## ASIA’S DIGITAL REVOLUTION

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**Canonical URL:** [ASIA’S DIGITAL REVOLUTION](https://www.imf.org/-/media/files/publications/fandd/article/2018/september/asia-digital-revolution-sedik.pdf)

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### Overview and context
- A new wave of digital innovation in Asia is reshaping the region, driven by advances in artificial intelligence, robotics, cryptography, and big data.
- Major Asian firms cited: Alibaba, Tencent, Baidu, and GO-JEK (Indonesia).
- Digitalization is affecting industries across retailing, banking, manufacturing, and transportation and is compared in its transformative potential to the steam engine and electricity.

### Regional positioning and adoption
- Asian economies display the highest dispersion in adoption of digital technologies; Japan, Korea, Hong Kong SAR, and Singapore are global trendsetters.
- At any given income level, Asian economies are at the frontier relative to global peers.
- Even relatively poor Asian economies, such as Cambodia and Nepal, are experiencing accelerating digitalization.

### E‑commerce and fintech leadership
- China’s share of global e-commerce retail transaction value grew from less than 1 percent about a decade ago to more than 40 percent today.
- E-commerce penetration (percentage of total retail sales):
  - China: 15 percent
  - United States: 10 percent
- E-commerce penetration is lower in the rest of Asia but growing fast, particularly in India, Indonesia, and Vietnam.
- Indonesian e-commerce platforms mentioned: Bukalapak, Lazada, Tokopedia.
- Mobile payments by individuals for goods and services in 2016:
  - China: $790 billion — 11 times more than in the United States.

### ICT growth and innovation
- ICT growth during 2005-15:
  - India: 15.9 percent
  - China: 13.7 percent
  - Thailand: 7.1 percent
- Corresponding economic growth rates during 2005-15:
  - India: 7.7 percent
  - China: 9.7 percent
  - Thailand: 3.5 percent
- Japan: ICT growth was almost quadruple GDP growth.
- Among the world’s top 10 economies with the largest ICT to GDP ratio, 7 are in Asia (including Malaysia, Thailand, and Singapore).
- Empirical finding for China: a 1 percentage point increase in the digitalization of China’s economy is associated with 0.3 percentage point of GDP growth.
- If countries are ranked by ICT share of total patents, Asian economies occupy the top five slots.

### Firm‑level impacts of e‑commerce
- McKinsey & Company study cited: 60 percent of internet spending in China is diverted from traditional retail; close to 40 percent represents new consumption.
- Firm-level associations in Asia for online commerce participation:
  - More than 30 percent increase in total factor productivity.
  - Firms engaged in e-commerce export 50 percent more.
- Factors supporting online firms’ better performance: innovation, human capital, and to some extent access to finance.

### Financial inclusion, public finance, and fintech benefits
- Fintech can support growth and poverty reduction by strengthening financial development, inclusion, and efficiency, particularly for individuals and SMEs in poor countries.
- If all Asian economies with low financial inclusion moved to the level of Asia’s emerging-market frontier, Thailand, 20 million people could be brought out of poverty (analysis result).
- Digitalization by governments can increase revenue via better reporting of transactions.
  - If Asian economies were to move halfway to the global frontier, VAT revenue could rise by 0.6 percent of GDP.
  - For Association of Southeast Asian Nations (ASEAN) members, estimated gains are 1.2 percent of GDP.
  - For small Asian states, estimated gains are on the order of 2.5 percent of GDP.

### Automation, robots, and employment
- Two-thirds of the world’s industrial robots are employed in Asia.
- Cross‑country analysis of robot usage finds productivity-enhancing effects may have offset destruction of old jobs; however:
  - Focusing only on Asia, there is a slight negative impact on overall employment, particularly in heavily automated sectors like electronics and automobiles.
  - Workers with medium-level education are more vulnerable to displacement than those with low or high education levels.
- Japan’s experience:
  - With a shrinking labor force, increased robot density in manufacturing is associated with greater productivity and local gains in employment and wages.
  - Japan’s experience suggests China, Korea, and Thailand, facing similar demographic trends, may also benefit from automation.

### Global value chains and reshoring risks
- AI, robotics, and 3D printing are expected to decrease competitiveness based on wages, potentially transforming manufacturing and leading to reshoring of production to advanced economies.
- Anecdotal evidence indicates reshoring may already be happening, which could pressure economies with large pools of low-skilled labor to devise new growth models.

### Risks from fintech and digital platforms
- Fintech risks: potential to undermine competition, monetary policy, financial stability and integrity, and consumer and investor protection.
- Technological leapfrogging has been associated with falling levels of traditional financial infrastructure, particularly bank branches.
- Asian tech giants, especially in China, have become key providers of financial services, putting competitive pressures on traditional financial institutions.
- Crypto-assets may pose risks related to money laundering, tax evasion, circumvention of capital controls, and other illicit activity.
- Digital platforms raise competition issues:
  - Economies of scale can lead to winner-take-all dynamics and anti-competition concerns when platforms become large.
  - Network effects make it challenging for retailers and vendors to switch platforms, reinforcing platform market power.
  - Digital platforms can pose risks of tax base erosion; peer-to-peer platforms (Airbnb, Uber, and Asian competitors such as GO-JEK, Grab, Tujia) can allow transactions to avoid or evade taxes.

### Policy recommendations and priorities
- Policy responses should balance enabling digital progress with addressing risks.
- Policies to harness digital dividends include:
  - Revamping education to meet demand for more flexible skill sets and lifelong learning.
  - Providing new training, especially for the most adversely affected workers.
  - Reducing skill mismatches between workers and jobs.
  - Investing in physical and regulatory infrastructure that spurs competition and innovation.
  - Addressing labor-market and social challenges, including income redistribution and safety nets.
- Regional and international cooperation is key for effective policy responses given the global reach of digital technologies.
- Societal willingness to support those left behind will affect the pace of innovation that can be accommodated; with the right policies, the digital revolution could be a new engine of growth and prosperity for Asia and the world.

*Tahsin Saadi Sedik, senior economist, IMF Asia and Pacific Department; article based on a chapter in the IMF’s forthcoming Regional Economic Outlook: Asia Pacific.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/september/asia-digital-revolution-sedik.pdf_