TWN Info Service on UN Sustainable Development (Apr18/08)
20 April 2018
Third World Network

Plus and minuses of digital platforms for South
Published in SUNS #8666 dated 20 April 2018

Geneva, 19 Apr (Kanaga Raja) - Digital platforms lead to efficiency gains such as from lower transaction costs, lower consumer prices and increased access to markets, but also raise concerns that the market power of certain platforms may lead to abuse of dominant positions, data protection and privacy issues, ta x erosion and negative effects on jobs.

This is one of the main conclusions highlighted by the United Nations Conference on Trade and Development (UNCTAD) in a Secretariat Note prepared for the second session of the Intergovernmental Group of Experts (IGE) on E-Commerce and the Digital Economy, meeting here from 18-20 April 2018.

The second session of the IGE on E-Commerce and the Digital Economy is also taking place during UNCTAD's E-Commerce Week (16-20 April) where issues such as consumer protection online, trade logistics in the digital era, digital identities, digital platforms and competition policies, trade policies and e-commerce, and e-commerce developments in Africa and South Asia are being discussed.

The UNCTAD paper, titled "Fostering development gains from e-commerce and digital platforms", addresses the role of digital platforms for electronic commerce in developing countries.

It also highlights recent e-commerce trends, the nature and implications of digital platforms, the role of local platforms in developing countries and the main barriers to e-commerce and participation in digital platforms in developing countries.

According to the UNCTAD paper, digital platforms lead to efficiency gains derived from lower transaction costs and information asymmetries supported by rating systems, lower consumer prices, increased access to markets, more competition, better use of under-utilized resources, flexibility for providers of services and benefits for the planet through more efficient use of resource s (if reducing waste).

However, it said, "there are concerns that the market power of certain plat forms may lead to abuse of dominant positions, data protection and privacy issues , tax erosion and negative effects on jobs."

Lower cost of consumption may increase the volume of resource use and carbon emissions.

Moreover, net benefits can be unevenly distributed, which may call for redistribution policies, UNCTAD said.

"In a broad sense, economic policies and regulations should aim to maximize the benefits and minimize the costs of digital platforms," it added.

The UNCTAD paper said that new digital solutions, including for e-commerce, are creating new opportunities for companies of all sizes to engage in domestic and international trade, notably by increasing market access for customers, supply chains and competitors, and by reducing trade costs.

This is affecting micro-enterprises and small and medium-sized enterprises (MSMEs) in countries at all levels of development, but in different ways.

Potential benefits for developing-country companies and consumers range from greater efficiencies to deeper specialization and division of labour, greater gains from variety and predictability for all players, as well as lower costs and prices of inputs and final products.

Digital technologies can also be used to empower women entrepreneurs.

"However, such gains are not automatic. In order to harness digitalization in support of trade, investments in information and communications technology (ICT) infrastructure should be complemented by an appropriate set of regulations and institutions, and support for skills development," the paper suggested.

"Current gaps in terms of e-commerce readiness, between and within countries, imply that benefits from e-commerce are not equally distributed," it said.

OPENING REMARKS BY UNCTAD DEPUTY SG

In some introductory remarks at the opening plenary session of the IGE on Wednesday, Ms Isabelle Durant, the Deputy Secretary-General of UNCTAD, said that since the beginning of the week (the E-Commerce Week) "we have said very many times that the digital economy is evolving rapidly and, at the same time, so are digital platforms."

For example, between 2012 and 2017, the number of users of the Facebook platform went from 1 billion to 2.2 billion. The number of online shoppers globally went from 600 million in 2010 to around 1 billion in 2016 and the quickest progress is happening in developing countries.

In fact, around 90 percent of new internet users in the past five years live in developing countries.

It is highly likely that this trend will be further confirmed in the coming decades because the internet growth is most expected outside of the advanced economies, she said.

The explosion of users is happening primarily on the social media. Between 60-80 percent of new users are active on social platforms whereas the percentage of online shoppers often remains around or below 10 percent.

As coincidence would have it, said Ms Durant, the discussions today and in the following days follows recent revelations on the use of data by certain social networks for purposes which go beyond merely influencing our consumption behaviours. In fact, it sought to influence our economies and our societies in general.

