How is digitalization changing Asia?

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Over recent years Asia and the Pacific has been turned from a digital factory reliant on cheap labor into a digital hub reliant on creative industry. It is home to 60% of the world’s population, which certainly means more opportunities for innovation and growth. The region’s new generations of digital natives are forerunners who could herald a new era where forthcoming advances are the norm with unfiltered feedback, exposure to global influence and dynamic cultures, while the days when information was owned by one source are long gone.

Digitalization could be an important support for development outcomes in the region’s Sustainable Development Goals (SDGs) – launched in 2015 to set the development agenda until 2030 – which emphasize inclusiveness through a pro-growth, pro-poor and nondiscriminatory approach with the principle of leaving no one behind. Goal 9, on building resilient infrastructure, promoting sustainable industries and fostering innovation, is particularly relevant. Access to information and communication technology (ICT) is also an enabling factor in achieving other goals, including gender equality and empowerment of women and girls (Goal 5).

This article is concerned about how digitalization facilitates trade, which drives employment and inclusive growth in Asia and the Pacific.

Digital Trade

According to eMarketer, Asia and the Pacific’s e-commerce is forecast to have grown 31.5% in 2016, thanks to benefits from rapid technological advances, improved logistics and infrastructure and expansion of the internet, as the world’s biggest market for online sales of goods and services. And double-digit growth is forecast through to 2020, with an expected $2.7 trillion in sales in 2020.

The bulk of Asia and the Pacific’s e-commerce market in 2016 involved China – almost half (47%) of retail e-commerce sales worldwide, worth more than $899 billion. Several Chinese e-commerce platforms played key roles in shoring up growth, especially Alibaba. By providing basic technological infrastructure and marketing reach for businesses to engage with customers in more than 200 countries, Alibaba has overtaken Walmart and Amazon and eBay to become the world’s largest retailer by market value.

However, some parts of the region remain at a nascent stage, for instance Southeast Asia, which comprises a fraction of retail sales due to underdeveloped digital payments infrastructure and a weak logistics framework. However, the widespread use of social media platforms, such as Facebook and Instagram, is transforming the region’s e-commerce landscape, especially for small- and medium-sized businesses. It offers plenty of opportunities to complement the lack of consumer access to developed payment systems and robust shipping services. The strong market position of Facebook among a young population has made C2C (customer to customer) and B2C (business to customer) transactions easier.

Lazada is Southeast Asia’s dominant e-commerce platform, established in 2012 and majority-owned by Alibaba, selling 39 million products across Southeast Asia, including electronics, home products, fashion and other fast-moving consumer product categories. It expanded 181% over 2015. Southeast Asia is expected to achieve a double-digit growth over the next four years, with retail e-commerce sales in primary markets — Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam — tipped to more than double by 2020.

E-commerce in Asia appears to be mainly domestic, including in China and Japan, which have very high digital buyer penetration rates, but whose online purchases are mostly geared toward local merchants. While cross-border shopping is least common in Asia, China remains the most popular online shopping destination for global shoppers, accounting for 21% of the total, while Japan accounts for 4%. As regulatory and infrastructure bottlenecks are eliminated, it is estimated that cross-border B2C e-commerce sales in Asia and the Pacific will surpass Western Europe and North America by 2020.

With the region’s customers more engaged than ever in social networks and frontrunners in the adoption of mobile devices, cross-border commerce has been increasingly carried out via mobile devices such as smartphones. For instance, mobile cross-border commerce in some markets, like China and Thailand, amounts to nearly half of purchases. The growth of mobile cross-border commerce is likely to accelerate and mobile devices are said to be the “biggest game-changer” for cross-border e-commerce.

Digital trade can help achieve the SDGs, especially employment targets. One of the biggest challenges in fighting poverty in the region is a lack of quality jobs. The SDGs notably see job creation as the primary channel to realize inclusive growth. SDG Goal 8 “promote[s] sustained, inclusive and sustainable growth, full and productive employment, and decent work for all” by raising “economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labor-intensive sectors.” Goal 8 also emphasizes that policy measures must support productive capacities, employment generation, and innovation if growth is to be inclusive.

Digitalization tends to deepen specialization, which can advance welfare across a whole economy and, in turn, increase economic growth and demand for labor. Digital trade can raise employment quality, when trade competition encourages companies to formalize employment, which incentivizes workers and can increase productivity.

Digital trade can improve labor force participation for women in Asia and the Pacific, who are on average 70% less likely to be in work than men, with a country-to-country percentage varying anywhere from 3% to 80%, and wages that are one-half to two-thirds of men in the same jobs. Globally, the average labor force participation rate (LFPR) declined from 78.8% to 76.2% for males, and from 52% and 49.5% for females. Changes in LFPR vary across Asia and the Pacific. Between 2000 and 2015, LFPRs rose in about 70% of the economies of Central and South Asia and 50% of Southeast Asia states, while rates declined in about 60% of East Asian economies and 70% of Pacific economies.

To enable digital trade and related investments to promote the broad development agenda for job creation and inclusive growth, policies are needed to address lingering practices that reinforce gender bias in access to employment and working conditions. Areas include support to implement labor market policies that foster efficiency and flexibility in labor markets and penalize discriminatory employment practices. Also, labor laws and programs can help workers transition from one workplace to another. Job referral services, vocational training to upgrade skills or acquire new ones, and other compensatory adjustment programs can help reduce the pain. Notably, free trade and international investment agreements increasingly tend to negotiate for the inclusion of labor standards, which serves to prevent degradation of working conditions for local workers.

The way forward

Yongfu Huang (2017) discussed how to promote digitalization in his article, “Is inclusive growth in a digitalized world achievable?” This article focuses on investment and regulatory reform in the region.

First, to pave the way for digital infrastructure or mass adoption of advanced technology, many countries in the region have already responded with various investment programs that support growth in the digital economy. Here are some examples:

Second, significant legal, regulatory and institutional constraints present barriers to e-commerce in many developing Asian countries. There is no doubt that a regulatory framework that encourages cross-border trade opportunities for e-commerce could increase competitiveness, maximize economic gains, and generate social impacts.

Apart from the pioneers such as China and Japan, countries in the region including Singapore, Laos, South Korea, and the Philippines are enacting e-transaction laws, cloud-first policies, and investments in high-quality, widespread access to the Internet. Singapore, for example, has a nationwide high-speed, fiber-optic network and 87% broadband penetration. Plus, it is the first to publish a regulatory framework for the use of TV “white space” in wireless connectivity.

The increasingly cross-border nature of e-commerce calls for coordinated regional and global efforts to promote ICT and e-commerce, such as the e-ASEAN initiative; this will also boost government capacity to implement legislation. Development of national and regional strategies can help Asian economies address challenges more systemically and unlock the potential of e-commerce. Coordination between different countries and development partners is essential and could work toward standardized e-commerce business processes and automated information exchange to simplify transactions. Digital trade facilitation has been integrated in a number of ADB subregional programs, including the Greater Mekong Subregion (GMS), Central Asia Regional Economic Cooperation (CAREC), and Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA).

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