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Samsung's new Samsung Pay mobile wallet system is demonstrated at its Australian launch in Sydney, June 15, 2016.   REUTERS/Matt Siegel - S1AETLGSQJAA
Report

Digital Australia: An economic and trade agenda

The capacity of the Australian economy to grow and deliver sustained increases in living standards will require a boost to productivity.1

The use of digital technologies is a key driver of productivity gains and it will shape the global economy over the next decades. In fact, Australia’s Commonwealth Scientific and Industrial Research Organization (CSIRO) has identified increased immersion in a digital world—characterized by data-driven new business models, platforms, and e-commerce, enabled by global supply chains—as one of the global megatrends for the next 20 years.2 

For Australia, this will require using the global internet and data flows as drivers of innovation and productivity to underpin further decades of economic growth, jobs, and rising living standards. For instance, in the U.S., it is estimated that the internet has improved productivity in the digitally-intensive sectors of the economy by 7.8-10.9 percent.3

According to one estimate, taking full advantage of the opportunities presented by the “internet of things,” big data analytics, automation and online talent platforms could increase Australia’s gross domestic product (GDP) by an additional A$140 billion-A$250 billion by 2025.4

Building a digital economy is not merely about transforming physical goods and services into digital products. In a digital economy, data can be the product; it can be used to create digital goods and services and can be a source of information that leads to further action. The digitization of economic growth and trade will be increasingly driven by the use and extraction of value from data.

The expansive use of data will be needed across the economy and within sectors that traditionally have been outside information technology (IT), such as manufacturing, mining, and agriculture.

These digital developments have the following economic implications:

  • Access to data and the capacity to turn it into actionable insights will be a growing source of economic value. In turn, the growing value of data-based insights will support new business models and services.
  • The global internet and access to information is reducing barriers to commerce and international trade. As these barriers erode, opportunities for par­ticipation from small and medium sized enterprises (SMEs) and developing countries will increase.
  • Competition pressures should grow as global inter­net access and digital platforms create opportunities for businesses to compete across industries and across countries.

Global data flows are also transforming the nature of international trade, creating new opportunities for all businesses—including SMEs—to participate in the global economy and to plug into global value chains (GVCs), while also increasing the opportunity and value of exports of digital services. This should also increase competition and raise productivity.

  • The key developments in digital trade will be in the following areas:
  • Businesses can use the internet (i.e., digital plat­forms) to export goods.
  • Services can be purchased and consumed online.
  • Data collection and analysis can add value to goods exports.
  • Global data flows underpin global value chains, creating new opportunities for participation.5

A regulatory agenda for a digital economy

The broad economic impacts of a transition to a digital economy have equally broad regulatory implications.

Australia’s approach to regulation of the digital economy should aim to enable the uptake and use of digital technologies. Supporting digital start-ups is also important, but ensuring access to and use of world-class digital technologies as key business inputs across the economy should be the focus for the government. This will require adjusting existing regulation that is no longer salient, and avoiding heavy-handed regulatory reactions to digital disruption. Australia’s domestic agenda should focus on building trust in the transition to a digital economy, enabling access to and sharing of data for innovation, and ensuring that regulations in areas such as intellectual property (IP), privacy, and competition policy support digital opportunities.

Designing Australia’s regulatory framework for a digital economy should learn from the legal and regulatory systems in other countries, given the global nature of the internet and the accompanying digital trade opportunities. In particular, Australia should look to the U.S., where the digital economy first emerged and which remains the most successful country in leveraging the internet and data for growth and jobs.

Australia is a well-regulated economy. Yet, the impact of data and digital technologies can also be disruptive to incumbents, heightening competition and unsettling business models.

Australia has a strong record of supporting an open, competitive economy.6 In a recent report, the Harper Competition Policy Review confirmed that this remains the optimal orientation of economic policy, noting that failure to allow digital entrants with lower-cost products and services risks locking in the status quo, leading to Australia falling behind other countries as new approaches and innovations pass it by.7

This understanding should guide the government’s regulatory agenda for a digital Australia.

That said, building a digital economy is not simply a deregulatory agenda. For instance, protection of personal information is needed to ensure people have trust when living their lives online and for giving businesses access to data that can be used to add value and improve service delivery. There may be a role for more active use of competition policy to create space for new digital businesses.

The following points outline key domestic regulatory reforms addressed in this report.

1. Support competition enabled by digital plat­forms

Fintech can challenge the dominance of the large banks; online retailers can increase competition with brick and mortar stores; and Amazon will compete with incumbent supermarkets. The government needs to support opportunities for competition across digital platforms, while ensuring that underlying regulatory goals such as consumer health and safety are maintained.

