Embracing the Digital Economy and Smart Society

ICT Technological Transformation Drives the Digital Economy

Due to changes to international economic structures, China is facing developmental bottlenecks in the ‘new normal’ of the current macro-environment, resulting in the economy slowing from ‘high-rate growth’ to ‘mid- to high-rate growth.’

This ‘new normal’ has four defining characteristics: 1) Abandonment of traditional development modes; 2) internal economic risks, huge downward pressure, and requirements for growth-pattern transformation; 3) internal conflict between steady growth and structural adjustment; and 4) greater ‘middle-income trap’ risk.

Facing complicated economic situations and severe challenges at home and abroad, China must shift from ‘low- and mid-level development’ to ‘mid- and high-level development’ and promote structural reform. The government is very concerned about the development of the digital economy and has drafted many policies in recent years to better define its role in the digital economy: Digital economy was mentioned in the Report on the Work of the Government for the first time in 2017. In this report, Premier Li Keqiang called for more efforts to deepen the development of ‘Internet Plus,’ accelerate the growth of the digital economy, and bring more benefits to enterprises and the public. The digital economy has become an important part of China’s national development strategy.

At present, the world is undergoing a profound technological revolution. New technologies that once seemed inaccessible are now widely deployed, and technological advances are promoting industrial, social, and national development in various domains.

The latest cutting-edge technologies are rapidly integrating into people’s daily lives, and play an increasingly important role in the operations of enterprises. More and more enterprises are integrating connectivity, cloud, Big Data, the Internet of Things (IoT), and Artificial Intelligence (AI) into core production processes and management systems to improve efficiency and competitiveness. We are embracing a fully connected and super-intelligent world that will benefit all aspects of human life and drive economic prosperity.

• Technological Revolution Promotes Development Process Evolution

Carlota Perez, a Venezuelan-British evolutionary economist, believes every big technological revolution forms a techno-economic paradigm that adapts to it in two stages: The first stage is marked by the rise of emerging industries and the widespread installation and application of new infrastructure; the second stage is marked by prosperous development and profits from the first stage’s emergent industries (each phase spans nearly 30 years).

With the emergence and application of new Information Technologies (IT), the production factors and production relations affecting contemporary economic activity have changed. The IoT, Internet, cloud computing, Big Data, and AI have become the new production factors.

Production changes, such as the rise of a sharing economy, crowdsourcing, and network collaboration, have reconstructed production relationships and led to the birth of the digital economy. U.S. magazine Bloomberg Businessweek defines the digital economy as: Against the backdrop of economic globalization, the IT revolution has driven economic growth and the high-tech industry has become the leading business sector. The digital economy is the economic and cultural culmination of informatization and characterized by low unemployment, low inflation, low budget deficits, and high growth.

Currently, the world is in a new era of Big Data transformation. Mobile Internet, smart terminals, and new sensors are rapidly spreading to every corner of the globe. Accenture expects that global data usage will reach about 44 ZB (1 ZB = 1,000,000,000,000,000,000,000 bytes, or 1 billion terabytes) by 2020, covering all areas of economic and social development. The impact of this will reshape the productivity development model; restructure production relations; improve industry efficiency and management; and improve the precision, efficiency, and predictability of governance. There is no doubt the technology system represented by the new generation of IT will create the next generation of Internet ecology, trade form, and manufacturing form.

• Digital Economy Drives Economic and Social Development

In December 2016, General Secretary Xi Jinping pointed out in the 36^th collective study of the CPC Central Committee Political Bureau that the world’s economy is transforming toward one where the network IT industry plays a significant role. We must seize this historic opportunity, use informatization to gain momentum, and leverage that momentum to achieve new development.

In the past, the Information and Communications Technology (ICT) sector has accounted for a small proportion of the entire economy, but its role is becoming increasingly prominent.

ICT sectors from constituent countries of the Organization for Economic Co-operation and Development (OECD) account for 6 percent of the Gross Domestic Product (GDP) of the organization, and the figure is much lower in developing countries.

However, in recent years, the emergence of technologies such as cloud computing, Big Data, the IoT, and ICT has increased the Total Factor Productivity (TFP) and made remarkable indirect contributions to economic growth. The rapid application of digital technologies in the economy has produced wide-ranging benefits, and it is evident the digital economy is becoming a highlight of the overall economy for many nations. The digital economy is becoming society’s new driving force of economic development and its growth rate in each country is higher than that of the overall (traditional) economy.

