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ANALYSIS

Bahjat El-Darwiche

The varying effects of digitization on economies

Dubai, April 30, 2013

While digitization provided a $193 billion boost to world economic output and created six million jobs globally in 2011, the effects of the growing technologies are uneven across countries and sectors, a report said.

“Access to these services is no longer the primary issue facing policymakers,” said Bahjat El-Darwiche, a partner with global management consulting firm Booz & Company, with reference to the study “The Varying Effects of Digitization on Economic Growth and Job Creation – A Global Perspective” released by the company.

“The critical question is how policymakers maximize their adoption, utilization, and impact. Policymakers need to actively build digital markets.”

Booz & Company’s analysis reveals that an increase of 10 percent in a country’s digitization score fuels a 0.75 percent growth in its GDP per capita.

In 2011, East Asia, Western Europe, and Latin America received the greatest total GDP per capita impact from digitization, surpassing North America. The impact of digitization improvements in East Asia and Latin America was higher than that in North America and Western Europe, even though these regions have lower GDP impact coefficients.

This is because the economies in East Asia and Latin America are still at the transitional stage and were able to achieve the biggest digitization leaps. Eastern Europe and Africa benefited the least from their digitization gains in terms of their impact on GDP.

Impact on unemployment

Digitization creates jobs, with a 10 point increase in the digitization score leading to a 1.02 percent drop in the unemployment rate.

According to Booz & Company’s study, in 2011, digitization had the greatest employment effect in constrained and emerging digitized economies. East Asia, South Asia, and Latin America received the most employment growth of all regions, with more than four million jobs created as a result of these regions’ digitization improvements.

Conversely, digitization provided little employment growth in North America and Western Europe.

“These advanced-stage economies realize fewer employment benefits because, as their digitization increases, their productivity improves; some jobs get replaced by technology; and lower-value-added, labor-intensive tasks go overseas to emerging markets where labor is cheaper,” explained Milind Singh, a principal with Booz & Company.

By contrast, digitization has more significant employment effects in emerging markets for three main reasons.

First, the digitization gain in some emerging regions is higher than it is in the advanced. Second, some of these regions have large populations, which means that a marginal improvement in the unemployment rate leads to a significant number of jobs.

Finally, offshoring grows in tandem with digitization. As companies in digitally advanced countries improve their productivity thanks to digitization, they transfer jobs to digitally emerging countries.

Digitization’s sectoral impact

A typical company’s functions can be broken down into four areas:

•    Business: Digitization is fundamentally reshaping business models. It is lowering barriers to entry and expanding market reach for enterprises.

•    Go-to-market: Digitization is changing how companies build brands and products, communicate, and provide services to their customers. Companies are increasingly relying on social media to build brands. More and more, subscribers are forming their purchase opinions online.

•    Production: Digitization is also changing the way companies manage their production assets. It has enabled companies to move labor-intensive tasks to emerging economies while competing to develop the best design and user interface.

•    Operations: Finally, digitization has had the greatest impact on the way companies organize and operate to generate competitive advantage. Digitization has created more global entities, seamlessly in touch across continents, and has redefined the concept of office space.
The type and extent of the impact that digitization has on a sector of the economy is determined mainly by the interaction of the four impacts outlined above.

Five key economic activities

Booz & Company examined five key economic activities in developed markets that would yield conclusions that can guide policy responses. These five areas were identified by initially dividing the overall economy into three major sectors: primary, secondary, and tertiary. The primary sector relates to agriculture, farming, and mining. The second sector encompasses manufacturing. And, the tertiary sector provides services to consumers and businesses.

The study focused on subsectors in the secondary and tertiary sectors, where activities affected by digitization tend to cluster.

“We also looked at the impact on the overall services sector and we examined these subsectors in six advanced-digitization countries – Australia, Germany, Norway, Sweden, the UK and the US,” said El-Darwiche. “Our econometric analysis used three industry metrics: output, productivity, and employment. The study thus allows an understanding of how the positive national effect of digitization plays out differently in economic subsectors.”

The analysis showed that there is a clear relationship between productivity gains and job losses, as seen by the results for financial services and manufacturing. By contrast, other subsectors increased employment and output, although their productivity grew at a slower pace.

As digitization increases, financial services gain the most in terms of output and productivity. Increased digitization, however, cut jobs in financial services and manufacturing because productivity gains surpassed output gains. In parallel, digitization created jobs in services subsectors, with particularly notable gains in the hospitality and retail subsectors.

Policy implications

“Policymakers have focused until now on improving the reach and affordability of ICT services,” added Singh. “Though important, policymakers in the future also need to become digital market makers – creators of a digital economy that provides its citizens, enterprises, and economic sectors with the competitive advantage essential to thrive in a global market.”

Becoming a digital market maker requires policymakers to undertake three activities: designing sector digitization plans, building capabilities, and jump-starting and monitoring the wider digitization ecosystem.

To conclude, creating digital markets and boosting digitization can yield significant economic benefits and lead to substantial social benefits for societies and communities. Digitization has the potential to boost productivity, create new jobs, and enhance the quality of life for society at large.

For example, if emerging markets could double the Digitization Index score for their poorest citizens over the next 10 years, the result would be a global $4.4 trillion gain in nominal GDP, an extra $930 billion in the cumulative household income for the poorest, and 64 million new jobs for today’s socially and economically most marginal groups.

If policymakers want to capture these rich returns, then they need to adequately build their digital markets – the markets where the bulk of the world’s information and goods will be bought and sold in the upcoming decade of digitization. – TradeArabia News Service




Tags: Jobs | economy | GDP | emerging markets | Booz & Company | Digitization |

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