Digital economy hopes for Brazil overstretched
June 7, 2016, 11:55 am

Brazil is a closed economy as measured by trade penetration. Global connectivity indicators, such as McKinsey Global Institute (MGI) and DHL Global Connectedness Index, which take into account financial, data, knowledge, persons, services and communication flows, suggest that Brazil is also closed in those areas.

If being an economy closed to trade is already compromising growth, being closed to the digital economy can be even more compromising. After all, digitization is disrupting everything: the nature of goods and how to produce them, the universe of potential suppliers and customers, the method of delivery, capital and scale to operate globally, and capacity needs.

McKinsey research shows that while global flows on trade and finance are flattening, data flows are soaring — between 2005 and 2014, this volume grew no less than 45 times! Data flows directly accounted for $2.2 trillion to global GDP in 2014; indirectly, it added another $2.8 trillion.

People walk by a stand of the Chinese company ZTE during the “Futurecom 2015”, in Sao Paulo, Brazil on 29 October 2015 [Xinhua]

While this is indeed valuable, one should keep in mind the implications of “digital commoditization”, that is, the popularization of access and use of digital technologies. The concept says that, ultimately, using digital technologies can make little or eventually no significant difference to competitiveness if that technology is accessible by many. Indeed, cheaper computing power, sensors, and internet access are accelerating the pace at which businesses adopt new technologies.

So digital technologies may be a necessary, but not a sufficient condition to make a difference in terms of competitiveness at the global level. One may even expect that the marginal benefits of popular digital technologies will decrease overtime. One potential implication of the digital commoditization is that sometime in the future conventional comparative advantage will probably regain some relevance as a competitive factor.

The empirical evidence suggests that what really matters for wealth creation is developing digital technologies and developing and managing digital platforms, digital business standards and new business models. Digitization catalyzes rapid growth by creating network effect and by reducing marginal costs.

No wonder then that digital powerhouses such as Google, Apple, Microsoft, Facebook and Amazon are the ones taking the most advantage of their hyperscale platforms to move from search and networking into new sectors in a self-reinforcing, endogenous move. The ones that “got there first” and established business-operating platforms became incumbent superstars with little chance of being challenged by new entrants. This helps to explain the deceleration and loss of brightness of unicorns ( startup companies valued at $1 billion dollars or more).

This brings us to the fallacy of composition in the digital economy, namely, the idea that it is unlikely that there is room for everyone in the digital era due to factors such as platform-effects and the shortening lifecycles of digital technologies.

So, while digital technologies usage can certainly increase productivity, it is unlikely that it will increase competitiveness and promote productivity convergence across countries, as suggested by economist Dani Rodrik for the case of manufacturing.

While entering the digital era is more than relevant for growth prospects for a country like Brazil, using more and better digital technologies will not necessarily bring long term growth and create more and better jobs. This probably holds for other developing and emerging economies too.

Instead, Brazil will have to work hard and focus in creating the conditions – human capital, regulatory measures, openness, and infrastructure — for claiming a place in the brave new world.

The twenty-first century reminds us every day that the world is already, but will be even more divided between those countries that use and those that develop digital technologies and business models and standards.

As of now, the second group is mainly concentrated in a few advanced economies. It is likely to remain this way, at least for the foreseeable future, with important implications in terms of increasing GDP per capita gaps and economic development prospects.