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Asia’s Digital Revolution

Asia’s Digital RevolutionAsia’s Digital Revolution
During 2005-15, ICT growth averaged 15.9% in India, 13.7% in China and 7.1% in Thailand, far above their economic growth rates of 7.7, 9.7 and 3.5%

Asia is embracing the digital revolution. Companies such as Alibaba, Tencent, and Baidu are providing a wide range of services from e-commerce to fintech and cloud computing for customers in China and elsewhere. In Indonesia, GO-JEK offers services including ride-hailing, logistics and digital payments.

These and other Asian companies are exploiting recent advances in artificial intelligence, robotics, cryptography, and big data that promise to reshape the global economy and fundamentally alter the way we live and work in the same way that the steam engine and electricity did in centuries past. In Asia as elsewhere, the digital revolution is rippling across industries from retailing and banking to manufacturing and transportation, IMF.org reported.

Southeast Asia will face distinct challenges as the new technologies disrupt global value chains—the network of interlinked stages of production for the manufacture of goods and services—and undermine the model of labor-intensive, export-led manufacturing that has powered the region’s growth.

But the new technologies will also open opportunities for small businesses and offer the potential of enhanced productivity, something that Southeast Asia will need in order to move beyond middle-income status. For frontier economies like Cambodia, Lao P.D.R., and Myanmar, digital technologies can be powerful new tools in the struggle to end poverty.

  Asia at the Forefront

Asian players are in the lead in nearly every aspect of digitalization, but some economies lag significantly behind. Asian economies lie all along the income spectrum, and correspondingly, the region has the highest dispersion in terms of the adoption of digital technologies, with Japan, Korea, Hong Kong and Singapore being global trendsetters. But at any given income level, Asian economies are at the frontier relative to their global peers. Moreover, even for relatively poor Asian economies, such as Cambodia and Nepal, digitalization is accelerating.

E-commerce and fintech are other areas in which Asia leads. For instance, China accounted for less than 1% of global e-commerce retail transaction value about a decade ago, but today, that share has grown to more than 40%. The penetration of e-commerce, as a percentage of total retail sales, now stands at 15% in China, compared with 10% in the United States.

E-commerce penetration is lower in the rest of Asia but is growing fast, particularly in India, Indonesia and Vietnam. In Indonesia, e-commerce platforms such as Bukalapak, Lazada and Tokopedia are competing for the largest e-commerce market in Southeast Asia.

  ICT Growth

In fintech, too, Asian economies have made significant progress, in many cases leapfrogging into new types of technology. For example, in 2016, mobile payments by individuals for goods and services totaled $790 billion in China, 11 times more than in the United States.

Technological progress can bring enormous benefits by boosting productivity and growth and creating new jobs. In most of Asia, the share of information and communications technology in GDP has increased substantially faster than economic growth. During 2005-15, ICT growth averaged 15.9% in India, 13.7% in China and 7.1% in Thailand, far above their economic growth rates of 7.7, 9.7 and 3.5%. In Japan, ICT growth was almost quadruple GDP growth.

And digitalization is becoming a larger component of GDP in many Asian economies. Among the world’s top 10 economies with the largest ICT to GDP ratio, seven are in Asia, including Malaysia, Thailand, and Singapore. Digitalization can also boost the productivity of other sectors.

IMF’s empirical work shows that a 1 percentage point increase in the digitalization of China’s economy is associated with 0.3 percentage point of GDP growth. Importantly, innovation in Asia is tilted toward the digital sector: if IMF ranks countries according to the ICT share of total patents, Asian economies take up the top five slots—further highlighting the potential of digitalization to boost future growth.

  E-Commerce

E-commerce has the potential not only to support growth, but also to make it more sustainable. For consumers, e-commerce may translate into better access to a wider range of products and services at lower prices, ultimately boosting consumption. A study by McKinsey & Company shows that while 60% of internet spending in China is diverted from traditional retail, close to 40% represents new consumption.

For firms, e-commerce provides new business opportunities and access to larger markets, and thus supports investment. IMF analysis shows that, at the firm level in Asia, participation in online commerce is associated with a more than 30% increase in total factor productivity, or the portion of output not explained by traditionally measured production inputs of labor and capital.

Innovation, human capital, and to some extent access to finance seem to support online firms’ better performance. Finally, firms engaged in e-commerce also export 50% more.

Financial technologies can also support potential growth and poverty reduction by strengthening financial development, inclusion, and efficiency. Fintech can help millions of individuals and small- and medium-sized enterprises leapfrog access to financial services at an affordable cost, particularly in poor countries.

These technologies may also drive substantial efficiency gains in the financial sector. For example, they can provide cross-border payments that reduce both risk and cost for participants. If all Asian economies with low financial inclusion were to move to the level of Asia’s emerging-market frontier, Thailand, 20 million people could be brought out of poverty, IMF analysis suggests.

Finally, digitalization presents opportunities for improving public finance. Adoption of digitalization by governments can, through better reporting of transactions, increase revenue from value-added taxes, tariffs, and other sources.

If Asian economies were to move halfway to the global frontier, IMF analysis shows, VAT revenue could rise by 0.6% of GDP. For countries that belong to the Association of Southeast Asian Nations, the gains are estimated at 1.2% of GDP, and for small Asian states, which are typically further from that frontier, they are on the order of 2.5% of GDP.

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