Embracing Innovation and Economic Development: A Policy Perspective for the Asia-Pacific Region

Great Opportunities for Asia-Pacific Economies to Prosper through the Digital Economy

— The Asia-Pacific region has great opportunities to increase its prosperity through the digital economy. With an annual global growth rate of 10 percent between 2010 and 2015, the digital economy has already helped to shift the world’s centre of economic gravity towards Southeast Asia. Investors and entrepreneurs across the world are pulled to the region because of its high rates of economic growth. Moreover, consumer spending in the region has expanding 30 percent faster than global growth, making the region attractive for every business.

— The region’s digital ecosystem is supported by good technological readiness and a “mobile-first” culture that have been a vanguard of digital entrepreneurship and experimentation. The app market is growing two times as fast in Asia compared to Europe and North America – and new digital platforms have supported the emergence of a vibrant community of app developers. If the region gets its policy right, the positive economic impact of digitization can redouble.

— Importantly, a greater space for the digital economy in the Asia-Pacific region would help to raise productivity growth and increase the long-term prospects for sustained prosperity generation. Productivity growth determines how fast that material wealth in a society will expand, and – recently – several Asia-Pacific countries have seen a decline in how fast they expand their productivity frontier. Worryingly, countries like New Zealand have seen their productivity growth declining – by little more than 0.6 percent per year – and would do well with greater technological dynamism in the economy.

— Success in the digital economy does not happen by default. Just like everywhere else, it is not inevitable that digitization will lead to big improvements in consumer benefits and general welfare. For the digital economy to deliver on its huge potential, there has to be a supportive policy environment that incentivizes investment, innovation and competition. As

Asia-Pacific economies ponder the right set of policies for their digital transitions, this White Paper sets out a perspective for how the region could raise the positive economic impact from digitization.

— A first takeaway point is that improving the rate of economic growth on the heels of digitization requires investment in basic ICT capacities – network equipment, hardware, skills. Investment in digital skills is key for hardware investment to generate new business growth, consumer choice and welfare. While Singapore and Hong Kong are the countries with the best individual digital skills in the world – closely followed by other Asian countries like Taiwan and Malaysia – emerging Asia would get an economic boost if its digital human capital improved.

— A second takeaway point is that digitization can lead economic growth and raise economic opportunity if market and regulatory policies allow space for new technologies to effect real change in firms and markets. For consumers and citizens to really benefit from digitization, there has to be a high degree of market and regulatory openness to new ideas, technologies, services and business practices.

— There are plenty of best-case examples to learn from in the Asia-Pacific region. ICT in- vestments in Korea, for instance, have generated a vibrant and rapidly growing software and online-content sector, making the country not just a champion for hardware technology. The high degree of general market openness in countries like New Zealand and Australia have supported growing entrepreneurial dynamism in the high-tech sector.

— Asia-Pacific economies can also consider the learnings in Europe from investment in ICT networks and skills, and efforts in that part of the world to open their economies for more digital innovation and competition. A key positive example in Europe is how the removal of roaming charges encourages cross-border data exchange and use. Moreover, other reductions in cross-border regulatory restrictions have enabled consumers to use their services – like their online music library or subscription – in other countries than their home market. On the less positive side, it has taken Europe a long time to reduce such barriers and there are still restrictions in place that prevent consumers from using audiovisual services when they are abroad.

A Supportive Environment for Growth in the Asia-Pacific Digital Economy

— The Asia-Pacific region has many underlying social and economic factors that will help drive growth in the digital economy. Asia-Pacific economies are open to business and have gone through periods of profound economic reforms that have integrated countries with the world economy. They are deeply connected to each other – and the world economy – through corporate value chains that rely on substantial amounts of cross-border investment, trade and data flows. In 25 years time, Vietnam’s trade sector has expanded from 80 percent to 180 percent of the country’s Gross Domestic Product. Thailand’s trade ratio – trade/GDP – is four times the size of the US trade ratio.

— The region’s outlook for economic growth is strong – much stronger than in other parts of the world. With substantial additions to the economy every year, innovators and investors across the globe are naturally pulled to the region and its opportunities for business. Several countries are expected to grow by about 5-7 percent a year in the foreseeable future – including China, India and the Philippines – and will outperform most other countries in the world.

— Consumer spending in the region is expected to grow even faster. Consumption is boosted by an emerging middle class in Asia whose consumer spending will go from 10 trillion US dollars in 2015 to 35 trillion US dollars in 2030. In China and India, the number of mobile subscriptions is estimated to grow by 470 million between 2016 and 2020, leading to an even faster rate of growth in the use of apps and online services.

