Why (Almost) Everything You Hear About the Digital Economy Is Wrong

Nick Ashton-Hart was the senior permanent representative of the Internet sector to the UN and its agencies and member-states in Geneva until 2015 and remains active in international Internet policy. Connect with him on LinkedIn or Twitter @nashtonhart.

When most people think of the Internet they think of what they use—search engines, social media, online and streamed video and audio services, and email. This is undoubtedly a big part of the reason why policymakers think that the digital economy is dominated by these “business-to-consumer” services.

Nothing could be further from the truth. In fact, business-to-business digital commerce is ten times the size of the business-to-consumer space according to the UN Commission on Trade and Development’s Information Economy Report 2015. Seventy-five percent of the economic value of the digital economy goes to traditional bricks and mortar businesses and not Internet companies. This is true worldwide, not just in developed economies.

I’m a proud European so allow me to focus on the tragic discussion of the Internet economy in Europe, where policymakers obsess over the activities of a handful of U.S. multinationals instead of focusing on what really matters. According to the OECD, the information and communications technology (ICT) sector, while growing rapidly, only employs three percent of Europeans. Small to medium sized enterprises are critical to every economy and account for more than ninety-nine percent of all businesses in many developed and developing countries and are the primary source of GDP growth and employment—not multinationals.

Thanks to the Internet, many services can now be exported in a way previously unthinkable. Outsourcing is a case in point: the Internet has facilitated the rise of businesses that provide payroll services, legal discovery services, and customer relationship management. These facts explain why services have become the largest segment of the world economy in GDP terms. According to the International Labour Organization’s Global Employment Trends 2014, it is also the largest employer: services are forty-five percent of employment and growing, whereas agriculture is thirty-one percent and falling, and non-services commerce twenty-three percent.

The Internet has also made possible the rise of global value chains (“GVCs”), a development which has led to an astonishing reality: services account for roughly a third of the inputs in tangible goods, such as cars, televisions, or pharmaceuticals. Pfizer is a perfect example of the Internet and GVCs. The pharmaceutical giant has transitioned its entire global supply chain and logistics to a cloud service-based system.

While the business-to-business portion of the digital economy is larger than its counterpart, business-to-consumer services can have a profound multiplier effects on other types of commerce. It’s worth understanding why these multiplier effects exist and how they contribute to growth in an economy—not just the ICT sector.

Let us imagine a debate about the digital economy that was driven by such pragmatic concerns rather than the almost Alice-in-Wonderland-discussion we have now, and again allow me to take my fellow Europeans as an example. A healthy and balanced European discussion should focus on:

• Identifying how traditional services can leverage the digital environment to compete, innovate and export, and the role ICT services can play to make this happen given that the European services industry accounts for seventy-three percent of the Euro area’s economy, not the single-digits that the ICT services sector represents.
• Developing ways to help traditional industries leverage the digital economy to compete. For example, Volvo, the world’s largest manufacturer of commercial diesel engines, offers a 100 percent uptime guarantee thanks to sophisticated technology in their vehicles that indicates when parts need service before they fail. These service-enabled products are central to competitiveness and most European countries have national champions just like this.
• Analyzing what kind of data flows across the Internet and why. If e-commerce between businesses is ten times that between businesses and consumers, it is logical that a large proportion—and almost certainly a large majority—of data flowing across borders does not consist of personal information—Volvo’s engines reporting back to Volvo being a perfect example. The challenge of finding information on the proportion of data flows that is not personal tells us that we’re missing an important element of the discussion.

Europe is far from alone in suffering from an unhealthy economic debate on regulating multinational foreign business and consumer tech giants. Throughout the world policies being proposed as solutions—like demanding data to be hosted locally irrespective of any practical benefit to doing so—actually create far greater burdens on domestic competitiveness than on foreign multinationals. After all, multinationals have the economies of scale to afford burdensome data localization requirements. Of course when it comes to regulation, SMEs are often the very segment of the economy that suffers most despite being the most economically important.

I think that we will look back in a decade on the public debate about the networked economy we are having today and ask ourselves: “What were we thinking?” We’re making rules about the digital environment right now that will have an enormous impact on our economies and our societies for decades to come. We need to stop allowing the economic tail to wag the dog.