"What we do need to bear in mind particularly in this media storm is that t his digital economy which has emerged essentially overnight, is being driven by data and it is based on data."

"This digital economy has much broader implications than somebody simply communicating online or having a collaborative economy online, something which we are finding quite difficult to define," she said.

Highlighting that new regulations on data protection will soon be entering into force in the European Union, she said that this will mean that companies have an obligation to protect the personal data of each and every citizen of the European Union with which they trade, including employers, suppliers and consumers.

"That of course will have repercussions on the way of doing business in this economy which is increasingly data-based," said Ms Durant, pointing out that almost 60 percent of developing countries have no legislation on data protection. And where there is legislation, it needs to be updated very often.

"We therefore need to react in the face of these figures, particularly to enable companies in developing countries to be able to effectively trade with their partners, particularly the EU which will be imposing strict conditions in this area."

At the IGE session, Ms Shamika N. Sirimanne, Director of the UNCTAD Division on Technology and Logistics, also made a presentation of the UNCTA D Secretariat Note.

E-COMMERCE TRENDS

According to the UNCTAD paper, e-commerce, though a prominent feature of the evolving digital economy, remains hard to measure.

UNCTAD estimates that global e-commerce sales amounted to $25.3 trillion in 2015 - $22.4 trillion for business- to-business e-commerce, and $2.9 trillion for business-to-consumer
e-commerce.

An indication of the rapid expansion of e-commerce is the number of online shoppers in the world, which rose from less than 600 million in 2010 to about 1.2 billion in 2016.

A recent estimate suggests that there are some 2 million to 3 million e-commerce companies in the world (excluding China), of which some 1.3 million are in the United States of America and Canada.

The majority of companies that sell online also sell offline.

While most e-commerce takes place domestically, individuals and enterprises ordering or selling goods and services online across borders contribute to international trade.

UNCTAD estimates that cross-border business-to-consumer e-commerce in 2015 amounted to $189 billion, and that some 380 million consumers made purchase s on overseas websites.

According to the UNCTAD paper, the UNCTAD Business-to-Consumer E-commerce Index 2017 reveals that the e-commerce divide is considerable.

In most of the least developed countries, the share of Internet shoppers in the population is 2 per cent or less, and in many developed countries, it is around 60-80 per cent.

The top 10 economies in the index are mainly developed countries, with relatively similar index values.

"The lack of e-commerce data and statistics for most developing countries represents a barrier to the formulation and implementation of evidence-based policies in relevant areas," said the paper.

The possible establishment of the Working Group on Measuring E-commerce and the Digital Economy proposed at the first session of the Intergovernmental Group of Experts on E-commerce and the Digital Economy could provide for a useful forum for further discussion on how to address this challenge, said UNCTAD.

DIGITAL PLATFORMS AND THEIR IMPLICATIONS FOR SOUTH

The UNCTAD paper noted that various forms of digital platforms play a central role in the evolving landscape for e-commerce and the digital economy.

There are different kinds of platforms but there is no universal consensus on how best to classify them.

For example, a given product platform, such as the smartphone, which has emerged from a complex platform ecosystem, is in turn harnessed as a mobile platform for the delivery of higher-level product platforms, such as mobile social networking or e-commerce.

There is some confusion about the terminology used in relation to various digital platforms. The paper said that concepts such as the platform economy, sharing economy, collaborative economy, on-demand economy, peer-to- peer economy, gig economy, crowd-based capitalism and others, tend to be used interchange ably when referring to the new business models facilitated by digital platforms.

For example, the sharing or collaborative economy originally involved sharing assets or time. Examples included not-for-profit online car-pooling services with users sharing the costs, and online systems for swapping houses between owners during holidays.

By contrast, the paper noted, in the case of companies that today are often associated with the sharing economy, such as Airbnb, Didi Chuxing or Uber, an exchange of money is generally involved, and often the creation of some form of employment.

Thus, the term "sharing economy" can be misleading in such instances. When an individual or a firm uses a platform to obtain an income from an idle resource or asset, the function of the new business model is to extend the market to these resources or assets.

