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Digital Disruption: What Do Governments Need to Do?

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Digital Disruption: What Do Governments Need to Do? Digital Disruption: What do governments Productivity Commission need to do? Research Paper June 2016 Commonwealth of Australia 2016 ISBN 978-1-74037-584-9 (PDF) Except for the Commonwealth Coat of Arms and content supplied by third parties, this copyright work is licensed under a Creative Commons Attribution 3.0 Australia licence. To view a copy of this licence, visit http://creativecommons.org/licenses/by/3.0/au. In essence, you are free to copy, communicate and adapt the work, as long as you attribute the work to the Productivity Commission (but not in any way that suggests the Commission endorses you or your use) and abide by the other licence terms. Use of the Commonwealth Coat of Arms For terms of use of the Coat of Arms visit the ‘It’s an Honour’ website: http://www.itsanhonour.gov.au Third party copyright Wherever a third party holds copyright in this material, the copyright remains with that party. Their permission may be required to use the material, please contact them directly. Attribution This work should be attributed as follows, Source: Productivity Commission, Digital Disruption: What do governments need to do? If you have adapted, modified or transformed this work in anyway, please use the following, Source: based on Productivity Commission data, Digital Disruption: What do governments need to do?. An appropriate reference for this publication is: Productivity Commission 2016, Digital Disruption: What do governments need to do?, Commission Research Paper, Canberra. Publications enquiries Media and Publications, phone: (03) 9653 2244 or email: [email protected] The Productivity Commission The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long term interest of the Australian community. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Further information on the Productivity Commission can be obtained from the Commission’s website (www.pc.gov.au). Contents Introduction from the Chairman 1 Findings 5 1 Digital and disruptive 13 1.1 The focus of the study 13 1.2 What is disruptive technology? 15 1.3 How fast is the pace of change? 21 1.4 The economic impact of new technologies 27 1.5 What role does government play? 32 2 Markets and competition 35 2.1 Impacts on the structure of the economy 36 2.2 Market structures 46 2.3 Conduct of firms and industry 56 2.4 Market performance 63 3 Workers and society 69 3.1 Automation will replace some jobs, but there are limits 70 3.2 Internet platforms and the nature of employment 76 3.3 Skilled workers will be needed to use technology 80 3.4 Automation and structural adjustment 87 3.5 Trends in labour income 92 3.6 Technology can enable participation in the workforce 94 4 Government roles 97 4.1 Government activities that influence development and adoption of technology 98 4.2 Managing the adverse impacts of digital technologies 111 4.3 How digital technology can improve governments’ own processes 120 4.4 More changes are needed to diffuse digital technologies in government 129 CONTENTS iii Appendixes A Conduct of the study 137 B Case study: digital intermediaries and platforms 139 C Case study: advanced manufacturing 161 D Case study: transport technologies 171 E Case study: energy technologies 195 References 217 iv DIGITAL DISRUPTION: WHAT DO GOVERNMENTS NEED TO DO?DIGITAL DISRUPTION: WHAT DO GOVERNMENTS NEED TO DO? Acknowledgements In conducting this study the Commission has engaged with a range of stakeholders through meetings and a focused roundtable. Some parties also provided written input. The Commission is grateful to all those who have given their time to share their experiences and expertise. The report was produced by Lawson Ashburner, Rosalyn Bell, Brent Carney, Jenny Gordon, Timothy Hewett, Paulene McCalman and Daniel McDonald, with refereeing by Ralph Lattimore. The study was overseen by Commissioner Jonathan Coppel. ACKNOWLEDGEMENTS v Introduction from the Chairman The disruptive potential of digital technologies has become a hot topic in recent years. There are calls for governments to add or remove regulations, invest in digital start-ups, and protect the jobs of workers threatened by new ways of doing business. This research paper reviews and interprets expert opinion on disruption in order to inform governments about the policy tasks posed by digital technologies. For the Commission, this review sets a broader framing for the formal inquiries into Data Availability and Use, and Intellectual Property Arrangements. It also provides context for important work that we expect to come to us on productivity growth in a time of apparent digital transformation. With rapid advances in computing power, connectivity, mobility, and data storage capacity over the last few decades, digital technologies offer opportunities for higher productivity growth and improvements in living standards. But they also pose risks of higher inequality and