certain areas they have been associated with more vibrant local sectors that are helping build capacities and increase local economic value-added.

The two tables below expand on our findings, highlighting the broad range of instruments being used in the areas of the policy model (click for more details)

Policy instruments: Enabling digital markets

Policy instruments: Digital catch-up

Implications for policy makers

South Africa  (and other emerging and developing countries) faces similar challenges in trying to bridge the technological and industrial gap with more advanced economies in a rapidly changing landscape.  At the same time there is a need to ensure that digital policy is inclusive to achieve broader societal outcomes.

A number of policy lessons can be learnt for South Africa from the cases of Brazil and Indonesia. Policies to enable growth in digital trade are important to provide the framework for the expansion of the digital economy. Underlying this, there must be substantive investments in broadband infrastructure and appropriate regulation. An emphasis on inclusion policies will lead to more broad-based benefits from the digital economy.

To support local firms, digital ecosystem policy is a crucial consideration in grounding the benefits of the digital economy. This includes policies to support the growth and scaling-up of start-ups, and the higher participation of MSMEs in digital trade. Furthermore, encouraging global digital firms to localize some of their activities and to build domestic linkages is an important policy objective. As the ‘disbenefits’ of the digital economy become clear, policy makers need to legislate to reduce challenges in areas such as tax, data protection and the platform economy. Reflecting the importance of scale, regional integration is crucial in terms of digital policy. Broader markets, interoperability and national-regional strategic alignments are key to expanding markets, attracting foreign firms, and potentially increasing their commitment to a region.

Digital catch-up policy provides an important direction for supporting digital growth. Our work reveals a broad range of potential catch-up policy instruments in the digital economy (e.g localisation, incentives, and national digital projects). Future examination should explore the specific catch-up policies that could be fruitful in the case of South Africa.

For further information, see two recent GEG policy papers which expand on these issues:

Policy model – Azmeh, S. & Foster, C. (2018) Bridging the Digital Divide And Supporting Increased Digital Trade: Scoping Study, Discussion Paper, GEG Africa, Pretoria, South Africa.
Discussion paper | Policy brief

Case studies of Brazil and Indonesia – Azmeh, S. & Foster, C. (2018) Bridging the Digital Divide And Supporting Increased Digital Trade: Country Case Studies, Discussion Paper, GEG Africa, Pretoria, South Africa.
Discussion paper | Policy brief