Feeding data to digital giants is anti-development

As much as Industry 4.0 — the collection of interlinked digital technologies enabling machines to think for themselves and connect with each other — is worrying policy-makers in advanced economies over job destruction, it is exciting policy-makers in the developing world with the prospect of leapfrogging traditional industrial activities.

But what policy-makers everywhere need to take a closer look at is how these technologies lend themselves to rising monopoly power which, if unchallenged, will give a handful of giant corporations an ever greater say over future growth and employment prospects everywhere.

A different revolution

‘Creative destruction’ has always been a part of technological progress, whereby some businesses and practices are destroyed and others created, leading to long-term gains in productivity, incomes and jobs. However, Industry 4.0 differs from previous revolutions in important ways.

In earlier episodes — mechanisation, mass production, automation and electronics — the key inputs, whether cotton, iron, coal, or oil, had a tangible quality that, in combination with significant amounts of productive labour and dedicated managerial capabilities, anchored the process of adding (and distributing) value in a well-defined network of spatial and social relations where public policies could shape the landscape of winners and losers.

In the digital revolution, the key input, which is ‘data’, is intangible, requires little labour to create value and the capital behind it is inherently footloose.

This has given rise to a world of disembodied networks and diminished bargaining power of those producing the input, particularly in developing countries where the laws and regulations over the ownership of data and the capacities to use it profitably are weak or missing altogether.

In this world, first mover advantages enjoyed by the digital giants (Amazon, Alibaba, Google, Facebook, etc.) in collecting data allow them to use Big Data analytics to out-compete smaller rivals and block potential rivals.

The growth and operation of Uber — the world’s biggest taxi service which owns no taxis — has exposed the vulnerability of national firms, especially in developing countries where infant platforms tend to receive little or no state support UNCTAD’s ‘Trade and Development Report’ (2018) on ‘Power, Platforms and The Free Trade Delusion’, released this week, maps the growth of super platforms and big tech firms and reveals how their growing concentration has allowed them to take corporate rent seeking to a new level.

Apple recently became the first company to be valued at more than $1 trillion, matching the combined output of Saudi Arabia and South Africa. Alibaba’s profits-to-sales ratio increased from 10 per cent in 2011 to 32 per cent in 2015.

As a result, these super platforms can bear losses for a longer time just to wipe out competition. The recent purchase of India’s Flipkart by Walmart, following the hostile takeover efforts of Amazon, is an example of the growing anti-competitive practices of the global giants which follow predatory pricing and sunk losses to wipe out competition in national markets.

The irony of the situation is that as these digital platforms are becoming more and more predatory, many developing countries are being encouraged to facilitate their entry, often with favourable tax and other incentives, in anticipation of attracting big investments, generating jobs, and building technological capabilities.

The evidence for such spillovers is limited at best. In a world of ‘disembodied digital networks’, as more data is generated and more consumers are attracted, in turn bringing in more producers, the super platforms keep growing by feeding on data, and are able to further entrench their monopolistic power.

Worse still, there is what the Chicago economist Luigi Zingales calls a “Medici vicious circle” at play; the economic power that comes with establishing monopolistic positions readily translates into the capture of political power that reinforces those positions. That circle is already shaping digital rules, at both the national and international levels.

The way ahead

This is an anti-development agenda. The big question is what is to be done?

According to UNCTAD, national ownership of data and clear regulations on data localisation is a necessary first step for countries seeking to build an inclusive data-intensive economy. Designing digital industrial policies will be key and countries will need to protect their policy space and the freedom to make laws around regulating their data flows.

There is a need to develop and protect infant digital national platforms through effective competition policies and targeted support measures. These need to be designed with a view to advancing small producers/platforms and not just protecting the consumers.

Countries also need to encourage digital technology transfers. UNCTAD warns that there is a risk that the space of developing countries to design policies for enhancing development gains from the digital revolution can be severely curbed if the e-commerce proposals at the WTO are accepted.

The writers are Senior Economic Affairs Officer and Director, Globalisation and Development Strategies Division, UNCTAD.

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