Figure 1. Comparison of national digital economic growth and overall economic growth in four countries

The value of the digital economy in promoting the development of a society is embodied in 5 aspects: Reconstructing business models, improving labor productivity, driving industry upgrades, promoting mass entrepreneurship, and creating more jobs.

China Should Pursue the Digital Economy Dividends

In the current macro-environment, the digital economy is a strategic necessity for China’s transformation from an economic giant to an economic power. The digital economy is a major driver of innovation and efficiency, as well as an effective way to achieve economic optimization, economic transformation, and robust development.

The construction of a digital economy is a systematic project, which will promote economic and social development in five aspects:

• Reconstructing Business Models

First, with the advent of the digital economy, traditional industries are facing transformation and labor re-division challenges — and traditional business models are being reconstructed.

The freedom brought on by the Internet has subverted traditional industries, ushered in disruptive innovation, removed information barriers, and changed the intermediate phases of transactions. The shift from large-scale production to customization is reshaping the division of labor and making data a core enterprise asset. In addition, new transaction models (such as the shared economy) in the digital economy redefine user consumption models. Leasing, as a service model, is replacing purchasing. Blockchain emergence and the prevalence of mobile payments will encourage additional economic development models, and the digital economy will afford low unemployment, low inflation, low fiscal deficits, and high growth.

• Improving Labor Productivity

According to the World Bank’s report in 2013, while China enjoyed the largest manufacturing output in the world, the country’s overall labor productivity was USD 15.5 thousand (CNY 103.3 thousand) per worker (GDP per capita), which was seven times lower than that of the U.S. — USD 107.2 thousand (CNY 714.8 thousand) per worker — and even lower than that of developing countries like Brazil.

China’s labor productivity was only one-twelfth, one-tenth, one-ninth, and one-sixth of that of the U.S. in the information communications, manufacturing, finance, real estate, and commerce industries respectively. China’s labor productivity for the wholesale retail industry was among the top in the world, but only a quarter of that of the United States.

Against this backdrop, the effective utilization and vigorous development of the data economy can promote the improvement of labor productivity. Research from U.S. consulting firms showed that in all enterprises, labor productivity with a high informatization usage rate was 60 percent to 90 percent higher than that of enterprises with a low informatization usage rate. In the service industry, the contribution rate of the digital economy was two-to-three times higher than that of traditional models. Informatization drives process reconstruction and optimization while Big Data and IoT improve production automation capabilities.

• Driving Industry Upgrades

China is facing demographic dividend losses and greater manufacturing costs. According to data from the National Bureau of Statistics, regarding population distribution by age, China will soon become an ‘aging society.’ By 2050, the largest percentage of the population will be between the ages of 60 and 69, and the demographic dividend of the manufacturing industry will gradually disappear.

At the same time, China faces the pressure of increasing manufacturing costs. Boston Consulting Group (BCG) reported that China’s manufacturing costs are basically the same as those of the U.S. when natural gas and electricity manufacturing costs are taken into consideration, indicating a gradual cost-advantage loss for China’s manufacturing industry.

The gradual adoption of the digital economy throughout the manufacturing industry can promote the convergence and transformation of the traditional industry’s ecosystem chain and gradually improve the competitiveness of Chinese manufacturing.

In industry chain sectors such as marketing, service, R&D, and manufacturing, the more open the sector is, the deeper the integration between the industry chain and informatization. In this way, the sectors can provide personalized products, manufacturing as a service, process virtualization, organization decentralization, and manufacturing resource cloudification.

China is vigorously promoting ‘China Manufacturing 2025’ to encourage industry development through the in-depth integration of industrialization and informatization.

The comprehensive adoption of the digital economy will promote the application of China Manufacturing 2025, drive service industry development, and promote industry upgrades. Through the digital economy, China’s manufacturing industry can evolve toward both ends of the ‘smiling curve.’

• Promoting Mass Entrepreneurship

China is vigorously promoting mass entrepreneurship and innovation. In developed countries, Small- and Medium-sized Enterprises (SMEs) act as important engines in social and economic development. For example, SME GDP contributions reached 67 percent in Italy, while in China the figure was only 37 percent — far lower than in many developed and even developing countries.

The digital economy innovates traditional social services, and caters to a large number of start-up SMEs. In a digital economy, long-tail demands will drive the birth of numerous SMEs and create abundant innovation opportunities. On top of this, the digital economy provides fertile ground for development, which can lower the barrier for innovation and greatly improve labor productivity for SMEs.

• Creating More Jobs

The digital economy can create more jobs attracting middle- and high-end talent. The World Bank tracked this trend in the workforce employment ratio among developing countries from 1993 to 2010. According to its report, the demand for low-skill jobs in China was declining, reducing the number of many traditional positions, especially physical labor-intensive positions.

