## Asia’s Digital Revolution

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**Canonical URL:** [Asia’s Digital Revolution](https://www.imf.org/en/publications/fandd/issues/2018/09/asia-digital-revolution-sedik)

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## Bibliographic details
- Authors: TAHSIN SAADI SEDIK
- Published: September 1, 2018

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### Overview
- A new wave of digital innovation in Asia—driven by advances in artificial intelligence, robotics, cryptography, and big data—is reshaping industries from retailing and banking to manufacturing and transportation.
- With the right policies, this digital revolution "could be a new engine of growth and prosperity for Asia and the world."

### Asia at the forefront
- Asian firms leading digital services: Alibaba, Tencent, Baidu; ride-hailing and payments example: GO-JEK in Indonesia.
- Regional dispersion: Japan, Korea, Hong Kong SAR, and Singapore are global trendsetters; many Asian economies are at the frontier relative to global peers; digitalization is accelerating even in relatively poor economies such as Cambodia and Nepal.
- E-commerce growth and penetration:
  - China accounted for less than 1 percent of global e-commerce retail transaction value about a decade ago, and today that share has grown to more than 40 percent.
  - E-commerce penetration as a percentage of total retail sales: 15 percent in China, compared with 10 percent in the United States.
  - E-commerce is growing fast in India, Indonesia, and Vietnam; Indonesian platforms include Bukalapak, Lazada, and Tokopedia.
- Fintech scale:
  - In 2016, mobile payments by individuals for goods and services totaled $790 billion in China, 11 times more than in the United States.

### Economic impacts and productivity
- ICT growth outpacing GDP (2005-15):
  - ICT growth averaged 15.9 percent in India, 13.7 percent in China and 7.1 percent in Thailand.
  - Corresponding economic growth rates were 7.7, 9.7 and 3.5 percent.
  - In Japan, ICT growth was "almost quadruple GDP growth."
- Digitalization and growth:
  - 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 the ICT share of total patents, Asian economies occupy the top five slots.
- Firm-level effects of e-commerce:
  - Participation in online commerce is associated with a more than 30 percent increase in total factor productivity.
  - Firms engaged in e-commerce also export 50 percent more.
  - Study cited: McKinsey & Company finds that while 60 percent of internet spending in China is diverted from traditional retail, close to 40 percent represents new consumption.
- Public finance gains from digital adoption:
  - 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 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.
- Financial inclusion and poverty reduction:
  - 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.

### Employment, automation, and structural shifts
- Automation trends:
  - Two-thirds of the world’s industrial robots are employed in Asia.
  - Latest digital technologies—AI, robotics, 3D printing—could reshape global value chains and reduce competitiveness based on low wages, potentially prompting reshoring to advanced economies.
- Employment effects:
  - Cross-country analysis finds productivity-enhancing effects of robots may offset job destruction, but focusing only on Asia shows 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; suggests China, Korea, and Thailand may benefit similarly under similar demographic trends.

### Risks and challenges
- Risks to financial sector and stability:
  - Fintech may undermine competition, monetary policy, financial stability and integrity, and consumer and investor protection.
  - Leapfrogging countries have seen falling levels of traditional financial infrastructure, particularly bank branches.
  - Tech giants (especially in China) have become key providers of financial services, putting competitive pressures on traditional institutions.
  - Crypto-assets pose risks related to money laundering, tax evasion, circumvention of capital controls, and other illicit activity.
- Platform-market risks:
  - Digital platforms can produce winner-take-all dynamics, anti-competition concerns, and lock-in due to network effects.
  - Platform transactions can enable tax base erosion (examples: peer-to-peer platforms such as Airbnb, Uber, GO-JEK, Grab, and Tujia can allow transactions to avoid or evade taxes).
- Structural risks:
  - Potential for rising structural unemployment, especially among older and unskilled workers, if displaced workers lack alternative opportunities, with the potential to increase inequality.

### Policy recommendations and priorities
- Key policy areas to harness digital dividends:
  - Revamp education to meet demand for more flexible skill sets and lifelong learning, and provide new training especially for the most adversely affected workers.
  - Reduce skill mismatches between workers and jobs.
  - Invest in physical and regulatory infrastructure that spurs competition and innovation.
  - Address labor-market and social challenges, including income redistribution and safety nets.
- Governance and cooperation:
  - Regional and international cooperation is important given the global reach of digital technologies.
  - Societal willingness to support those left behind determines how fast innovation can proceed while ensuring broadly shared benefits.
- Overall policy objective:
  - Strike the right balance between enabling digital progress and addressing risks so that the digital revolution becomes an engine of growth and prosperity rather than a source of widening inequities.

*Asia’s Digital Revolution — TAHSIN SAADI SEDIK, F&D Magazine, September 2018*

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_Source: https://www.imf.org/en/publications/fandd/issues/2018/09/asia-digital-revolution-sedik_