The Pandemic and Push Towards a Digital Economy: Greater Inequality?

One of the supposed silver linings of the Covid-19 pandemic has been the acceleration towards a digital economy. Lockdowns and social distancing measures have hastened the adoption of technologies of the Fourth Industrial Revolution (4IR) that enable work-from-home arrangements and remote learning. While this acceleration is generally welcome, there is concern that it may increase inequality within and between countries, further increasing the digital divide in Southeast Asia. The adoption rate of these technologies has favoured the more developed members, but preparedness in the newer members — Cambodia, Laos, Myanmar and Vietnam (CLMV) – has lagged. This will widen development gaps in the region if left unaddressed.  

Apart from digital infrastructure being limited in CLMV, access to what is available can vary by income class within these countries. The poor are less likely to have the means to access this infrastructure and be further marginalised as a result. More concerning is the threat to their jobs, as automation and robotics take hold initially in the low-skilled, repetitive tasks before progressing to more complex activities. Apart from the greater risk of unemployment in the lower-skilled categories, low wage growth in this sector relative to higher skills, some of which could demand a huge premium, will add to wage and income inequality. Therefore, not only is inequality between countries in Southeast Asia likely to increase, a rise in income and wealth disparities within them appears unavoidable. 

Although attention has focused on how the 4IR can exacerbate inequality, various countervailing effects are often overlooked, perhaps because they will take time to emerge. The 4IR can produce offsetting effects that enhance economic inclusion, increase connectivity, improve agricultural incomes, and support micro and small and medium enterprises (MSMEs). 

4IR technologies will create new ways for citizens to connect and trade with each other, simply through increasingly affordable smartphones. For instance, developments in fintech are enabling the two-thirds in Southeast Asia that are unbanked to save in secure instruments to enlarge their asset base and escape cycles of poverty and inequality.

Smartphones enable the poor to access new sources of information such as high-frequency news and market prices that can materially affect incomes. In a famous study undertaken in South India, Robert Jensen showed how the adoption of smartphones by fishermen and wholesalers dramatically reduced price dispersion and eliminated waste, increasing consumer and producer welfare. Smartphones also enable new forms of education, such as online courses and virtual classrooms, and new healthcare services, such as telemedicine linked to diagnostic pills.

4IR technologies will create new ways for citizens to connect and trade with each other, simply through increasingly affordable smartphones.

Smartphones give farmers better access to prices, weather information, and knowledge about soil, seeds and fertiliser. They may also enable a “sharing economy” to take hold, whereby farmers who cannot afford to buy expensive mechanical equipment can rent it by the hour from other farmers by accessing online sharing sites.

MSMEs are often constrained by a lack of access to business and financial services, but blockchain technology has the potential to dramatically increase the security of cross-border financial transactions and logistics even in the poorer countries of Southeast Asia where these services are relatively underdeveloped.

While these factors can offset some of the negative impacts on inequality, addressing rising unemployment amongst the low skilled and widening wage disparities due to the skills premium will be key if inequality is to be addressed. 

As an immediate response, enabling greater mobility of unskilled workers would curtail unemployment in labour-abundant countries and help sustain growth in labour-scarce ones. Even in labour-abundant countries like Indonesia and the Philippines, importing skilled labour can bring in much-needed competencies while capital can come with diffused technology, both of which can spill over to benefit the local economy.

Divergent demographic trends will add to the need for greater factor mobility. While South Asia (especially India, Nepal and Pakistan) and the newest members of ASEAN (especially Cambodia, Laos and Myanmar) have relatively young populations, the rest of Southeast Asia and East Asia is ageing rapidly. Countries in the region with young populations also tend to be capital importers, while ageing economies tend to be capital exporters. Policies that enable greater factor mobility can help reduce differences in capital-labour ratios and assist in productivity catch-up in the region to promote more inclusive growth.

Such policy changes must first overcome anti-globalisation forces, reinforced by the pandemic. If successful, the growing calls for “reshoring” of supply chains and self-sufficiency would curtail rather than promote factor mobility. In this environment, regional initiatives like the ASEAN Economic Community and the Regional Comprehensive Economic Partnership that aim to liberalise trade may help. That is, commodity exchange can partly substitute for factor movement in achieving factor price equalisation. 

The pandemic’s push toward a digital economy may worsen inequality, but it will also increase inclusion in some areas that will serve as an offset. If policies that increase trade, labour, or capital mobility can be implemented, then short-run adjustment costs will be eased. Overall, some overhauls might be needed. This includes transforming systems of education and learning, and creating deeper local capital and financial markets required to address long-term challenges posed by the 4IR, including rising inequality.

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