— The region is already a pioneer in e-commerce and app-development. With the rapid middle-class growth, Asia-Pacific economies are transforming to a design hub, a factory floor and an online shopping mall of the world. The region host some of the world-leading companies in e-commerce – e.g. Alibaba. Chinese consumers now import, through e-commerce platforms alone, for 40 billion US dollars a year. Importantly, these platforms have created new opportunities for small and medium-sized enterprises to expand faster and reach niche customers on a global scale. Female entrepreneurship has grown important throughout the region and there are plenty of successful women entrepreneurs – from Indonesia’s online payments market to Singapore’s job-search market – in the digital sector that inspire younger women to set up new companies. Countries in the Asia-Pacific region score high in rankings of female entrepreneurship – New Zealand is at the top.

— A young population drives faster rates of technology adoption. Asia-Pacific countries like India and Indonesia have a high share of young people in their populations – a third of their population is young. For the region as a whole, the median age is ten years lower than in Europe. Younger people have shown far greater readiness to “go online” and to use the opportunities offered by a digital economy. They adopt technologies faster than other generations. In China, the “young generation”, those born in the 1980s and 1990s, grow their online shopping twice as fast as people born in the 1970s and 1960s.

— Countries in the Asia-Pacific region have some of the best ICT infrastructure in the world. Several countries like Singapore and Korea top the rankings of ICT quality and the readiness to capture the opportunities of digitization. Other countries are catching up fast and emerging economies in the region have a good chance to improve their ICT infrastructure radically in the next decade.

Learnings in Europe from its Digital Expansion

— Asia-Pacific economies could use learnings from Europe’s position in the digital economy and its efforts to raise its positive economic impact. Policy reforms opening up for digital innovation in the economy is important. Regulations may slow down the pace of digital change and delay the benefits of digitisation to reach the economy – restrictions against Uber being a case in point. The company recently had to close down its business in Denmark, preventing consumers to get more choice. In contrast to the Asia-Pacific region – where Uber, Grab and other transport platforms have successfully used technology to increase consumer benefits – many countries in Europe have tried to restrict the openness of the market to digital innovation.

— Importantly, to redouble the economic impact of digitisation, policy development should aim to create an environment for innovative products and services to become available to consumers. In that process, time is of essence – and it has often been proved that regulations encouraging innovation and new competition deliver better outcomes for consumers at a faster pace. The implementation of regulations is key to their success, and governments with the desire to establish granular regulations before innovative products and services are allowed, often slow down the rate of positive change. In Europe, the Digital Single Market – an initiative to reduce barriers to digital enterprise and exchange – is an example of both the benefits that come by creating more space for digitisation and the challenge of shaping up those policies in a timely manner.

— Substantial investment in telecom infrastructure gives a solid foundation for digital growth. Several European countries have among the best telecom infrastructure in the world; it is predominantly the same countries, especially the Nordics, that have been able to spur digital entrepreneurship and “digital deepening” by high broadband and smartphone penetration rates. Countries that have raised their digital skills – like Belgium and Spain – have also seen a higher rate in digital entrepreneurship. Higher rates of ICT capital in different sectors generally lead to better economic outcomes and higher business productivity.

— Policies to improve the positive impact of the digital economy also need to take aim at restrictions in non-digital sectors that slow down the diffusion of new digital technologies. Countries in Europe with lower regulatory barriers in sectors like retail and business services have also seen a faster expansion of online competition and output in that sector. For instance, lower entry barriers to professional and network services in the Netherlands and the UK have generated faster output growth and ICT penetration in these sectors than in countries like Italy with higher barriers to entry. The great economic promise of digitisation is that it will improve the performance of all sectors and countries that have made efforts to open sectors for entrepreneurship and competition have delivered on that promise.

Driving Digital Growth in the Asia-Pacific Region

— Asia-Pacific economies could redouble the positive economic impact of digitization. Just like in Europe, there are great disparities be- tween countries in the region and many countries can boost the economy by investing more in digital skills and high-quality digital infrastructure. Some Asia-Pacific economies are already at the frontier of skills and hardware, and the tightly knitted value and supply chains in the region could improve substantially if other economies converged with the frontier countries.

— All Asia-Pacific economies would benefit from policies that promote the digital economy and enable innovation from new and existing firms – big and small, domestic and foreign. They share with Europe the need to get the digital economy to influence non-digital sectors deeper and faster. If countries continue developing policies that make it easier to trade, invest and compete in their economies, the Asia-Pacific region will sustain its high rates of economic growth, not least through faster digital deepening.

— Generally, there is a clear and optimistic forward-looking agenda for Asia-Pacific economies seeking to expand innovation, productivity and the digital economy. If policies are directed towards removing the barriers to digital innovation and their diffusion into the economy, digitisation will bring remarkably strong benefits. The digital economy comes with a great promise for the region: it will help many countries in the region to sustain its trend of doubling GDP per capita for every generation, if not faster. Businesses and governments have all the tools they need to make that promise real.