Productivity Commission on Digital Disruption

Findings from today's Productivity Commission's Digital Disruption report -

Impacts of disruption on markets and competition 

2.1 The distinction between services and manufacturing is declining, with design and pre and post sales service parts of the production cycle becoming increasingly important sources of value added. This has implications for:

• the importance of scale in production 

• the types of capital firms need 

• how much work happens within the firm and how much is outsourced 

• the types of jobs that will be created and replaced 

• the dynamics of the business cycle. It also has implications for the National Accounts, including adjusting for changes in quality, and the long term comparability of industry classifications. 

2.2 Clarity in how and when infrastructure investment decisions will be made assists firms that are developing and adapting new technologies. Uncertainty around future technology and infrastructure needs is not a reason for inaction by governments — the costs of inaction, in terms of slower diffusion in technology, can be widespread and significant. 

2.3 Digital technologies are allowing firms to outsource more of their production. This outsourcing is based on access to skills as much as low cost labour, offering greater opportunities to firms in high labour cost economies. Trade policy has been slow to adapt. Substantial increases in outsourcing across international borders may necessitate government attention to:

• secure movement of data across borders 

• regulatory requirements for delivery of service exports in other countries 

• barriers to outsourcing imposed by differential treatment across industries and products in bilateral and regional trade agreements and in behind the border policies 

• workability of rules of origin with many disparate sources of inputs to production. 

2.4 Digital platforms allow households and non market organisations, such as research facilities, to engage more in the market economy by ‘sharing’ access to their under utilised assets. This poses structural adjustment issues for industries that have traditionally faced little competition due to regulations, such as taxis and short term accommodation. More effective utilisation of under employed assets, whether market or non market, is a positive economic outcome. 

2.5 Digital technologies are changing the sources of market power, with control over data and networks providing new means for firms to hinder entry and extract rent from customers.

• The length of time and extent to which firms can exercise market power is highly uncertain, requiring active monitoring rather than pre emptive action. 

• New regulatory tools may be needed to address these very different sources of market power arising with the digital economy. Aspects of third party access regimes could be explored as a relevant approach. 

2.6 Digital platforms can help overcome information asymmetries, which have been a common justification for regulation. This can allow governments to reduce the restrictiveness of regulations seeking to provide consumer protection, subject to confidence in the information provided. 

2.7 Like previous waves of technology, digital technologies should translate to productivity improvements. Indeed, the low marginal cost of replication means that intangible inputs should fall in price, boosting firm profits. However:

• consumers may capture a larger share of growth in productivity where this is delivered in terms of higher quality products, and where enhanced competition drives down prices 

• some digital products can be difficult to monetise 

• the value of data and networks can result in a winner take all model in some digital services. 

Impacts of disruption on workers and society 

3.1 Developments in digital technologies, such as sensors and machine learning, are expected to widen the boundary of the types of tasks that can be automated. But there remain tasks that have proven difficult to automate, including those requiring perception, or creative and social intelligence. Just because a job can be automated does not mean that it will be. 

3.2 The 'gig' economy is in its infancy, making its future effect on the nature of employment uncertain. But if the gig economy develops quickly and its spread is wide, there will be risks that need to be managed. While governments need to address real concerns, blocking these technologies is not an appropriate response. In the longer term, depending on the scale of change, governments may need to consider whether:

• changes to workplace relations regulations are required to accommodate a growing category of employment 

• the income support system needs to be changed to ensure it is not a barrier to workforce engagement and helps reduce income volatility for low income workers. 

3.3 Simply increasing the share of STEM graduates is unlikely to resolve the low rates of adoption of digital technologies by firms. Given the relatively high underemployment of STEM graduates and apparent underutilisation of STEM skills, the current approaches are not delivering the problem solving skills needed for technology rich work environments. Beyond delivering a high competency in literacy and numeracy at the school level, initiatives could include reviewing teaching methods, increasing flexibility of university degrees and improving information on employment outcomes for students to help inform student choice. 

3.4 The automation of many tasks in the workplace, with large labour saving technological advances, has not led to unemployment rates trending upwards over long periods of time. However, there is concern in parts of the community that the pace of change will accelerate, leading to substantial unemployment in the future. But dire employment scenarios remain speculative given the considerable uncertainty about the impact of automation on employment. Past experience with structural change suggests some workers will find it difficult to secure new jobs. Government should focus their efforts on assisting displaced workers and resist pressure for industry protection or assistance. 

3.5 Wages in Australia have increased at all income levels in recent decades, however they have increased more in higher deciles. Technological change that increases demand for high skilled workers has played a role in the widening of the wage distribution. Ensuring the benefits from future technological change are shared will be an ongoing policy challenge for government. Raising the supply of skilled workers will be part of the solution, along with the continued role of Australia’s tax and transfer system in reducing income inequality. 

