IS DIGITAL TRANSFORMATION A PATHWAY TOWARDS ECONOMIC DEVELOPMENT?

By Ishan Binod and Alancia Menezes | Edited by Ikshita Jain and Khushi Shah

For:

“We went from being the Flintstones to the Jetsons in 9 months”

-Dan Schulman, Paypal

Commenting on his company’s digital transformation during the Covid-19 pandemic.

The economies of the world have been subjected to a multitude of changes over the recent decade. Economic paradigms have been in constant flux with countries, conglomerates and entities alike, working overtime in order to adapt. Technology has been a driving force, pioneering development across all facets of the economy. This has resulted in the creation of several avenues for wealth generation and achieving organizational objectives.

With the advent of digitalization and economic activities being enhanced by their virtual counterparts, it no longer remains a choice. Digitalization has deemed itself a necessity. Before we get into the heart of the matter, let’s understand what digitalization truly is.

In a simple sense, it is the process of conducting any activity that was once physical and tangible into a completely or partially virtual one. This has a wide purview and ranges across multiple economic activities. It began with micro computers in 1957 which computed small business tasks and helped run analytics. By 1980, there were well over a million personal computers around the world being used to add a degree of efficiency to tasks. Gone were the days of thick ledgers and binders, it was now the era of the floppy disks and DVD’s (Digital Versatile Disks). As the 2000’s rolled around, it became quite evident that in order to compete, one had to embrace digitalization. Another decade later, with smartphones in the hands of any and every individual, consumer behavior became the digital equivalent of oil. The one with the ability to interpret and effectively utilize this data automatically assumed the spot at the top of the food chain. Warehouses were filled with servers and billions were invested into developing Information Technology and data handling capacity.

A few years later, we saw one of the world’s most devastating black swan events. The Covid-19 pandemic forced the world into an economic stand still. Two years of rebuilding and recovery saw one dominant trend emerge across all sectors, the massive surge in digital activity. Whether it was pumping dormant money into the stock market via your phone’s favorite trading application or ordering groceries from local vendors, an individual’s digital footprint saw a sharp rise.

Companies headed to their drawing board and devised strategies to mobilize this chart-topping trend. According to Dell’s Digital Transformation Index of 2020, 89% of 4000 business leaders acknowledged that the Covid-19 pandemic called for a more versatile and scalable IT environment. Several million dollars later, a robust and growth-oriented strategy for digitalization boasts the following benefits.

A virtual premise helps allow entities to push aside all conventional notions and explore beyond more than what meets the eye. Large format data and ease of accessibility helps predict consumer behavior to a microscopic level, leaving minimal margin for error. Customer satisfaction and acquisition appears to be an all-time high. With growing interconnectivity and a rising number of digital economic activities, complex algorithms have been devised to feast on the wide array of data and determine the most appealing and relevant solution. The milli-seconds required for this process only further legitimizes its presence.

Beyond just speed and accessibility, technology has also greatly impacted the work environment. The physical office has now become a dynamic ecosystem with just a simple device enabling employees to execute their duties from any place around the world. Operational costs have boiled down to server space and equipment charges.

With the shift from conventional methods, heavy focus is being laid on R&D and technologically oriented growth. Entities are finding new methods to analyze already existing data in order to stay ahead of the competition. Manufacturers have expanded beyond the purview of simple production. Data and consumer trends allow them to facilitate monitoring and set up maintenance, thus adding another dimension to their customer experience. Similarly, entities can ideate to devise strategies that will effectively combat the macro economic factors that would affect demand.

Revenue has increased quarterly after brick and mortar stores have introduced supplementary online services. McDonald’s, Chipotle, Starbucks remain prime examples of companies that introduced dedicated pick-up lines for online consumers, thus capitalizing on their online services in addition to  increasing footfall.

With Web3(the third iteration of the world wide web) on the horizon, there exists untapped potential in a completely digitalized and virtual platform. If you look beyond the issue of decentralization, there exist several tools in the form of blockchain technology and token-based economies that can integrate sectors and markets alike to achieve seamless transfer of data and currencies, equipped with real monetary value. Though it may sound far-fetched, if one were to solve the issue of decentralization and implement policies that are in tune with the spirit and rationale of Web3, we could very well witness the next big economic breakthrough.

To fully understand the extent of digitalization, take your time to assimilate these statements. Uber, the largest taxi service, does not own a fleet of cars. Airbnb, the world’s largest accommodation servicer, owns zero real estate. These companies were the early ones to pioneer growth and now command a major share of their market. Digitalization is very much here to stay and is bound to dictate the course of the near economic future. 

Against:

The COVID-19 pandemic brought a new wave of digitalization called ‘digital transformation.” The way humans now interact globally and locally is now changing. Digital transformation isn’t merely the digitalization of conventional processes but rather- as the word suggests its transformation. This transformation includes not only changes in operations but also in culture. More and more economies are now adopting digital transformation given its celebrated benefits for the efficiency of human capital.

However, one must understand that most economies focus on numbers, and more often than not, numbers are deceptive. The statistics of digital transformation display the positive impact it has on economic growth and a country’s GDP. However, it is imperative to ask one question- “At what cost?” Let’s understand the rather negative implications of digital transformation on economic development. 

Although this may sound counterintuitive, digital transformation does in fact widen the digital divide among countries. The adoption of digital technology has resulted in profits for several first movers. Despite this, the digitalization of economics and politics has had no impact on narrowing the digital divide among countries.

