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Accelerating Digital Transformation in Asia

22 June 2022

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By Mr Lurong Chen, Senior Economist: Digitalisation — the use of digital technologies and digital-enabled solutions in socio-economic activities — has triggered global changes that are wider and less predictable than ever before. With digitalisation, the world economy is set to become better connected, smarter and more efficient. Accelerating digital transformation is key to unleashing Asia’s potential in global competitiveness and long-term development and is a core component of the region’s policy package for post-pandemic recovery.

Despite ongoing recessionary drag from the pandemic, digital solutions provide an effective alternative for services and business activities in the face of government measures to limit mobility and empower people and businesses to grasp new market opportunities. Within two years, more than 600 million e-commerce users entered the online market, driving the world’s total e-commerce revenue up by nearly 25 per cent from 2019 to 2020 and 17 per cent from 2020 to 2021.

Markets for online services — particularly education and food delivery — expanded quickly, thanks to higher-than-expected growth of digital platforms. The size of the market has increased by nearly 50 per cent since the beginning of the COVID-19 pandemic and the world’s total revenue from these services reached US$466 million by the end of 2021.

There is also evidence that COVID-19 has accelerated the transformation towards a cashless society. Among ASEAN’s population of 680 million, half now use digital payments to pay for products and services.

The internet has become an integral part of daily life. Especially during the pandemic, online solutions have efficiently substituted offline practices in many areas — from doing business online to working and studying from home. This has changed people’s mindsets on digitalisation.

But many consumers and producers experienced hardship during the pandemic, not only from health threats caused by the virus, but also because of the global contagion of plummeting international commerce and the global economic recession.

The outbreak of COVID-19 and consequent lockdown measures triggered a global supply chain crisis. It started with a negative supply-side shock when China, the world’s centre of manufacturing, closed its borders to prevent spread of the virus. As exports from China decreased sharply, total supply faced widespread shortages. Through the links of global value chains (GVCs), shocks spread quickly from the supply side to the demand side. Consequently, businesses in the upstream of value chains saw demand vanish, as orders from their downstream clients in China were suddenly cancelled or postponed.

Accelerating digital adoption will be necessary for post-pandemic economic recovery, particularly the recovery of GVCs. Indeed, the progress of digitalisation and GVC recovery will mutually reinforce each other.

On one hand, digitalisation will make supply chains ‘smarter’ — introducing digital solutions into GVCs can strengthen connectivity, improve network transparency and reduce the risk of introducing shocks to the system. On the other hand, digitalisation needs GVCs to facilitate the production of hardware and software that are necessary for its development. An example is the semiconductor industry, production in which is dispersed globally to take advantage of high-tech capacities in the United States and low labour costs in China.

US–China decoupling will have even longer-lasting impacts on GVCs. In the past, the world has benefited from US–China economic partnership in GVCs. The fast pace of digitalisation in the past two decades has come from joint efforts between America’s steady stream of new ideas, new products and new business models, combined with China’s continuous efforts to drive down the cost of production and provide solutions that are more affordable. Decoupling signals the end of this pattern of international collaboration and the restructuring of GVCs.

Accelerating digital transformation may help Asia increase its importance in GVCs and gain a greater say in global affairs. This will require support from an inclusive international ecosystem that can level the playing field of the digital economy. Free flow of data is vital for 21st century GVCs. Since the application of digital solutions could be equally effective in either facilitating or hindering data flow and the sharing of information, free flow can only be achieved when there are international rules and regulations that set the boundaries of data use.

The biggest obstacle to global rule-setting is probably not countries’ differences in ideology and socio-economic structure, but their lack of trust. This highlights increasing concern about data and privacy protection and cybersecurity.

While the advancement of information technology facilitates the use of data, it also increases the risk of data being illegally leaked, stolen or misused. Free flow of data across borders can only be feasible when there is sufficient trust among countries, backed up by sound laws and regulations.

Asia’s existing achievements in regional integration give countries a strong starting point for trust-building. ASEAN-centred bilateral dialogue mechanisms also provide a platform for countries to exchange ideas, which can help enhance mutual understanding and pave the way for negotiation of regional agreements on the digital economy.

It is worth noting that beyond technological progress — the main driving force of digitalisation — many other factors such as the global economic order, geopolitical power shifts and social transformation also affect the progress of digitalisation. Policymakers need to take all these factors into account in forging a path to accelerate digital transformation.

This opinion piece was written by ERIA's Senior Economist, Mr Lurong Chen and has been published in East Asia ForumClick here to subscribe to the monthly newsletter.

Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the Economic Research Institute for ASEAN and East Asia.

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