Airbnb and Uber are basically offering commercial transportation and accommodation services over online booking systems - thus enabling e-commerce.

By reducing transaction and search costs, as well as frictions, digital platforms enable those offering assets or services to connect more easily with those wishing to consume them. This has created opportunities for new types of trade (in digitally traded products, services and tasks), as well as for more traditional trade using e-commerce and other online platforms to better match buyers and sell ers and make products more visible.

Platforms allow for a more efficient utilization of physical assets or time. Often accessed through mobile applications, they bring together and aggregate demand and supply in ways that were not possible before (faster, cheaper and more easily coordinated), including in geographical areas and service sectors where lower density has acted as a barrier.

The use of digital platforms is growing, especially in sectors facing strong global competition and involving many buyers and sellers.

Their emergence may have been favoured by macroeconomic trends in the global economy since the 1970s.

These include fiscal austerity, tax evasion, cost reductions and outsourcing, as well as loose monetary policy characterized by increasingly low interest rates in the United States since the 1990s, and particularly quantitative easing since the global financial crisis of 2008.

As a result, large amounts of money seeking higher returns have been invested in equity in technology companies often relying on digital platforms of various kinds.

Among the main characteristics of digital platforms are the provision of infrastructure to intermediate between different user groups; reliance on network effects as more users beget more users, leading to monopolistic trends; and the use of cross-subsidization.

Platforms also tend to outsource jobs and services. Moreover, platform owners set the rules of product and service development, as well as marketplace interaction, that is, access conditions and prices.

The most important value of digital platforms stems from data extracted from users that can be further analysed, used and sold to third parties. Data have indeed become a valuable extractable resource in the digital economy.

There are different ways for MSMEs to gain an online presence to market their goods and services to potential buyers in their own country or in foreign markets.

The introduction of digital platforms has lowered some traditional obstacle s, such as the need for in-house resources, information technology equipment and expertise to establish and maintain a web presence.

The paper noted that a few major online marketplaces have captured significant parts of the overall market, benefiting from economies of scale and network effects.

Leading e-commerce platforms include the Alibaba Group, Amazon, eBay and Rakuten. However, in many developing countries, such platforms are complemented by national or regional ones.

The development of a local e-commerce industry can provide convenience for residents through shorter shipping times, flexible payment options, relevant products and local language interface.

Other potential advantages to the domestic real economy may include more linkages with local industries and suppliers, reduced reliance on imports and greater openness to support exports.

A growing number of e-commerce platforms have emerged in developing countries, often with the help of foreign capital.

Locally oriented platforms have sometimes been able to grow, in part owing to the absence of global competitors in the local market.

The UNCTAD paper however said that the line between local and foreign platforms is becoming increasingly blurred.

Local e-commerce platforms are often backed with foreign capital. Once local platforms achieve a certain level of scale, they become attractive acquisition targets for global players, as in the cases of Lazada and Souq.

According to the paper, Lazada, based in Singapore, was launched in 2012 as an online retailer and marketplace, with the Alibaba Group becoming the majority owner of Lazada in 2016, while Souq is a regional online retailer headquartered in the United Arab Emirates with operations in Egypt and the Gulf States, and was acquired by Amazon in 2017.

Moreover, due to the existence of network effects, local platforms may not be profitable before they reach a significant size in terms of users.

In some developing countries, the absence of global platform providers creates scope for local players to fill the void.

In sub-Saharan Africa, various e-commerce solutions have been developed to facilitate commerce over feature phones.

There are thousands of e-commerce start-ups throughout the continent, but only a few have reached significant scale.

Many new e-commerce payment gateways have also cropped up. In various low-income developing economies, new e-commerce sites are targeting the domestic market, enabling consumers to browse and order goods or services online.

"The use of digital platforms has economic, social and political impacts. Policymakers face challenges in relation to relevant policy areas, such as competition and consumer protection, data protection, taxation and labour relations. Some policies and regulations may need adaptation to the new digital context," said UNCTAD.

Although it may appear that most of the activities involved in the platform -based economy are free from any regulation, as long as these are economic activities, there would appear to be no reason to separate them from other traditional economic activities that are subject to existing policies and regulations.