However, China was distinct in that the demand for middle-skill jobs was growing rapidly, which was in stark contrast to situations in all other countries. This phenomenon demonstrated the rapid rise of China’s middle class and the continuous upgrade of China’s manufacturing industry.

According to statistics, China had more than 7.3 million college students in 2014. By comparison, the number of college students was 2.7 million in the U.S. and 400,000 in Germany. After more than 10 years of collegiate development, the number of obtained higher education degrees in China has exceeded 120 million.

Cities that more deeply adopt the digital economy become more attractive to middle- and high-end talent, and can provide more jobs for those individuals.

The digital economy will create more jobs and facilitate population migration during urbanization, which is an important aspect of China’s future economic development.

In 2030, China’s urban population proportion is expected to reach 70 percent. This means more than 300 million people will migrate from rural areas to cities over the next 10 years. Providing job opportunities for those people will become an important challenge.

IT innovation can meet urbanization service requirements, refine the industrial division of labor, and create new positions for employing urban residents. According to the World Bank, the disappearance of one position from the traditional industry will bring 2.4 new positions in the digital economy.

Embrace the Digital Economy and Move toward a Smart Society

The 19^th National Congress of the Communist Party of China proposed that China should promote the in-depth integration of the Internet, Big Data, and AI with the real economy, and build network power, digital China, and a smart society. This is the guiding principle of digital economy construction in the new era. China urgently needs to ride the wave of the digital economy to inject vitality into overall economic development.

• Digital Economy Requires Full Connectivity

As digital technologies play a more important role in the total reconstruction of business logic, information infrastructure construction becomes a source of momentum for the digital economy, and even the real economy, to achieve quality growth.

As the saying goes, “if you want to get rich, build roads first.”

ICT infrastructure paves the way for the information connectivity that serves as the foundation of digital economy development. According to Huawei’s Global Connectivity Index (GCI) 2017, the multiplier effect brought by ICT infrastructure investment is becoming apparent.

In 2016, a USD 1.00 (CNY 6.67) investment in ICT infrastructure led to a USD 3.00 (CNY 20.00) rise in GDP; and by 2025, for every USD 1.00 (CNY 6.67) investment, the average return to GDP will be USD 5.00 (CNY 33.34).

Governments need to enact more positive policies to encourage and lead increased information infrastructure investments. In other words, a determined and far-sighted government should adopt active and effective policies to help industries better achieve digital transformation.

• Government Is the Most Important Driver of Digital Economy Development

With its huge scale and influence, government plays a key role in improving the productivity, participation, and creativity of an entire society; and is thus uniquely well suited to dictate the application of digital economy strategies.

In the pursuit of digital economy development, government bears the following responsibilities: It should not only realize its own digital transformation, but also drive the digital transformation of enterprises and social departments to exert a far-reaching influence.

According to the management consulting company McKinsey & Company, with existing ICT technologies, the digital transformation of governments and all industries can generate over USD 1 trillion (CNY 6.67 trillion) a year.

• Leading National Digitization and Improving Competitiveness

In promoting digital economy development, government should provide guidance and support through capital, talent, tax policy, and other programs to create an environment that helps industries better apply information technologies and Big Data.

In the next 10 years, information technologies with Big Data as the core element will become new core competitors. More and more countries have developed national strategies to evolve into digital countries. Some examples include Germany’s Industry 4.0, Singapore’s Smart Country, Kenya’s National ICT Development Plan, the E.U.’s Horizon 2020 and Digital Agenda, the United States’ Smart Earth, and Japan’s Resurgence Strategy.

In the progression toward an intelligent society, the government should make full use of the latest ICT and platform construction to realize new governance models, and transform toward a people-centric digital government through data sharing and analysis. In addition, through collaborative operations and policy guidance, the government needs to promote the digitization of industries and social departments, and enable evolution toward Smart Cities and a digital country.

Two successful examples of governments playing an active role in the move toward Smart Cities (and ultimately Digital Countries) are Yanbu Industrial City in Saudi Arabia and Guilin in China. Yanbu Industrial City seized the opportunity offered by the Saudi Arabian government’s transformation strategy Vision 2030, and initiated Smart City construction to meet modern industrial city construction requirements. And Guilin cooperated with Huawei to develop three major functional sectors: Lijiang, Guilin Old City, and New Industrial City — achieving converged development of the city and its industries.

These two typical cases illustrate how governmentally-guided digital economy development can bring new value to cities.