The world is witnessing rapid advancements in technological innovations and digital technologies that are reshaping product markets and altering the business environment. These changes create new pathways and opportunities for a more prosperous future, but they also introduce new challenges and social disruptions that may lead to winners and losers.
In this context, the Brookings Institution, in collaboration with the Korean Development Institute, published a book in 2022 titled “Shifting Paradigms: Growth, Finance, Jobs, and Inequality in the Digital Economy,” edited by Zia Qureshi and Cheonsik Woo.
The book discusses the implications of digital transformation on the economy and public policy agendas, offering suggestions to make public policies more productive and inclusive from both a global and individual perspective. It also particularly focuses on the South Korean economy.
Intersections of Technology and Politics:
Although technology is a primary driver of productivity and economic growth, the rise of digital technologies has been met with sluggish productivity gains, declining economic growth, and increasing income inequality, which can result in public discontent and political polarization. However, the issue does not lie with technology itself, but rather in crafting smarter policies aimed at leveraging the immense potential that technology offers to achieve stronger and more inclusive economic growth.
In this regard, there are five issues that should occupy policymakers to more effectively reduce inequality and economic insecurity:
- Combatting monopolies and enhancing competition among companies in line with the digital age by reviewing laws and principles related to mergers and acquisitions.
- Improving the innovation ecosystem to foster new knowledge and technologies, thus achieving a better balance between existing interests and promoting innovation.
- Strengthening digital infrastructure to expand access to new opportunities in the digital economy, which requires increased investment in the digital space.
- Promoting investment in skills through the development of education and training programs related to new technologies.
- Reforming labor market policies and social protection systems to realign them with the changing economy and nature of work, such as enhancing workers’ capacity to transition to new jobs.
Overall, digital economy policies require the establishment of new frameworks for international cooperation in areas such as regulating cross-border data flows and taxing cross-border digital businesses.
Requirements for Technology Diffusion:
The process of “technology diffusion” is a dynamic result of the adoption of new technology in the workplace. However, there are key facts about this process: first, it takes time and occurs gradually; second, the diffusion of technologies, particularly digital technologies, does not happen at the same pace across different countries, regions, sectors, and companies. The slower the technology diffusion, the wider the productivity gap between firms. Third, various tangible and intangible factors and challenges related to the transition to a knowledge-based digital economy affect technology diffusion.
In this context, governments can play a vital role in promoting technology diffusion in the digital age through measures that remove barriers to diffusion and help enhance the absorptive capacity of firms, such as improving the market environment, enhancing competition, advancing knowledge production, developing workers’ skills, and prioritizing digital infrastructure.
For companies, their role in technology diffusion requires a series of steps. The first step is “having the technology” that the company is willing to adopt. The second step involves the company’s awareness of the existence of this technology and its potentials, and identifying the best fit for producing the relevant goods or services. The third step is the “decision to adopt the technology,” which is often constrained by financial and non-financial factors such as training employees. The final step is the ability to effectively utilize the adopted technology concerning its products or production processes, requiring the company to assimilate new knowledge and exploit it commercially.
Digital Investment and Financing:
Supporting technology diffusion necessitates expanding intangible investments, such as investment in assets like research and development, information technology, human capital, organizational capital, product design, and marketing. Based on an analysis of data from 11,000 South Korean companies, there is a noted positive correlation between reliance on digital technologies and intangible assets and the firm’s productivity power. There is also a complementary relationship between intangible assets and the incentive management practices within companies.
Despite Korea being one of the leading countries in information and communication technology, the adoption rate of digital technologies among companies appears relatively low. Results also indicate that company size affects technology adoption, with a lower adoption rate in small and medium enterprises compared to large firms. Furthermore, different types of technology have varying impacts on productivity across firms with diverse characteristics.
In addition to intangible investments, fintech plays a crucial role in enhancing digital productivity, encompassing digital innovations in the financial sector, such as using smartphones and digital platforms for banking and financial services, technical underwriting, smart contracts, and automated consulting.
In this framework, there are three groups in the financial industry: traditional intermediaries, including banks and insurance companies, which are expanding their IT spending; fintech companies, which aim to scale beyond their specialized markets; and large technology firms that have become increasingly involved in finance, such as Alipay in China, and Apple Pay and Amazon Pay in the U.S.
