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The dark side of digitalization – and how to fix it

The digital economy has finally arrived. During the mid-1990s, technology enthusiasts predicted that the rapid spread of the internet and super-computing would generate new efficiencies, innovations and economies of scale

By: EBR - Posted: Thursday, September 24, 2020

"Governments and firms will need to invest in a sustainable digital transformation not only to thrive, but to survive the 21st century."
"Governments and firms will need to invest in a sustainable digital transformation not only to thrive, but to survive the 21st century."

by Robert Muggah, Rafal Rohozinski and Ian Goldin*

The digital economy has finally arrived. During the mid-1990s, technology enthusiasts predicted that the rapid spread of the internet and super-computing would generate new efficiencies, innovations and economies of scale. But the promised revolution in e-business and e-commerce stalled when the dot-com bubble burst. Since then, however, the world’s digital footprint has increased exponentially. Today, global IP traffic is almost 150,000 GB per second compared to 100 GB per day three decades ago. Ubiquitous data and connectivity – around 60 zettabytes are anticipated in 2020 and almost three times as much by 2025 – is powering the new economy. The spread of cloud computing, artificial intelligence and billions of digitally connected devices are taking things to an entirely new level. These trends have only accelerated since the onset of the COVID-19 pandemic.

But the digital economy is not all good news.

While several first movers have profited, the digitalization of government and commerce has failed to narrow the digital divide. As shown in Terra Incognita: 100 Maps to Survive the Next 100 Years, wealthy countries and companies are still far more digitally connected than poorer ones. It will be hard to close the gap. This is because success in the digital economy is determined not by the number of mobile phones and wireless connections, but by ownership of infrastructure, code and data. Richer countries in North America, Western Europe and East Asia house well over 90% of the world’s data centres, while Latin American and African states are home to less than 2%. The US and China account for over 75% of cloud computing, 75% of all patents related to blockchain, and 50% of spending on IoT. Between them, they have over 90% of market capitalization in the world’s largest digital platforms. As a result, some countries, companies and sectors are benefiting far more from digitalization than others.

The dividends of the digital economy are still unevenly shared. A relatively small number of countries including the US (35%), China (13%), Japan (8%) and European Union states (25%) are reaping the benefits of the global digital economy. Likewise, a handful of firms – Amazon, Alphabet, Apple, Google, Facebook, and Microsoft alongside Alibaba, Baidu, Huawei, Tencent, WeChat and ZTE – have achieved dominant market positions and account for 90% of all revenue and profits. Major retailers and manufacturers are restructuring and digitalizing, or risk being extinguished. Most businesses are going virtual in the hopes that they may benefit from network effects and greater competitiveness.

To make matters worse, the digital economy is generating serious negative externalities, including ratcheting-up climate change. Despite the efforts of some tech firms to clean up their act, they are still considered among the most unsustainable and environmentally damaging in the world. In order to meet voracious demand for hardware, they are ramping-up extraction of rare earth minerals and other precious metals like cobalt. Technology redundancy and planned obsolescence are contributing to mountains of waste.

Most worryingly, the expansion of internet services is consuming about one-tenth of global electricity production. The shift to cloud is scaling up energy consumption and carbon emissions, including from coal-fired power plants. The servers, cooling systems, storage drives and network devices of some of the world’s largest data centres consume more than 100 MW of power, the equivalent of 80,000 US households. Today, Bitcoin mining alone uses over 7 GW, the equivalent of seven nuclear power plants. One study determined the annual carbon emissions of creating crypto-currencies at between 22 and 29 million tons of CO2 – the equivalent of a small country like Jordan.

Social and environmental challenges aside, the digital economy is growing faster than the real economy. Depending on how it is defined, its total value could be $11.5 trillion, or 15% of global GDP. Researchers believe this could rise to as high as $37 trillion, or 26% of GDP, by 2040. Countries for whom a sizeable share of their economies depends on information and communications technologies – from Finland and Ireland to Singapore and South Korea – are especially well positioned. Advanced and emerging economies alike stand to gain if they can leverage new technologies to optimize processes and production, reduce transaction costs and upgrade their supply chains. But progress will be hampered if they cannot overcome structural issues related to the generation, storage, processing and transfer of data. And the digital economy boom could go bust if it does not become more sustainable – and quickly.

The COVID-19 pandemic is accelerating the digitalization of economies virtually everywhere. The unprecedented shift to remote working and explosion of online content and consumption are contributing to a data surge. With more and more people substituting videoconferencing for business travel, communications platforms and data providers are booming. But the pandemic is also widening inequalities between and within less-connected and hyper-digitalized societies.

Countries that lack digital resilience and market power are falling behind. Ensuring a more equitable global digital economy will require crafting agile government regulations, mandating universal broadband, upskilling workers and the introduction of social protections to more fairly distribute the gains and minimize the losses. Global and regional agreements to better manage cross-border information flows, regulate competition and taxation and ensure privacy are no less important in an era of diminishing cooperation.

Governments and firms will need to invest in a sustainable digital transformation not only to thrive, but to survive the 21st century. With the right combination of incentives, oversight and investments, the digital economy could play a key role in economic recovery from COVID-19, as well as potentially the rise of entrepreneurs and small and medium businesses in lower-income countries. This will require big spends in – and greater redistribution of – the critical infrastructure that powers the services and applications driving the digital economy. Most important of all, public and private actors will also need to develop a mindset in order to adapt to, benefit from, and minimize the risks of digitalization. Digital resilience is no longer optional.

*Founder, The SecDev Group and Igarape Institute and Founder, The SecDev Group and Professor of Globalization and Development; Director, Oxford Martin Programme on Technological& Economic Change, Oxford Martin School, University of Oxford
**first published in: www.weforum.org

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