"Thus, they should be regulated in a manner consistent with a fair trading environment that is not biased towards or against any modality of trade and that provides equivalent protection to the rights of all parties involved - consumers, workers and taxpayers."

The paper also pointed out that winner-takes-all dynamics are typical in platform-based economies, where network effects benefit first movers and standard setters.

Whoever controls the platform also controls the distribution channel, and t his can give the dominant platform (and data) owner considerable market power.

Indeed, the world's top four companies by market capitalization are all leveraging digital platforms: Apple, Alphabet (Google), Microsoft and Amazon.com.

Regarding competition and consumer protection issues, digital platforms have the potential to transform markets and enhance competition, while increasing consumer and overall welfare.

However, they can be perceived by traditional enterprises as unfair competition, since platforms do not usually comply with the same regulatory requirements.

Competition authorities around the world have advocated against excessive regulation of the platform economy, which may reduce its potential benefits.

The paper said that the digital platform environment may lend itself to potential anti-competitive practices. As a result of network effects, platforms may gain market power and could abuse their dominant position, for example, by imposing exclusivity arrangements on their providers or carrying out predatory pricing against competitors.

However, in various competition cases involving platforms, they were not considered to hold dominance over the relevant market.

Consumers have greatly benefited from the eruption of digital platforms through new and better suited offers, lower prices and more pertinent information.

"At the same time, the lack of face-to-face transactions entails greater risks for consumers with respect to disclosure and transparency, data protection and applicable law and responsibility of platforms and peer providers."

As stated in the United Nations Guidelines for Consumer Protection, member States should ensure a level of protection in e-commerce that is "not less than that afforded in other forms of commerce," which also applies to digital platforms.

The digital economy relies increasingly on the generation, storage, processing and transfer of data, both within and across national boundaries.

Access to data and data analysis are becoming strategically important for t he competitiveness of companies.

In relation to the use of digital platforms, there are concerns about how data flows can be harnessed, while at the same time addressing concerns related to privacy and security.

The paper said policymakers should balance the need for companies to collect and analyse data for innovation and efficiency gains, on the one hand, and the concerns of other stakeholders with respect to security, privacy and movement and ownership of data, on the other.

The current system for data protection is fragmented, with varying global, regional and national regulatory approaches. In addition, many developing countries still lack legislation in this area altogether.

"Instead of pursuing multiple initiatives, it would be preferable for global and regional organizations to concentrate on one unifying initiative or a smaller number of initiatives that are internationally compatible."

Policymakers in developing and developed countries alike face the challenge of taxation in the digital economy.

Reliance on digital platforms may weaken the international tax concept that allocates jurisdictional tax claims over profits of multinational companies based on physical presence, said UNCTAD.

It raises issues such as enforcement, where to tax non-resident e-commerce businesses, how to assess intra-group transactions, how to classify digital goods, how to identify taxpayers, and where and how to collect consumption tax.

Whereas concerns related to tax implications from e-commerce are likely to be more pronounced in countries where the uptake of e-commerce is high, finding ways to address related concerns are of relevance to all countries.

Moreover, the digital economy could enable more tax planning and erosion, which reduce the availability of domestic resources for development.

In the European Union, domestic digitalized business models are subject to an effective tax rate that is less than half of traditional business models.

Regarding employment and working conditions, the evolving digital economy has been accompanied by the rise of trade in tasks mediated by online labour platforms, such as Amazon Mechanical Turk and Upwork.

This is creating new income-generating opportunities for people in developing countries who have adequate connectivity and relevant skills. Annually, some 40 million people access these platforms looking for jobs or talent.

At the same time, the fragmentation of the production process and a large oversupply of jobseekers on such platforms may weaken their bargaining power and thus accentuate tendencies towards a race to the bottom in terms of compensation and other working conditions.

"It is important that policies and regulations enable this expanding segment of the economy to provide quality and decent jobs. More research is needed to assess the costs and benefits of online trade in tasks for both workers and enterprise s, and to formulate appropriate policies and regulatory responses," said the paper.

BARRIERS FACED BY SOUTH

The paper said global online platforms are becoming increasingly important for MSME involvement in some value chains.