2. Develop a framework that supports data shar­ing and use

Building a digital Australia will require greater data collection and use by businesses and government, as this will be central to how they operate and add value. This will require broad community support for such activities. Yet, Australia lacks a broad framework to address the opportunities and risks for sharing data. Instead, privacy laws are the main regulation appli­cable to data sharing practices. Yet, one of the key challenges for public entities in releasing data sets is determining whether such data when linked with other available data sets will turn otherwise anonymous data into personal data. The challenges of making such assessments underscores the potential that govern­ment agencies in particular err on the side of caution and avoid making data sets public. This could lead to underutilization of public data and the opportunities to improve government services, government policy, and related economic benefits.

Addressing limits to data sharing will require various steps. For one, government leaders need to shift the public sector culture away from minimizing risk to being rewarded for better data use and sharing. A framework to guide data collection, use, and sharing that gives due attention to the importance of privacy while also taking account of the economic and social opportunities of data use would also support greater data utilization. In this regard, the productivity commission has recommended that the federal government develop a regulatory risk based framework for data sharing and release.8

Meanwhile, the private sector is using data and likely treating this uncertainty as a cost of doing business.

In addition, building and maintaining community support for data use by the public and private sectors will be crucial. Australia’s privacy principles should support and help build such trust as data use grows. Non-government activity to build trust can also help, such as Data Governance Australia’s Code of Practice.

3. Ensure that intellectual property protection provides appropriate protection and opportunity for innovation

The IP regime is particularly important for a digital economy. On the one hand, the scope for illegal copying and use of IP-protected work is almost unlimited online. On the other hand, in a digital environment, material cannot be handled without copying;9 this aspect is necessary for the effective functioning of the internet.

In addition, digital trade itself increasingly relies on effective IP protection. For instance, trade online in digital content such as software, music, and applications (apps) is often a trade in a license. Additive manufacturing (essentially 3-D printing) will also transform trade in goods to trade in designs.

The U.S. approach to balancing these IP needs has been a key building block for the digital economy.10 It has underpinned the growth of internet companies as well as the development by content providers of online business models that monetize copyright in content using online streaming. Australia should consider adopting some of these legal pillars that have underpinned the development in the U.S. of a digital economy, specifically U.S.-style fair use exceptions to copyright exceptions and extending safe harbor framework to internet intermediaries.

4. Build smart manufacturing

Australia’s manufacturing sector is relatively small compared to peers in the Organization for Economic Co-operation and Development (OECD) and has been challenged by high cost of inputs (labor, electricity) and the strong Australian dollar. Australia’s manufacturing productivity growth has also been below benchmarks. Despite these challenges, Australia’s manufacturing sector does not appear to have lost its structural com­petitiveness and could rebound.11

The internet, data, and use of digital technologies have the potential to transform Australian manufacturing into a sector that is connected and networked, uses digital services, and is much better integrated into GVCs. This is about the development of ‘smart’ manufacturing. Smart manufacturing transformations are already underway in the U.S., the European Union (EU), China, and Japan.

The government has identified six industry sectors with competitive strength: advanced manufacturing; food and agribusiness; medical technologies and pharma­ceuticals; mining equipment, technology and services; and energy. To support these sectors, the government has established six independent and industry-led in­dustry “Growth Centers” with the aim of improving sec­tor competitiveness, their capacity for innovation, and their productivity.

In many respects, the growing importance of connectivity, data, and digital services will be key to any move to smart manufacturing and is a development that could play to Australia’s existing services strengths. Digital services are also increasingly key inputs into manufacturing processes. This is underpinning a broader shift in manufacturing value added being derived from services.

Developing smart manufacturing should also create new opportunities for participation in GVCs as digital services are themselves becoming inputs into global manufacturing processes.

Smart manufacturing will also require developing international standards that enable interoperability among software, machines, and processes.

5. Encourage digital platforms and SMEs

E-commerce is a growing commercial opportunity for Australia businesses. The expansion of the internet globally means that online platforms such as eBay and Alibaba enable business to reach overseas customers and thereby engage in digital trade. In particular for SMEs, digital platforms provide a springboard to a global presence for businesses that otherwise would have remained local.

These opportunities rely on cross-border data flows, access to digital payment mechanisms, and efficient transport and delivery options.

6. Develop Australia’s fintech opportunity

Financial technology (Fintech) has emerged as an area where Australia could assume a global position. Australia’s Fintech strengths include a well-regulated banking sector, with some of the world’s largest and safest banks. Compulsory retirement saving has re­sulted in Australia having the fourth-largest pool of in­vestment fund assets in the world and this will continue to grow as the population ages.

