The rise of the digital world

A new economy based on greater connectivity, disintermediation and more accessible technology will trigger significant changes. Right away with regard to work habits, but it will also aggravate inequalities.

It is not the strongest that survives, nor the most intelligent, but the one that best adapts to changes ”, Leon Megginson

It is not really new how, in recent decades, technology has evolved and assumed a relevant role in our daily routines, with regard to the way we socially relate, how we access information and communicate our opinions, how we get together around causes and adhere to political activism, or how we organize our leisure time, and also in the way our professional life has been shaped according to the digital ecosystem that has been redesigning the different sectors and industries.

The health crisis set in motion a process on several fronts that stimulated the digital migration of a substantial part of the population in the affected countries - especially in the more developed economies - and sparked new habits and behaviors (such as working from home, or shopping) supermarket) from which we are unlikely to break free in a post-Covid cycle. We are therefore at the beginning of what could be an era of sharp rise in the digital world, which will inevitably influence the way we live and which will represent a challenge for governments, regulators and institutions.

Disintermediation and increased global connectivity are realities of the ongoing digital revolution

Finding a simplified concept to define what this digital economy is is not an easy exercise, as it encompasses a series of complex concepts to aggregate. However, we can find patterns of behavior that associate the various economic agents that are essentially associated in two important aspects, which are the disintermediation of traditional channels of communication or transaction, and, above all, a huge increase in the global connectivity of individuals and businesses.

Internet access rates continue to increase worldwide, and the maturity of 4G technology has also enabled access to equipment (smartphones) that is increasingly broadened.

This was the reality even before the pandemic. The disruptive movement would find support in the gradual changes in consumer preferences, in demographic dynamics and in a permanent cycle of technological innovation, allowing maturation of implementation costs to increasingly broad levels. In fact, the estimates of some observers in the economic area indicated that the percentage of consumers available to use digital mechanisms could double in the next decade, based on the increase of “digital native” generations, that is, who lived in this ecosystem from an early age.

Covid-19 as an accelerating factor of change

The pandemic changed the way we looked at available technology, which, in a flash, went from curiosity to an essential element of everyday life. Just look at some practical examples of the routines acquired during the confinement period, such as teleworking or the purchase of goods and services online, and realize that some of these changes may have become permanent. It is true that personal interaction will continue to be relevant, but the conclusions about the effect of the pandemic indicate that this will be a catalyst for accelerating the adoption of new trends.

In addition to the forced changes in consumption habits, with many using the internet for the first time to carry out transactions that they would not otherwise be able to do, companies, institutions and above all governments have accelerated their plans following the pandemic to deal with with a world with more physical barriers.

It is natural that in the exit strategy from the crisis, many of the countries' recovery plans are based on investment in digital infrastructure, which allows their economies to initiate plans for the transformation of the business fabric that translate into greater resilience and more potential for value creation a mid-term. This scenario was very evident in the behavior of the US technological giants on the stock exchange in the last six months, which have shown themselves to be highly resilient in terms of operations and profit growth, when compared to other companies in more traditional sectors of the economy.

About half of private consumption in developed economies could be done online in 2030

Taking all these factors into account, it is very likely that private consumption will have an increasing expression on digital channels. Likewise, companies should invest more in technology and automation processes that allow them to reduce fixed costs, as well as create resilience in the face of future situations, similar to the current one, in which social distance is relevant.

Also in this context, the greater maturation with regard to the cost of industrial automation equipment, could allow the six-fold increase in the current number of robots in the production chain by 2030 (according to a study by Oxford Economics, “How Robots Change the World”, from 2019).

Expectations point to a strong change in the patterns of use of new digital technologies in the coming years. According to some analyzes (HSBC, Euromonitor) within a decade, half of the consumption of goods in developed markets will be able to be traded online, in a world where half of the population must be connected to the internet. This is a scenario that opens the door to major changes, with opportunities that are certain, but also with potentially destabilizing situations that may require some attention on the part of institutions and regulators.

Potential changes arising from the rise of the digital economy pose additional challenges

A new economy based on greater connectivity, disintermediation and more accessible technology will trigger significant changes. Right from the start with regard to work habits, where flexible and remote work can remain a partial routine in sectors where it is already being implemented as a health response to the pandemic. The decrease in the time spent in the workplace, and the consequent decrease in the time needed in transport, may allow a change in the decision to choose the place of residence (benefiting the cities in the periphery), especially if this practice allows 30% to 40% of teleworking.

Another change is related to the deflation effects associated with the innovation process, which allows, in a context of high implementation, companies to obtain significantly lower production costs (through greater automation) and greater transparency, given the potential price comparison in an online competition regime - which will cause lower levels of inflation than would happen under normal conditions.

Finally, there are challenges that governments and regulators will have to face. The difficulties with the digital transition, especially in the component of less qualified employment, which will go through greater difficulties in inserting itself in the new segmentation of created offer, and the difficulties of capturing the real level of economic activity, since the transactions will be based more and more more in digital format to the detriment of the traditional approach and also due to the fact that many goods are transformed into services (ex: music, previously sold on CD support, today is sold on streaming) are some examples of the obstacles to overcome.

'Bottoms up': inequality and the crucial role of the state and regulators in ensuring balance

Many low-income people do not have digital literacy or access to technology to successfully transition to a more connected and digital world, which will limit the qualifications needed for many of the jobs that are created, or limit the ability of children these low-income households to progress in the education system.

In a way, these weaknesses were already exposed during the period of confinement, with the digital exclusion creating situations of inequality, both in education and in distance work, so it will probably be the biggest challenge that States will face for ahead over the next decade.

It may happen that the impact of automation ends up creating enough jobs to balance those it will destroy. But it will take time, and the need to adapt will require a debate on ways to ease the pressure on employment, with solutions such as universal basic income (RBI) or taxation on automation (robot tax) to occupy a central place in discussions in the coming years.

Guaranteed is the increase in the role of States in this process of controlling inequality, but also in managing the balances related to the investments in infrastructure necessary to leverage the digital revolution, and also with regard to the innovations necessary to correctly tax the new digital economy.

Likewise, regulation will also face important challenges in the areas of database management and use, transparency in transactions and cybercrime. Tasks that will require cooperation efforts between States, which could make the international community more interconnected and lead to an inversion of the recent increase in protectionism at the global level, perhaps by strengthening world institutions, although it may also originate new tensions - depending, most likely, on progress that has been made in creating a new social pact with citizens. On this ability to create balance, much will depend on the success of the digital revolution as a creator of value for human society.

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