Direct sales of certain types of goods in international markets, such as intermediate products, gifts and retail food, can sometimes be more viable, particularly when they are differentiated or value added outputs.

For many developing-country firms, exporting by means of e-commerce platforms has been hampered by difficulties in evaluating the quality of firms, production processes and products, or by payment solutions being poorly integrated or inflexible.

Newer generations of such platforms can partly overcome such barriers. They include more sophisticated ratings, as well as more viable payment options and guarantees that can provide stronger protection for both buyers and sellers, thereby helping to overcome lack of trust.

International e-commerce platforms are used by a growing number of small enterprises to market and sell various products. It is becoming easier for firms in lower-income developing economies to integrate, for example, with e-commerce sites such as Alibaba, Amazon Marketplace, eBay and TradeKey.com.

Such platforms are extending their protection and coverage to support trade rs in a growing number of countries. This enables MSMEs to trade using a convenient payment system and platforms in their own language.

With more widespread Internet access, such platforms are expected to become increasingly important channels for exports of intermediate and final good .

"However, merchants in developing countries may face restrictions when wishing to make use of these services, and access to them remains uneven across the developing world."

The paper also said that access to and use of global e-commerce, payments a nd applications market platforms vary. For example, UNCTAD noted that only in one developing country (India) were merchants able to register as sellers on Amazon.

When moving outside the United States, and especially beyond developed countries, the scope of services gradually narrowed.

Similarly, in the case of eBay, users were able to register to sell on its platform in 24 countries, including 9 developing countries. Other eBay sites allowed for buying but not selling.

According to UNCTAD, such asymmetrical access to marketplaces may accentuate existing imbalances in e-commerce trade, as it makes it easier t o export from one country to another.

A common factor limiting access to e-commerce platforms is the lack of cross-border payment solutions, such as PayPal.

In 2017, PayPal business accounts were available in more than 100 countries, but unavailable in most low- income developing economies.

The paper said while global e-commerce platforms provide integrated payment s solutions, in many African countries, companies cannot use them because the y lack the requisite foreign bank account or subsidiary.

Similar asymmetries have also been observed with regard to mobile applications in sub-Saharan Africa. In one study, Nigeria was the only country in the region in which users and developers were able to buy and sell Android applications a s in developed countries.

In 22 countries, users were able to download free and paid applications; however, developers could only upload free applications but could not generate revenue from them. In most countries, developers had no options, and it was not clear whether users could even download free applications.

Moreover, the largest advertising platforms, such as Google AdSense, do not accept advertisements in any African languages except Arabic, English, French and Portuguese, reducing the potential to monetize new services.

A number of factors act as potential constraints on e-commerce, the paper highlighted.

Economic barriers include inadequate ICT infrastructure and use, unreliable and costly power supply, limited use of credit cards, lack of purchasing power and underdeveloped logistics and financial systems.

Socio-political barriers include weak legal and regulatory frameworks, which influence whether people and enterprises trust online transactions; cultural preferences for face-to-face interaction; and reliance on cash in society.

Cognitive obstacles are low levels of ICT literacy, awareness and knowledge related to
e-commerce among consumers and enterprises.

The UNCTAD paper pointed to a number of common barriers that prevent MSMEs in developing countries from effectively engaging in e-commerce:

* lack of awareness, understanding or motivation among policymakers, trade and investment support institutions and MSMEs about opportunities for increased trade online and how to overcome related barriers;

* lack of access, affordability and skills with respect to relevant technologies. Many MSMEs do not master technology or they lack relevant skills;

* poor availability of international and local payment solutions. Merchants often lack online payment solutions;

* lack of access to cost-effective logistics. Often, the international services provided by local postal monopolies are of poor quality, and express delivery may be costly;

* limited capability to manage requests and relationships with international customers;

* low visibility, lack of an established reputation and poor trust in target markets. Potential customers need to know about the exporting firm and its products, and to have trust in the marketing channel; and

* lack of conformity with legal and fiscal requirements in target markets. Failure to account for value added tax and import duties can result in the consumer having to cover unanticipated extra costs on delivery.