South-South Trade, Investment in the Digital Economy

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by Dr. Hany Besada, Senior Research/Programme Advisor, UNOSSC*

The digital revolution has and continues to profoundly transform economies and societies with unprecedented scale and speed across regions, delivering far reaching changes but also immense challenges and obstacles. The triggers of these changes have been noted as economic and political, with their main cause as technological innovation. Defined as “that part of economic output derived solely or primarily from digital technologies with a business model based on digital goods or services” (Bukht & Heeks 2017: 1), the digital economy is estimated to make up around 5% of global GDP and 3% of global employment (Bukht & Heeks 2017: 1).

Of relevance, the internet has led to a 10% growth in the GDP of BRICS economies and 5% in other Southern states (Manyika, et. al. 2011). In addition, the internet economies of Southern states are growing at a rate of 15-25% annually (UNCTAD 2019). The emergence of e-commerce is growing at a faster rate in the Global South than elsewhere in the world. For Southern economies, digital technology can foster higher levels of economic growth, through lowered cost of transaction, increased productivity of labour and capital coupled with free entry into the global markets. 

In many cases, the digital economy is already showing evidence of its ability to alter entrenched economic inequalities, increase average local wage for digital workers leading to global equilibrium of incomes; creation of new local markets for digital start-ups; and combat unproductive, corrupt market and labour institutions through digital platforms.  

In terms of trade in the agricultural sector, for instance, the adoption of digital technology can enable access to basic financial services and aid rural farmers in the sale of goods at above market prices. In Kenya and Tanzania for instance, farmers in both countries have gained experience in the effective use of ICT in their sector to access commercial markets and value chains, helping to promote agricultural trade and investment in the East African Community. Findings conducted in these economies show that mobile phones allow farmers in these countries to access simple but useful data such as changes in the market prices.

However, due to limited access to the internet for farmers, the effect of the internet on accessing complex knowledge such as more sophisticated means of distribution, fulfilling exporter standards, the formalization needed to enter the channels remain low. This is despite the fact that research findings reveal that sophisticated distribution chains such as direct sales to exporters through digital technology points to higher rewards for farmers engaged in cross-border trade. However, the results reveal that even though digital technology offers opportunities for cross-border farmers, the essentiality of using digital tools to relate with exporters as well as intermediaries and traders increases the risks of exclusion for the farmers that do not use digital technologies in the short run.

Furthermore, it was revealed that even though the adoption of digital technology by Tanzanian farmers could close the bridge between farmers and exporters, exporters still preferred to relate with intermediaries that could supply large volumes of bulk products to them, which farmers are unable to provide. Some critics contend that this situation could be that way because digital technology for development is concerned with technology for improving lives at the individual level rather than the total restructuring of processes. 

Internationally, the fast-rising trend of the digital economy poses enormous challenges, costs and risks to the Global South, especially because many Southern economies lack the capacity to fully operate in a digitalized manner. The unequal access to low-cost digital technology and reduced capacities to make use of the emergent technologies could create a structure of uneven circulation of benefits. This means that micro, small and medium-sized enterprises with limited capacity to connect are most likely to be left behind in this global digital economy.  

Despite the increased contributions of digital technology to Southern economies, they often lack appropriate strategies and capacity in terms of institutions and infrastructures to mainstream digital technologies and services in efforts towards contributing to the global value chains.  South-South cooperation offers possibilities for countries in the Global South, on a demand-driven basis, to leverage digital technologies and services in the diversification of export portfolios, building of digital infrastructure for industrialization, enhancing trade in services, establishing and managing data policies, building capacity and transforming economies. 

Against the background of differences in initial conditions and preparedness for emerging changes in the composition and structure of the global economy, only countries that are prepared can leverage benefits from digital technologies and innovations. Digital technology also has multi-sectoral implications as it affects various economic sectors. The relative success of countries like China and India in the digital era underscores the imperative of, and possibilities for, South-South cooperation to support other developing countries to take advantage of the changes that are associated with digital economy in ensuring structural transformation. This type of support can take the form of higher investment flows, knowledge exchange, capacity building and assistance in building digital infrastructures. 

With regards to the fast-paced technological innovation and development taking place in a number of Southern countries, improvements in dynamic information infrastructure can significantly support socio-economic growth. Linking back to the notion of private sector development, the importance of technology and innovation in building productive capacity is essential. Access to information is at the forefront of generating an innovative and open space for communication. An increased emphasis on opportunities in trade and investment provide these essential tools and promote the development of institutional frameworks. Impact in the private sector can then be seen through stronger policies for intellectual property that will foster an entrepreneurial environment. 

Moreover, the focus on such technological innovation will gradually reduce reliance on industry-based exports, mainly natural resources in a number of regions, particularly Africa. This shift away from commodity-based economies reflects diversified and risk resilient economic conditions driven by the private sector growth. Veering away from the traditional economic patterns of Africa’s past provides significant opportunities for growth through the development of improved institutions. 

Without doubt, the concern with technological development in Southern countries are the structural networks that encourage its financing, both from regional and global actors. Once countries have developed a strong platform for innovation, they can utilize their knowledge as a competitive advantage and negotiate deals that attract increased trade and investment. Therefore, facilitating South-South cooperation is key to engagement in ongoing technological exchange and provides the basis for building new infrastructure to finance technological development.

REFERENCES

Bukht, R and Heeks, R. (2017). Defining, Conceptualizing and Measuring the Digital Economy. Manchester: Centre for Development Informatics. Working Paper no. 68. Available from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3431732&download=yes Accessed 5 January 2020. 

Manyika, et.al. (2011). Big Data: The Next Frontier for Innovation, Competition and Productivity. New York: McKinsey. pp. 143.

UNCTAD. (2019) Digital Development: Opportunities and Challenges. International Journal of Financial Research Trade and Development. Geneva: Sciedu Press 93. Vol. 9: 2. Available from: http://ijfr.sciedupress.com.  Accessed 3 January 2020.

*This article is a product of original research and open knowledge exchange to share best practices, advance experiences and share new models of cooperation. The views expressed are those of the author and do not necessarily represent those of the United Nations, UNDP, UNOSSC or United Nations Member States.