Digital transformation and the G-20: A wake-up call for policymakers

Concerns that the world is ill prepared as it ushers in a Fourth Industrial Revolution and a Globalization 4.0 era were top of mind from Davos to Moscow in recent days.

At the Gaidar Forum in Moscow, January 15-17, where I was a speaker, one of the debates centered on the G-20’s role in challenges facing the global economy. My intervention focused on how technology is transforming economies and the need for the G-20 to step up to the plate more in addressing this agenda of change.

Seen as a steering group for the global economy, how is the G-20 responding to this change and what should be the agenda ahead?

First, there is useful but insufficient progress by the G-20 in addressing the implications of digital transformation. Some steps have been taken under recent G-20 presidencies in dealing with elements of the digital economy. Under Argentina’s presidency, three topics were identified as initial focus areas: digital infrastructure, digital government, and measurement of the digital economy. Aspects of the changing future of work were also addressed to some extent. This is a good start, but the approach has been incremental and piecemeal. There is a need to take on the digital economy agenda in a bolder, deeper, and broader way.

Today’s technological changes are arguably unparalleled in terms of their scope, scale, and speed—the increasingly sophisticated computer systems and mobile telephony, digital platforms, cloud computing, robotics, artificial intelligence, and the “internet of things.” The impacts of these technologies are not confined to certain issues or segments of the economy. They are economy-wide and they are global. Change permeates product markets spanning production and commerce, labor markets and the nature of work, financial markets, and markets for knowledge and intellectual property. Digital globalization is ushering in a new era of global flows; with the rise of digital trade and global technology giants, cross-border digital flows today are estimated to have a larger impact on global growth than traditional flows of traded goods.

Fittingly, the main theme of the World Economic Forum (WEF) this week was the Fourth Industrial Revolution, driven by digital technologies, which is shaping Globalization 4.0. In announcing these themes, WEF founder and executive chairman Klaus Schwab urged policy leaders and business people to “use the current moment to explore the gaps in the present system, and to identify the requirements for a future approach.” His observation that the world is “vastly under-prepared” for the change is apt.

Second, policies have a key role in addressing change, but the G-20 policy responses have been behind the curve. Digital technologies hold enormous potential to boost economic progress and raise human welfare. However, technological change is inherently disruptive. The gains from today’s technological advancements are not automatic; how they are realized and shared depends crucially on policy responses.

Paradoxically, as new technologies boomed in recent years, productivity growth, which is the main driver of long-term economic growth, slowed rather than accelerated in the major economies. The benefits of the new technologies have been captured largely by a few big firms. Market concentration, monopoly power, and monopoly rents have increased. Productivity growth has stagnated in the vast majority of other firms. At the same time, workers have faced job and wage losses, as the new technologies favored capital and shifted demand from low and middle level skills to higher level skills. As a result, long-term economic growth has slowed and income and wealth inequalities have increased, fueling today’s societal discontent, political backlash, and rising populism.

Recent U.S. experience vividly illustrates this outcome. Over the past decade, average labor productivity growth in the U.S. has been lower than half of what it was in the previous decade. Since the 1980s, income inequality in the U.S., as measured by the income share of the richest 1 percent, has more than doubled.

What explains these adverse growth and distributional outcomes? Policy inertia is an important part of the story. Policies have been slow to adapt as the new technologies reshaped markets and the nature of work

Third, what is the way forward for the G-20? Digital technologies are profoundly altering the dynamics of economic growth, jobs, and income distribution and it is this framing that the G-20 should use in approaching the digital economy agenda—not in a piecemeal way of a couple of discrete issues at a time but through the integrated, holistic lens of growth, jobs, and distribution. The core forward agenda should be framed in terms of how to better harness the potential of the new technologies to achieve more robust and more inclusive growth. Within such an integrated framework, key and linked areas for policy consideration and action can then be identified and addressed, such as revitalizing competition for the digital age, improving the innovation ecosystem (R&D policies, intellectual property rights) to promote wider diffusion of innovations, boosting investment in upskilling and reskilling workers and in continuous learning, reforming labor market policies and social protection systems as part of an overhaul of social contracts, tackling the new tax challenges of the digital economy, and, at the international level, addressing the need for new disciplines for digital globalization.

This is a large agenda. The G-20 can contribute to it in three ways: Through knowledge sharing on the new issues and policy innovations, through coordination of policy efforts, and through collective initiatives.

Within the G-20, the Framework Working Group—which is a core group in the G-20 whose mandate focuses on strong, sustainable, balanced, and inclusive growth—can take the lead in this work. It can help anchor and integrate—within a framework of growth, jobs, and distribution—the work on digital economy issues by the more specialized G-20 workstreams, with expert support provided as needed by international institutions.

The G-20, of course, does not have to do all of this work itself. It can provide strategic and political leadership within a coherent framework, and work with governments and international institutions to substantively move this agenda forward.