Fintech should also catalyze improvements in fi­nancing decisions and resource allocation within the financial sector, providing capital and other financial services to businesses, supporting job creation, and innovation across the economy.

Proximity to Asia, including free-trade agreements with China, Japan, Korea, and other countries within the Association of Southeast Asian Nations (ASEAN), makes Australia an attractive hub for fintech exports. Exports will be needed to give fintech startups in Australia the opportunity to scale their operations.

The government has already undertaken a number of regulatory reforms and other support for fintech development but more needs to be done. This includes promoting access to data, which will be needed to realize fintech possibilities. Additionally, the government will need to address a range of domestic and international issues regarding fintech governance.

7. Build Australia as a center of blockchain excellence

Blockchains are a digital technology that—combined with cryptographic data management, networking, and incentive mechanisms—support the checking, execution, and recording of transactions between parties.12 A key benefit of blockchain is the ability to build trust among disparate parties. By providing trust in a ledger based on distributed consensus, the blockchain can replace reliance on third parties that traditionally have performed an intermediating role.

Blockchains also provide scope for so-called smart contracts that use computer programs incorporated into a blockchain to automatically execute an action based on specified conditions or events. For instance, a blockchain could be created to automatically transfer payments upon receipt of goods. This allows block­chains to become more than just a distributed database and increases the range of potential uses.

International trade is one area where blockchain technology could add value for Australian exports in terms of supply chain management and provenance, increased efficiency, and reduced cost. For instance, supply chains stretching across countries and involving multiple parties could use a blockchain to confirm the movement of goods through each stage in the chain

Blockchains can also be used to record the provenance of agriculture products, determining the particular farm or even the single paddock that high-quality beef came from, potentially adding value and creating new market opportunities for Australian agricultural exports.

Developing a digital trade policy

The global nature of the internet and the digital trade opportunities will require international cooperation, new trade rules, and international standards.

Governments are still learning the steps needed (particularly developing ones) to nurture their digital economy and engage in digital trade. The Australian government could play a leadership role and support dialogue, capacity building, and the sharing of experi­ences of regulating for a digital economy.

The government has recently taken important steps to develop a digital trade policy, most recently outlined in Australia’s International Cyber Engagement Strategy. This includes pursuing digital trade commitments in future trade agreements as well as engaging on digital trade issues in international forum such as the Asia Pacific Economic Conference (APEC), the Organization for Economic Cooperation and Development (OECD), and the Group of 20 (G-20).

This report builds on the government’s digital trade policy—it reaffirms much of what the government is doing and expands on it in some areas. This report also clearly links Australia’s digital trade policy to recommendations for a domestic digital agenda.

Australia’s digital trade policy should be developed with the following goals in mind:

  • Maximizing access to data and digital services
  • Reducing barriers to exports of digital products
  • Developing international standards consistent with Australia’s interests
  • Addressing other countries regulatory barriers including restrictions on data flows that affect Australia’s digital exports
  • Engaging other countries on the regulatory agenda needed to support digital economic growth and digital trade

Australia should develop a multifaceted international agenda with respect to digital trade that includes engagement at the World Trade Organization (WTO) and through free trade agreements. It should also look to influence the agendas at the G-20, APEC, the OECD, and international standards organizations.

Footnotes

 

  1. Harper Ian, Peter Anderson, Su McCluskey, and Michael O’Bryan. (2015). Competition Pol­icy Review: Final Report”, Canberra: Australian Treasury. http://competitionpolicyreview.gov.au/ files/2015/03/Competition-policy-review-report_ online.pdf
  2. Solving the Productivity Puzzle, McKinsey Glob­al Institute, 2018.
  3. CSIRO (Commonwealth Scientific and Indus­trial Research Organisation). (2016). Our Fu­ture World. Global megatrends that will change the way we live. Brisbane: CSIRO. https://doi. org/10.4225/08/584ee9706689b
  4. United States International Trade Commission. Digital Trade in the US and Global Economies, Part 2, August 2014.
  5. Digital Australia: Seizing the opportunity from the Fourth Industrial Revolution, Digital McKinsey 2016.
  6. Baldwin, R. (2016) The Great Convergence: In­formation Technology and the New Globalization. Boston: Harvard University Press.
  7. Harper I. et al (2015) Competition Policy Review Final Report”, March 2015.
  8. Ibid.
  9. Productivity Commission (2017) Data Availability and Use, Productivity Commission Inquiry Re­port No. 82, 31 March 2017.
  10. Australian Law Reform Commissions. (2013). Copyright and the Digital Economy, ALRC Re­port 122, November 2013, p. 250.
  11. Anupam Chander.2014. “How Law Made Silicon Valley”, Emory Law J. 63, 639.
  12. Ibid.
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