Digital finance has revolutionized how companies are established and how products and services are delivered, alongside democratizing access to financial services. It has also contributed to reduced costs of financial services, improved financial inclusion, and reduced discrimination, while simultaneously creating challenges around privacy, regulation, law enforcement, consumer protection, and antitrust issues.
Although China is the most advanced and innovative country in digital finance globally, its digital innovations remain largely local, and Beijing’s integration into the development of the global finance industry depends on political will and recognition of economic interests.
Digital Inequality:
Technology has long been a significant concern for workers, as employees often fear being replaced by machines and modern technologies. The COVID-19 pandemic has exacerbated this fear by increasing online shopping and remote work in many industries. However, the impacts of digital transformation and automation appear ambiguous; for instance, while robots may have a direct and indirect negative impact on low- and medium-skilled employment, they conversely have a positive effect on high-skilled labor. Thus, the effects of digital transformation and automation on employment and inequality include:
- The elimination of certain tasks or jobs, contributing to greater inequality.
- The emergence of new jobs that support automation and provide new digital goods and services, leading to increased income disparity due to higher demand for skilled labor.
- The creation of job opportunities to meet rising overall demand due to increased total productivity.
Given the challenges many workers face regarding technological advancement, especially those without college degrees, major economies need a strong political agenda to assist these workers in adapting to reality. This should include developing education and training systems, encouraging employers to use technology to create good jobs, along with supporting wages and addressing immigration and retirement laws, as well as reforming the tax system (by imposing higher taxes on tangible and intangible capital or lower taxes on labor).
This strategy contributes to stability by influencing the pace and direction of innovation; supporting policies that compensate workers who have lost their jobs and preventing increases in income inequality. Additionally, income generated from technological change can also be redistributed among the population through appropriate tax tools and safety nets.
In a related context, new digital technologies offer additional competitive advantages for companies in the market; however, firms differ in their progression toward the Internet of Things and investment in these digital technologies. As the work environment changes, companies looking to accelerate digital transformation must enhance their focus on educating and developing skills for workers within their companies, not only attracting new employees. Education involves not only the roles of governments and traditional educational institutions but also existing companies contributing to education and enhancing the human element.
The Korean Case:
The South Korean economy is significantly affected by modern technological changes, given its status as a leader in digital transformation. Based on data from over 33,000 establishments, inequality in Korea has reportedly increased over the past two decades, with the wage gap between firms of varying sizes contributing to rising income inequality. Larger firms typically enjoy better human capital, larger capital investments, and higher levels of innovative activity. However, small firms dominate most Korean industries. Consequently, the heterogeneous performance between firms of different sizes contributes to wage disparity.
On another note, there is evidence that technological change in Korea has contributed to rising income inequality, thereby increasing household income disparities, especially during the period from 1996 to 2006. Interestingly, the level of employment within the Korean economy has remained stable, as human capital is seen as complementary to technology. Nonetheless, the demand for high-skilled labor continues to rise, even as overall labor demand declines, leading to increased wage inequality. Lastly, one reason for household income disparity is the increasing number of dual-income families resulting from higher female workforce participation.
To mitigate wage disparity and inequality, a review of the system and a shift in policy approaches is essential to realize the competitiveness of small and medium enterprises by targeting potential growth and profitability. Furthermore, the Korean government should reconsider its regulatory framework and develop a long-term strategy to modernize the service sector, redirecting policies to encourage labor to transition towards more high-value-added production patterns. Additionally, strengthening the social safety net is crucial to support job transitions.
In conclusion, despite the expected benefits of technological change and digital transformation for businesses and consumers, such changes can come with disruptions and pressures, most notably income inequality or job reductions. The book suggests several measures that governments and companies can adopt to mitigate the adverse effects of digital transformation and automation, such as enhancing workers’ competency through investment in education and training to equip them with new skills aligned with advancements, strengthening tax and social insurance systems, among others.
Source:
Zia Qureshi and Cheonsik Woo, eds. “Shifting Paradigms: Growth, Finance, Jobs, and Inequality in the Digital Economy.” (Brookings Institution Press, 2022).
