Non-alternative digital future 

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Tigran Sarkisyan 

Chairman of the Board of the Eurasian Economic Commission, Candidate of Economic Sciences, Prime Minister of Armenia (2008-2014), Chairman of the Central Bank of Armenia (1998-2008) 

 

DIGITALIZATION: A GAME CHANGER

The rapid advance of information and communication technologies in all spheres of people’s lives causes significant changes in the nature of production, and hence in trade and economic relations between countries and in integration.

In particular, we are witnessing the formation and successful operation of digital industrial platforms (DIPs) which ensure automatic coordination and optimization of interconnected activities of a large number of market players by eliminating unnecessary intermediaries. This leads to a sharp reduction in transaction costs and an increase in the speed of operations.

Thus, the DIP is a special, modern form of organizing the division of labor. The peculiarity of this form is also important given that it exists in the new economic reality, one of the main characteristics of which is as follows: the maximum added value is being created today in brand- new industries as well as industries that have been digitized, which leads to a sharp increase in labor productivity by linking industry-specific data with DIPs.

A good example of determination in developing a digital platform is the Chinese Alibaba Group (established in 1999, capitalization US$ 266 billion). The group consists of 14 digital platforms, including trading platforms oriented to the external and internal markets, as well as financial, logistics, customs and other platforms. Fostering economic growth, Alibaba Group plays an important role in promoting China’s economic interests worldwide, including the territory of the former USSR.

Using government support, transnational corporations similar to Alibaba Group from the United States, Europe and China have accumulated huge amounts of data and information, and a colossal scientific potential. According to the World Bank the global digital platforms are already abusing their dominant position.

DIGITAL ECONOMIC TRENDS

Assets in any traditional industries that have not been digitized are undergoing dramatic depreciation as the value of new digital assets is rising. Leading experts agree that within the next 15-20 years the world will see the widespread application of the platform-oriented business model and, in fact, the reformatting of the customary organizational structures of industry and trade.

Speaking of the ways in which the main trends in the digitalization of the world economy and trade have influenced the Eurasian Economic Union, one can say that our integrated marketplace has been losing consumers which migrate to the digital markets of other countries. For example, Aliexpress sends as much as 90% of parcels ordered as part of electronic cross-border trade by citizens of our countries, and generates about 50% of the cash flow. In addition, large Russian investors are investing in subsidiaries of similar corporations. Thus, we are already participating in this new digitalized world trading system and the main task facing us today is to occupy a proper place in it.

All the above trends have introduced a new logic not only into the systems of world trade and economy, but also into integration systems. The old models have lost their relative advantages, while new ones are in the process of being formed. No other way is possible since the existing models of integration were formed in the economic conditions, whose most important elements were the establishment of tariffs, the facilitation of customs procedures, the development of general rules of trade, etc. The current technological and digital leap has created its own integration logic based on technological platforms and solutions, digitalization and digital standards.

It should be noted that the development of the digital economy has led to the emergence of major new trends in the development of world trade and economic activity, in the division of labor, and in the industrial system. The key trends are as follows:

The world economy implements the so-called “smart management systems”, which, thanks to the automation and digitalization of production processes, manage those production processes, significantly reduce transaction costs, increase energy efficiency and identify marketing and trading advantages.

Thanks to digitalization, tens and hundreds of new specializations have appeared while some of the old ones have disappeared. This process runs so quickly that educational systems cannot keep up with the changes and the new sectors themselves often turn into education centers. A graphic example is the educational centers set up by the world’s largest IT corporations, whose graduates are valued on the market no less than graduates of top universities.

And, most importantly, brand-new industries have been created based on digital technologies. Some of the old industries are dying out, but some are being transformed through digital logic. The «digital share» in the cost of modern cars, for example, is steadily growing, and the cars themselves are turning into «smartphones on wheels,» as they were called in the article which appeared in The Economist.

It should be noted that the developed countries and some integrated unions have already formulated their digital agendas in order to accelerate the transformation of traditional industries and the transition to a digital form of interaction. The European Union has institutionalized the digital agenda as a separate direction of integration and approved the creation of the «EU Digital Single Market». The United States, Great Britain, South Korea, Singapore, Israel and others have announced their digital economy strategies and have been actively promoting them through international treaties and bilateral agreements. Many countries have identified their role in the division of labor in the digital economy.

NO ALTERNATIVE

The Eurasian Economic Union has yet to finalize and implement its digital agenda but we need to understand that no other way is possible. To be more exact, the only alternative is the establishment of full control over the Eurasian Economic Union’s digital marketplace on the part of the global players. And it is unacceptable for both the integrated union and the EAEU member states.

If the scenario outlined above is implemented we will run the risks of losing the digital sovereignty or the motivation for integration by reason of:

a) our trade and the free movement of goods being diluted by global markets;

b) our digitized domestic enterprises being connected to other countries’ DIPs;

c) our businesses and individuals using new digital solutions for financial services, including the bitcoin, created by foreign companies;

d) our highly skilled workforce being used for the development of new IT solutions for foreign DIPs which will retain most of the created added value.

Thus, the main risk boils down to the Eurasian Economic Union’s losing its competitive edge as global markets transform. The most effective way to limit the integration processes to the EAEU boundaries is the formation of the Union’s own DIPs in order to keep pace with the new digital revolution and maintain economic and technological independence.

OUR ADVANTAGES

The availability of huge amounts of data collected from the majority of the organizations within the government-controlled information system can be relatively advantageous for the swift implementation of this approach in our countries. It can become a springboard for building our own ecosystem for the EAEU’s digital platforms. Thus, in Russia alone there are 390 government-controlled information systems that annually collect several thousand different reporting forms from businesses. A side effect of building such an ecosystem will be turning the existing regulatory activities into algorithmic regulation which is transparent and does not require a huge administrative apparatus for its implementation.

The second advantage may be the existence of private initiatives in our countries, which have already been used to create our own markets and media platforms that may be involved in the process of building global DIPs on the basis of government- controlled private partnerships. This will enable us to attract domestic investors for the implementation of megaprojects, and to award contracts to our IT specialists including those working for foreign companies. The first echelon of such DIP megaprojects may include trading, logistics and financial platforms, while a possibility of organizing government procurement on the basis of such platforms can dramatically increase the attractiveness of integration and the market value of such projects.

Today the Eurasian Economic Commission is building an integrated information system for the interaction and coordination of state information resources and information systems (Article 23.3 of the Union Treaty). However, in order to adequately respond to the challenges and risks facing our young association we need a coordinated approach to our Union’s broad digital agenda. The EAEU statement on the digital agenda adopted by the heads of state on December 26, 2016 in the city of Saint Petersburg is an example of such approach.

We must do the following: 
А) formulate our own digital agenda,
Б) identify joint megaprojects that can give an impetus to the development of the entire sector,
В) provide for designing our own DIPs to ensure access to global markets.
On the one hand, this will allow us to formulate a new economic program for the modernization of national economies, and on the other, to strengthen our integrated union with the possibility of adding countries that, for objective reasons, will be unable to build their own digital platforms. The implementation of the digitalization program for our economies and marketplace is a task that, in terms of its ambition, is comparable to the legendary GOELRO, but its positive effect may turn out to be no less than that resulting from the implementation of the electrification program.

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