Technological progress can bring enormous benefits by boosting
productivity and growth and creating new jobs.
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
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.
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 SAR, 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 percent of global e-commerce retail
transaction value about a decade ago, but today, that share has grown to
more than 40 percent. The penetration of e-commerce, as a percentage of
total retail sales, now stands at 15 percent in China, compared with 10
percent 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.
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 (ICT) in GDP has increased substantially
faster than economic growth. During 2005-15, ICT growth averaged 15.9
percent in India, 13.7 percent in China and 7.1 percent in Thailand, far
above their economic growth rates of 7.7, 9.7 and 3.5 percent. 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, 7 are in Asia, including Malaysia, Thailand, and Singapore.
Digitalization can also boost the productivity of other sectors. Our
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 we rank 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 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
percent of internet spending in China is diverted from traditional retail,
close to 40 percent represents new consumption.
For firms, e-commerce provides new business opportunities and access to
larger markets, and thus supports investment. Our analysis shows that, at
the firm level in Asia, participation in online commerce is associated with
a more than 30 percent 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, we find that
firms engaged in e-commerce also export 50 percent 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, our 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 (VAT), tariffs, and
other sources. If Asian economies were to move halfway to the global
frontier, our analysis shows, VAT revenue could rise by 0.6 percent of GDP.
For countries that belong to the Association of Southeast Asian Nations, the
gains are estimated at 1.2 percent of GDP, and for small Asian states, which
are typically further from that frontier, they are on the order of 2.5
percent of GDP.
These new technologies are automating increasingly complex activities that
could previously be performed only by people. Major transitions lie ahead
that could match the scale of historical shifts out of agriculture and
manufacturing, creating new challenges for policymakers. This new wave of
creative destruction will transform jobs and skills, with old jobs and firms
disappearing and new ones emerging. Historically, adjustment to change has
been difficult, and gains have been spread unevenly. The new wave of
automation also risks raising structural unemployment, especially for older
and unskilled workers, if there are no new alternative opportunities for
displaced labor with the potential to increase inequality.
Automation via industrial robots is one area in which Asia is clearly at the
forefront, with fully two-thirds of the world’s industrial robots employed
in the region. In our study, we analyze the impact of robot usage on
employment across a large sample of countries in Asia, Europe, and the
Americas. Contrary to some observers’ worst fears, we find that the
productivity-enhancing (and thus job-creating) effects may have offset the
destruction of old jobs.
Focusing only on Asia, however, there is a slight negative impact on overall
employment, particularly in heavily automated sectors like electronics and
automobiles. Furthermore, like others, we find that workers with
medium-level education are more vulnerable to displacement than those with
either low or high education levels, since jobs that are most susceptible to
automation tend to involve routine tasks performed by workers with mid-level
skills. In Japan, with its shrinking labor force, increased robot density in
manufacturing is associated not only with greater productivity but also with
local gains in employment and wages (see “Land of the Rising Robots,” in the
June 2018 F&D). Japan’s experience suggests that countries such as
China, Korea, and Thailand that will face similar demographic trends in the
future may also benefit from automation.
Looking ahead, some of the latest digital technologies could reshape global
value chains, in which Asian economies have been key players. Traditionally,
Asian manufacturing has been based on the supply of relatively low-cost and
low-skilled labor. But artificial intelligence, robotics, and 3D printing
are expected to decrease competitiveness based on wages, transforming the
nature of manufacturing and leading possibly to the reshoring of production
to advanced economies. Anecdotal evidence suggests that reshoring is already
happening, and economies with large pools of low-skilled labor may face
pressure to devise radically new growth models.
Fintech also poses risks to the financial sector if it undermines
competition, monetary policy, financial stability and integrity, and
consumer and investor protection. These technologies may disrupt the
business models of established financial institutions and lead to a
migration of activities outside the regulated sector. We find that countries
with a greater propensity for technological leapfrogging have also tended to
see falling levels of traditional financial infrastructure, particularly
bank branches. Unlike their US counterparts, Asian tech giants, especially
in China, have become key providers of financial services, putting
competitive pressures on traditional financial institutions. Crypto-assets,
an area in which Asia has been a leader, may pose risks related to money
laundering, tax evasion, circumvention of capital controls and other forms
of illicit activity.
And while digital platforms may magnify the benefits of e-commerce, they
raise competition issues. Economies of scale may lead to winner-take-all
dynamics and pose anti-competition concerns, particularly when e-commerce
platforms become large. Network effects also make it challenging for
retailers and vendors to switch platforms, reinforcing their market power.
Digital platforms can also pose risks of tax base erosion. For example,
peer-to-peer platforms such as Airbnb and Uber (or Asian competitors such as
GO-JEK, Grab and Tujia) allow transactions normally carried out in highly
taxed and regulated sectors, like taxi service or hotels, to avoid or evade
Striking the right balance
While the digital revolution is inevitable, the outcome—utopian or
dystopian—will depend on policies. Policy responses should strike the right
balance between enabling digital progress and addressing risks. Policies to
harness digital dividends include: revamping education to meet the demand
for more flexible skill sets and lifelong learning, as well as new training,
especially for the most adversely affected workers; reducing skill
mismatches between workers and jobs; investing in physical and regulatory
infrastructure that spurs competition and innovation; and addressing
labor-market and social challenges, including income redistribution and
Considering the inherent global reach of these technologies, regional and
international cooperation will be key to developing effective policy
responses. The more willing society is to support those who are left behind,
the faster the pace of innovation that it can accommodate and still ensure
that everyone ends up better off. With the right policies, the digital
revolution could be a new engine of growth and prosperity for Asia and the