Asia Went Online, Yet the Digital Economy Declined

As the pandemic embedded “digitalization” into our daily lives, the digital sector suffered along with other aspects of the economy. The rise of the digital economy has made defining and measuring it imperative for policymaking.

As pandemic lockdowns spread across the globe, people increasingly looked to their computers, phones and other digital devices for work, school and everyday life. The global internet bandwidth increased by 35% in 2020, the largest one-year increase since 2013, according to UNCTAD’s Digital Economy Report 2021, and by 29% in 2021, according to the research firm TeleGeography.

Surprisingly, our research found that despite an observed increase in the use of digital platforms and the demand for digital technology-based products, the performance of the core digital sectors plummeted across several economies in 2020. This may be attributed to the economic downturn which adversely affected household purchasing capacity; and to supply chain issues that constrained production. While digital sectors generally declined with the overall economy, there were a few notable exceptions.

Despite its GDP declining by 5.6%, Malaysia’s digital economy, driven by increased production of digital hardware, grew by nearly 3%. The digital economy of the People’s Republic of China grew even faster (8%) compared to its overall economy (2.3%), owing to the remarkably buoyant telecommunications industry and digitally oriented capital investment, as enterprises shifted to digitalization for business continuity.

While investments in technology have traditionally been driven by cost reduction, businesses now perceive them as avenues to enhance their competitive edge. Thus, from households to enterprises, digitalization has become more of a necessity than a choice.

“Another critical economic issue caused by the pandemic is the global shortage of semiconductors acutely experienced in 2021 that exposed fault lines in the global chip supply chain”

This has made it increasingly important to correctly define and measure the digital economy to assess it’s contribution to economic recovery and growth. However, due to a lack of consensus on its definition and blurring lines between the traditional and the digital economy, estimates tend to vary markedly.

To address the issue, ADB used a methodological framework for measuring the digital economy, which we define as productive activities of the “core digital sectors” – industries that produce a well-defined set of digital goods and services. Our research estimates the digital economy’s gross domestic product (GDP) to be 2%-9% of select economies in the years considered.

Although the digital industries’ GDP contribution is significant in many economies, there is considerable variation in the value-added by digitally enabling and digitally enabled industries. The total GDP contribution of the digital, digitally enabling, and digitally enabled sectors – collectively defined as digitally dependent economy – is estimated to be 17% – 35% for the economies we studied.

“The global value chain participation of the digital sectors declined 2% between 2018 and 2019 compared to 1% for others”

Another critical economic issue caused by the pandemic is the global shortage of semiconductors acutely experienced in 2021 that exposed fault lines in the global chip supply chain. While semiconductors by themselves are not digital products they are integral to those based on digital technology. As the demand for digital and digitally enabled products rose sharply during the pandemic, chip supply struggled to keep pace, resulting in the shortage. The parameters used in our study can spotlight such issues in the production networks, and also provide a reliable measure of the consequent economic impact.

We also found that increasing digitalization resulted in significant disruption in employment. For example, between 2010 and 2016, overall employment in Germany’s digital and digitally enabled sectors increased by 0.35 million jobs. However, during the same period, efficiency gains, process changes, and technological improvements cost almost 1.3 million jobs. The increase in demand for digital and digitally-enabled products and changes in consumption pattern added about 1.65 million new jobs.

While digital sectors generally expanded their global value chain participation from 2000 to 2019 – notably at a higher rate than non-digital sectors between 2014 and 2018 – trade conflict affected them more adversely. The global value chain participation of the digital sectors declined 2% between 2018 and 2019 compared to 1% for others.

The contribution of digital sectors to GDP, employment and trade has been increasing. Even more remarkable, as a recent study shows, there are clear indications that, constraints faced amid the pandemic notwithstanding, digitalization has helped to bolster the global economic recovery from the pandemic, with faster recovery projected for more digitalized economies.

Thus, it is imperative to have a deep understanding of the digital economy to illuminate policy issues.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members.

This Article was first posted on ADB Blogs