Implications of disruption for how governments operate 

4.1 The pace of change has implications for how governments undertake regulatory functions. Some regulations and regulatory approaches are explicitly preventing the development and efficient adoption of technologies. In principle, governments should:

• adopt a ‘wait and see’ approach to new business models and products rather than reacting quickly to regulate what may be unrealised risks 

• where relevant regulations already exist – adopt fixed term regulatory exemptions for innovative entrants that maintain overarching regulatory objectives (as recommended by the Business Set up, Transfer and Closure inquiry) – use the opportunity of disruption to reform markets where there have been undue regulatory restrictions by removing restrictions that impose a competitive disadvantage on incumbents rather than extend existing restrictions to new business models 

• where regulation is needed to manage negative externalities, take a proportionate approach (that is, balance the benefits and costs) and regulate outcomes not technologies 

• take an evidence based approach drawing on Australia’s scientific agencies in making assessments of the risks to the community from new technologies 

• regularly review regulations affected by digital technologies, especially where an increasing share of activity is mediated through digital platforms 

• assign the responsibility for reporting to the parties best able to comply at least cost, and design transparent mechanisms for dealing with complaints. 

4.2 Governments do not necessarily need to be involved in the development of standards, but where standards are mandated (as a form of technical regulation), following good regulatory principles would mean that standards:

• are the minimum necessary to achieve regulatory objectives 

• maximise interoperability 

• follow international standards where practicable and relevant, unless use of standards based on Australian technology would deliver higher net community benefits 

• are developed in consultation with the private sector. In negotiating international standards, the interests of the Australian economy rather than individual businesses should be of primary consideration. 

4.3 Governments contribute to promoting innovation across the economy by delivering a low cost operating environment for innovative activities. This could include:

• removing disincentives for universities to work collaboratively with business and encouraging the sharing of knowledge 

• ensuring transparent policy objectives and predictability in those areas most affected by developments in technologies 

• improving the functioning of cities to attract and retain highly skilled workers and innovative firms. 

4.4 To improve the reliability and usefulness of information provided by digital intermediaries governments could:

• reduce regulations aimed at the provision of information on a product or service, where consumers are more effectively able to get this information through another avenue (such as an online rating system) 

• encourage digital platforms to develop industry standards to improve the reliability of feedback and right of reply and prevent the use of gag clauses on consumers 

• encourage industries to develop a common or standardised language around product offerings to assist consumers in making comparisons 

• ensure existing broader governance structures for consumer complaints are sufficient to give consumers and businesses confidence in the use of digital intermediaries. 

4.5 Digital technologies allow for more pervasive collection of data on individuals and firms and can be a medium for harassment and security breaches. This may change what is needed in order to:

• protect individuals privacy 

• prevent the unlawful use of information 

• maintain the integrity of digital networks. The case for government action in these areas relies on ensuring that the likely benefits of any restrictions outweigh the costs of restrictions to the community. 

4.6 There remains further scope for regulators to adopt new technologies that reduce the burdens incurred in obtaining regulatory outcomes, undertake more effective risk based assessment, and substantially improve engagement and the targeting of monitoring and enforcement activity. 

4.7 Better information systems and scope to monitor services delivered and their outcomes could improve the efficiency and timeliness of human service delivery by:

• allowing consumer choice to play a greater role in the delivery of human services 

• using linked information on services and customers to better target service delivery and introduce more integrated services 

• reducing the cost and improving the safety of people involved in areas such as environmental management and emergency services. 

4.8 Technologies embedded in infrastructure and greater use of digital platforms to link infrastructure with users and suppliers offer governments considerable scope to:

• assess infrastructure usage and the responsiveness of demand to pricing and to introduce efficient pricing technology 

• augment and maintain public infrastructure in ways that minimise disruption to its use 

• optimise investment in public infrastructure, better matching the build requirements to evolving needs. 

4.9 Governments (particularly at a subnational level) have already made increasing use of digital technologies in on the ground service delivery. Some adoption of technology in regulatory processes is also evident. There remain, however, issues that governments need to confront before the benefits of digital technologies can be more widely realised.

• A risk averse culture in the development of policies that are wide reaching within the relevant jurisdiction could be assuaged by measures such as: greater use of policy trials, relying on precedents from other jurisdictions; and drawing on recommendations and advice of independent agencies. 

• Skill sets within the public service need to evolve in tandem with technological change. The capacity of agencies to recruit staff with relevant skills and shed those with inadequate skills could be enhanced by more flexible performance management and termination conditions in agency enterprise agreements. 

• A sharing of data and cooperation between agencies would improve capacities to solve complex problems that do not fit neatly into the competencies of a single agency. 

• Governments need to find ways to: – exploit, in their program delivery and policy making processes, the increased transparency that comes with digital technologies – avoid locking in details of policy responses at early stages without scope for genuine re evaluation ‘en route’ to the end objective.

The PC's chair comments

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.

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. Broader protections for an individual's rights (such as with control of personal information) and to support society's moral and ethical mores (relevant to technological advancements into artificial intelligence, remote sensing and medical research) will require ongoing government attention informed by scientific evidence.

Digital technologies offer governments scope to improve their own service delivery, including through better assessment of risk in regulatory activities, integration of human services, and infrastructure management. Digital technologies will also make governments more publicly accountable than in times past and raise pressure for greater transparency. By showing leadership in their own practices, re designing regulation to enable rather than block the adoption of digital technologies, and mitigate community level risks where practical, governments can do more than they appear to envisage today.