The authors Goldin and Muggah in their book ‘Terra Incognito’ illustrate how wealthier countries are more digitally connected than poorer countries. This is due to ownership of infrastructure, code, and data, rather than the quantity of wireless connections and mobile phones, determines success in the digital economy. Over 90% of the world’s data centers are located in wealthier nations in North America, Western Europe, and East Asia, with less than 2% in Latin American and African states. Together, they control more than 90% of the market value of the biggest digital platforms in the world. As a result, certain nations, businesses, and industries stand to gain significantly more from digital transformation than others. 

That’s not it. The benefits of the digital economy are still being distributed unfairly. The United States of America (35%), China (13%), Japan (8%), and the member states of the European Union (25%) are among the relatively few nations benefiting from the global digital economy. A small number of companies, including Amazon, Alphabet, Apple, Google, Facebook, and Microsoft have dominated their respective markets and generated 90% of all sales and earnings. This makes the competitive market a rather echo chamber- forcing firms to go digital in the fear that they may risk being extinct otherwise. 

Moving on, the digital divide is just the tip of the iceberg. To aggravate the situation, digital economies send climate change through the roof. With digital transformation seeping through cultures, the practice of ‘replacing’ mobile phones instead of ‘repairing’ them is now a common sight. Research work by Restart tells us that “The average mobile creates 55 kilograms of carbon emissions in manufacture, equal to 26 weeks of laundry.” However, a lot of digital businesses, particularly Apple, have long campaigned against encouraging buyers to repair their own gadgets or have them repaired more affordably somewhere else. Companies are stepping up the exploitation of rare earth minerals and other valuable metals like cobalt to meet the insatiable demand for hardware. Mountains of garbage are being produced as a result of deliberate obsolescence and technological redundancy.

The expansion of online services is consuming an alarming one-tenth of the world’s power generation. Increased energy use and carbon emissions, notably those from coal-fired power plants, are a result of the move to Cloud technology. More than 100 MW of energy is used by the servers, cooling systems, storage drives, and networking equipment of some of the biggest data centers in the world. Currently, Bitcoin mining alone consumes more than 7 GW, which is the same as seven nuclear power reactors. According to research by Stoll et al, the annual carbon emissions from producing a crypto currency range from 22 and 29 million tonnes of carbon dioxide, which is similar to the emissions of a small nation like Jordan.

Finally, digital transformation certainly has positive impacts on the overall productivity of human capital, resulting in increased output of firms. However, a survey of employees in large companies conducted by the European Central Bank suggests different apprehensions. About 1/3rd of participants viewed digitalization as reducing employment rates in the near future. Moreover, it is emphasized that while digital transformation helps improve efficiency and knowledge transfer, it may be able to completely replace low and medium-skilled jobs. It should be noted that more than 70% of the Indian population and around 40% of the global workforce is engaged in these job levels. This gives an insight into the future of human labor. Digital transformation is an innovation-centric model for human capital productivity. However, as much as it focuses on improving an individual’s ability to scale at a job, it risks putting people out of employment.

Conclusion:

The effects of digital transformation for an economy’s growth are clearly positive. However, when we take a step back and question its impact on an economy’s real development- the answers may be mixed. While digitalization has proved to be both a bane and a boon to economies and the global space in general, it can have long-term, irreversible damage if it is left unchecked. Today as young enthusiasts of economics, we must all ask ourselves one question before understanding the impact of anything in economics. And that is, “The numbers are growing, but at what cost?”

References

Digital Technologies Are Part of the Climate Change Problem. (2020, February 20). ICTWorks. Retrieved September 25, 2022, from https://www.ictworks.org/digital-technologies-climate-change-problem/#.YzAQz3ZBw5v

European Central Bank. (2018, November 7). Digitalisation and its impact on the economy: insights from a survey of large companies. Retrieved September 25, 2022, from https://www.ecb.europa.eu/pub/economic-bulletin/focus/2018/html/ecb.ebbox201807_04.en.html

Hughes, R. (2021, August 4). The unintended consequences of digital transformation. ComputerWeekly.com. Retrieved September 25, 2022, from https://www.computerweekly.com/opinion/The-unintended-consequences-of-digital-transformation

Scholz, R., Bartelsman, E., Diefenbach, S., Franke, L., Grunwald, A., Helbing, D., Hill, R., et al. (2018). ‘Unintended Side Effects of the Digital Transition: European Scientists’ Messages from a Proposition-Based Expert Round Table’. Sustainability, 10(6), 2001. MDPI AG. Retrieved from http://dx.doi.org/10.3390/su10062001

Stoll et al., ‘The Carbon Footprint of Bitcoin’.  Joule 3, 1647–1661 July 17, 2019 ª 2019 Elsevier Inc. https://doi.org/10.1016/j.joule.2019.05.012 

The dark side of the digital revolution – and how to fix it. (2020, November 11). World Economic Forum. Retrieved September 25, 2022, from https://www.weforum.org/agenda/2020/09/dark-side-digitalization/

The Restart Project – The Right to Repair and Reuse Your Electronics. (2022, August 31). The Restart Project. Retrieved September 25, 2022, from https://therestartproject.org/

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One Comment Add yours

  1. Very well brought out arguements

    Well documented work👍🏽

    Like

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