Research Paper 93, March 2019

Regulating the Digital Economy: Dilemmas, Trade Offs and Potential Options 

The digital economy has been growing exponentially in recent years thanks to new technologies that are promoting a global transformation. Key technologies responsible for this transformation have become the subject of intense discussions under the umbrella term ‘fourth industrial revolution’. This paper offers a discussion on the differentiated impact of digital technologies on unemployment, capabilities building and technological catch-up for developing countries. It articulates some of the key issues and tradeoffs for developing countries that should be considered in policy discussions and deliberations.

Two important conclusions for policy stand out from the analysis in this paper. Firstly, new digital markets introduce a range of market failures throughout the process of knowledge creation, knowledge mediation, value creation, value capture and trade in the digital economy. The new technology-mediated economy is imperfect, riddled with information asymmetries, monopolies, algorithmic intransparencies and ‘winner-takes-all’ effects. Secondly, these market failures intensify all existing government or institutional failures that have held back development in developing countries. Any pre-existing binding constraint – such as the lack of coordination for innovation, lack of ability to mobilize domestic resources, inability to create linkages, low resilience of the domestic entrepreneurship sector, tax avoidance, and the failure to regulate competition – will have a direct bearing on how the gains of the fourth industrial revolution can be secured. The real challenge for developing country policy makers, therefore, is to be able to articulate their own industrialization and developmental goals as part of the transition to the digital era and to enact policies that enable it. The paper also warns against technological determinism; an approach that simply focuses on widely applying existing digital technologies for the broader good of mankind without a discussion of its public policy implications.

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Regulating the Digital Economy: Dilemmas, Trade Offs and Potential Options


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