dislocation of labour and capital. Speculation about the effects of technologies often suffer from extreme optimism or pessimism. In the 1930s, several countries were enthusiastically experimenting with using new rocket technology to deliver mail, and in 1959, the United States trialed mail delivery via cruise missile, a proposition that could now be regarded as comical. The Commission has attempted to avoid the overly excited or dire views of the impacts of current digital technologies, while recognizing their potential where evident. There is nevertheless a serious debate amongst economists on whether we are extracting less benefit from today’s digital disruption than from previous disruptions or industrial revolutions of the 1870s, 1920s or even 1980s. The data suggests this is so — Australia, and indeed other advanced economies, has yet to see digital technologies drive significant productivity growth or result in substantial disruption at a sector or economy-wide level. This is not a matter of minor technical interest. Productivity in its clearest form — multifactor productivity — has not recorded the kind of growth that would be expected from a period of change described as ‘disruptive’. While measurement of the productivity of new technologies is often problematic, US analysis indicates that measurement issues do not sufficiently explain the drop off in productivity. The open and critical questions are: whether the current economic lassitude is primarily a delay before the onset of significant social and economic changes driven by digital disruption; whether government policies (or lack of them) might themselves be frustrating the realization of the benefits; or whether the effects of this disruption are less fundamental than initially thought. INTRODUCTION FROM THE CHAIRMAN 1 The scope for pro-productivity policies — drawing on both digital and non-digital opportunities — will be examined in the Commission’s future work. This report contributes to that task by exploring the potential impacts and challenges of digital technology for markets and competition, workers and society, and the way governments operate. With a few exceptions, governments across Australia have, to date, evidenced largely reactive responses to dealing with digital technologies. Despite promising statements, we have also been unremarkable in our adoption of technologies to improve public sector processes and service delivery. In a short paper such as this, we do not seek to answer big policy questions in any comprehensive way but rather provide an informed direction about where policy may need to go. And while we hope to avoid ‘rocket mail’ errors, we expect that not every Finding reached in this report will ultimately prove accurate. But absence of conjecture in this space would be both timid and unhelpful to the development of a productivity policy agenda. The Commission anticipates digital technologies will continue and likely accelerate changes in Australia’s economy. Digital technologies offer greater scope for more distributed production, and facilitate the trend toward more service elements — pre- and post-production services — in manufactured and other goods. Data is a new source of market power but, in the face of the digital economy, advantage may also only be short lived. How governments deal with market power will be important for both those who control, and those who want to use, data and networks. Digital platforms are enabling greater utilization of assets, including research and household assets. Where governments enable this, firms, households and consumers stand to benefit from a greater product range, new sources of income and often lower prices. More generally, digital platforms afford more power to consumers than in the past — they can share views on products and make more informed consumer choices. Some regulations aimed at improving consumer information may become redundant; those aimed at ensuring information is authentic and platforms are not gamed, may become critical. There is much governments can do to enable the creation and take-up of digital reform opportunities without favoring particular technologies. In markets that are currently highly regulated but where digital technologies allow more producers — electricity generation is one such case — governments will need to review the institutional and regulatory arrangements to ensure that new technologies can compete for market share. More generally, standards to support interoperability of digital technologies and ensuring investment in enabling infrastructures (such as reliable and readily upgradeable communications networks), can help with rapid technological diffusion. There will be adjustments that come with digital disruption. Some workers will struggle to adjust to changes in demand for their skills and new, more flexible but less reliable, work options. Australia’s social safety net will remain important in mitigating risks for workers and lessening the effects of a widening distribution in incomes.
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