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What is a Digital Economy?
Land, labor, capital, and entrepreneurship are the four factors of production- also known as economic resources. They are the essential inputs required for the creation of any and all goods and services. These activities make up and drive an economy, which is a system of interrelated production and consumption activities responsible for defining the allocation of resources within a country, an area, or a period. An economy encompasses the structure and conditions around economic activities.
There is now a fifth economic resource- data. Since Web 2.0 in the 21st century, data has played an increasingly important role as an economic and strategic resource locally and globally, a trend underpinned by the COVID-19 pandemic. The pandemic compelled the world to pay more attention to the collection, transmission, storage, processing, and use of this intangible, non-rival commodity; as inter- and intra-border data flows strengthened the world’s response to the pandemic- as well as its preparedness for the future.
The emergence of data as an economic resource formed the foundation of a digital economy. Currently running parallel to the traditional economy, the digital economy is established on digital technologies. It is a system of interrelated economic activities that determine the allocation of resources within a country, area, or period, enabled by digitized data from digital technologies.
A digital economy is concerned with more than the broad range of economic activities across the data value chain: from the collection and transmission of data (digitization), to its storage and processing (digitalization), to its use (digital transformation) in enhancing economic productivity and growth. Beyond the consumption narrative, a functional digital economy is also concerned with the impact of digital channels on societal and economic behaviors.
Pillars of a Digital Economy
The data value chain (and its activities) stands on the shoulders of the current economy. It does not replace or exist without it. The digital infrastructures (fiber optic cables, internet, data storage facilities, etc.), enabling digital technologies (cyber security, cloud computing, big data software, blockchain, IoT, robotics, etc.), and human capital, are built on existing basic infrastructures (roads, airports, ports, electricity), enabling environments (policy, regulatory, financial, etc.), influenced by human action.
New Value and Markets
In a digital economy, value is created through the transformation of data to marketable revenue-generating intelligence- which can, and is, also used for social objectives, e.g., to help respond to or prepare for a global health or economic crisis. According to the Blue Ocean concept, this happens in three ways. The digital technologies on which the digital economy is predicated on, create value and/or markets by either:
The creation, adoption, and investment in digital technologies by economic actors (public and private sector) have created new job opportunities (even destroying some and redistributing labor), which solved existing and new economic (including labor) problems in existing and new occupations. For example:
A plethora of evidence describes how breakthrough fields such as Data Analytics, Data Science, Machine Learning (ML), Artificial Intelligence (AI), Robotics, and Digital Marketing, amongst others, have enhanced problem-solving and productivity across all sectors, thereby enhancing economic efficiency.
It is no wonder the global AI market was valued at $93 billion in 2021, while the global ML market is valued at $21 billion in 2022 and is estimated to grow by nearly 40 percent within seven years.
Digitization is changing how we purchase and consume products and services. In business and academia, digital technologies increase worth for the emergence of new markets- including the design and scaling of future-looking business models- while creating value in existing markets.
Developed and Developing Digital Economies: Emerged and Emerging Markets
50 percent of the world’s hyper scale data centers are in the United States and China. These two countries also account for the highest rate of 5G adoption in the world, 90 percent of the market capitalization of the world’s biggest data platforms, and over 90 percent of total global investments in AI startups. As implied earlier, the transmission of data forms the basis for participating in or benefiting from a functional digital economy. Access to communication technologies and the capabilities/capacity to utilize this access varies across the world- a global inequality challenge described as the digital divide.
The digital divide and its impact on cross-border data flow exist within and between countries. For instance, smartphone adoption rates are highest in North America and Europe, followed by China, while it is lowest in Sub-Saharan Africa; and mobile broadband penetration rate in developed countries is double the rate in developing countries. The urban-rural divide in digital access is also more prominent in developing countries. For example, in Ethiopia (a Sub-Saharan African country), 40 percent of the population have mobile phones, while only 20 percent are online (i.e., use smartphones), and only 6 percent use social media.
While in countries like Estonia (often referred to as the Digital Republic), where 99 percent of government services are provided online, 98 percent of medical prescriptions are issued digitally, 99 percent of the population has a digital ID, and all citizens can vote online since 2005; countries like Belize and Kenya are in the process of implementing their respective national digitalization strategies.
The COVID-19 pandemic highlighted the digital connectivity and usage divide, briefly highlighted above. While more people and companies conducted their economic activities online and increasingly connected to the internet, some people and companies were left behind and struggled to recover post-pandemic.
Which pill will developing countries take?
It should be noted that digitally transforming an economy has its drawbacks: for instance, increased reliance on digital communication technologies exposes public and private information to cyber criminals as well as huge losses due to software downtimes; however, as global economies become increasingly digitalized, and as data becomes more essential to development, developing economies need to strategize how to close the huge gaps that exist in connectivity, access, affordability, and availability of digital communication technologies, as well as prioritize how to increase their capabilities to utilize them.
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