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Asian economies

New cross-border competition policy

by Yasuyuki Sawada, Cyn-Young Park, Hans Dembowski

In depth

Google search at a Thai internet café.

Google search at a Thai internet café.

The internet is increasingly dominated by the platforms that a few multinational giants provide. To foster effective market competition, multilateral standards are needed, as two leading economists from the Asian Development Bank (ADB) argue.

What impact do the FAANGs – internet titans like Facebook, Amazon, Apple, Netflix and Google – have on Asian economies?
Sawada: Last year, the ADB prepared a report in cooperation with the World Economic Forum, and it reaffirmed the emergence of large multinational titans, the platform companies that dominate the global market. For example, Google’s share of the search engine market is 90 %, Facebook controls 77 % of social media and Amazon is running 75 % of e-book market. Evidently, a handful of giant corporations has almost monopo­listic power, and yes, they do have an impact on Asia. There are upsides and downsides. The most important aspect is that small and medium-sized enterprises (SMEs) are getting valuable new opportunities. Internet platforms give them access to the world market at very low marginal costs. In this sense, a Pacific islands country like Fiji is no longer as remote as it used to be. This is a very positive trend. It drives growth, because it allows small private-sector companies to thrive and take advantage of economies of scale. On the other hand, there is a risk of monopolistic power being abused. Whether the FAANGs are doing so is very hard to tell. It is ultimately an empirical question.

Economics is a model science, and one of the core tenets is that anyone involved in market exchange wants to maximise benefits. In theory, monopolists will exploit their position.
Sawada: Yes, and that is why we need a new kind of cross-border competition policies. There is a rich set of evidence showing that competition through low entry barriers in industries is a critical source of productivity improvements and growth of economies. The international community must adopt a legal framework to protect privacy rights and intellectual property, for example, to support fair market competition. So far, that is not necessarily happening – neither in Asia, nor at the global level.

Park: Another important question is whether or not Asian economies can foster their own platform companies. The point is that while SMEs benefit from the existing internet platforms, their gains might be even bigger if there was more competition between the platforms. China and India both have more than 1 billion people and they are evidently spawning platform companies of their own. They may be also in the position to define legislative frameworks. But it’s not necessarily the case for smaller Asian economies. Chinese and Indian platform companies actually tend to grow quite fast, perhaps thanks to language advantages among other things. But how much do they respect users’ privacy or intellectual property? It would be good to have international standards and principles on these matters. To foster effective market competition – both at the macro level of platforms and the micro level of platform users – global rules are needed. These rules should promote innovation, moreover.

What about taxes? So far, the internet titans hardly pay taxes.
Park: Yes, the global community needs rules on taxation too. It is interesting, for example, that India has declared that it considers internet interaction that involves a certain number of users in India a “presence in India”. The implication is that the relevant service providers could be taxed. India’s competition agency, moreover, levied a $ 21 million fine on Google. Consider platforms like Uber or AirBnB that provide transport or hospitality at low costs. While they are disrupting established businesses, they can also make the shadow economy visible, so increasing an economy’s tax base. Their gains can be taxed, to the extent that transactions are formalised. Let me add that taxation is not only about revenues, however. It can also set the right incentives. At present, internet platform service providers are not taxed evenly across borders which influences their location decisions for incorporation or business operations. As we are looking at multinational platforms, international rules are needed – not least to avoid taxation loopholes.

Who is in charge of making international rules?
Sawada: The OECD, the Organisation for Economic Co-operation and Development is considering tax matters. The World Trade Organization is working on a framework for e-commerce. The UN could certainly play a role too. Obviously, the G20 is a forum for tackling global issues, and its leaders have begun to discuss relevant topics, but such action has not resulted in an effective multilateral framework yet.

In Europe, we have the EU, which is imposing rules on internet giants. Are there Asian equivalents?
Sawada: The ADB is in favour of regional integration which allows nations to create larger markets and pursue interests collectively. ASEAN, the Association of South-East Asian Nations, is probably the most advanced regional institution in Asia, and the ASEAN+3 format also includes China, South Korea and Japan. However, ASEAN+3 does not have the kind of coherence and collective clout that marks the EU yet. That said, an Asian forum of competition agencies has recently been established, and it is meant to deal with issues of cross-border competition policy. This is a promising start. Awareness for related issues is growing fast. Just consider, for example, that the competition agency of the Philippines is quite young. It was only established two years ago.

Amazon and Alphabet, the parent company of Google, are leaders in the field of artificial intelligence (AI). Do you worry about automation disrupting young manufacturing industries in Asia and displacing masses of workers?
Sawada: Well, not everything that is technologically feasible is economically viable. It is true that robots are becoming ever more advanced, but so far we are not seeing Bangladeshi garment workers being displaced by sow-bots. Labour-cost advantages are still considerable. But in the long run, change will occur of course. For example, AI may displace jobs not only in manufacturing, but also in service sectors such as call centres and business-process operations in general. At the same time, there can be positive spill over into other sectors. Greater productivity achieved by AI means higher incomes and expanding markets. The net impact of technological progress can be positive, but we will have to minimise the frictions too. The big question is: will change lead to more equality or greater inequality? After all, redistribution policies will be critical, and governments will have to invest in people’s skills.

Park: No doubt, there is a need for prudent policies on taxation, income redistribution and social protection at national and international levels. But we must not forget that we need to ensure equal and fair opportunities. In this context, it is important to substantially increase infrastructure investment first of all. Digital infrastructure must improve in developing countries, and the multinational corporations that benefit in particular should contribute to making that happen. It is okay to worry about the downsides of recent trends, but it is even more important to ensure everyone has a chance to benefit from the upsides.

Facebook has actually been offering to provide poor people in remote areas with what it calls “free basics”, promising access to a limited number of websites free of charge. Is that a step in the right direction?
Park: Well, everyone knows by now that internet services are never free. If they are not paid in money, they are paid in data. Giving away data means to give away economic opportunities. Big platform corporations are actually interested in investing in internet infrastructure, and one reason is that it will allow them to include ever more users. There would be huge network effects. Since we must consider both data and monetary flows, it is very difficult to analyse costs and benefits accurately. Accordingly, it is very difficult to define some kind of fair burden sharing. Moreover, people in remote regions deserve full access to the internet. In this context, access to the internet can be basically a public good, which requires public policy and prudent regulation. To manage these matters well, policymakers need to understand the issues well. The challenge, of course, is that change is happening so fast.

Sawada: At this point, nobody knows how things will develop. We must try to understand the trends and make the most of the technological revolution that is happening. It would be important to note that ADB has set up a new digital unit. What we know for sure, however, is that Asia needs massive infrastructure investment to continue its growth momentum and to achieve the global climate goals. According to ADB’s estimates, an annual $ 1,700 billion will be required. The multilateral development banks such as ADB have been able to contribute only about few percent to that total. Under this situation, the ADB and the Beijing-based Asian Infrastructure Investment Bank have agreed to cooperate to meet Asia’s infrastructure demand naturally. Several co-financing projects have already been started. Indeed, we need to leverage our resources as best as we can.

Yasuyuki Sawada is the chief economist of the Asian Development Bank (ADB).
[email protected]

Cyn-Young Park is the ADB‘s director of Regional Cooperation and Integration division.
[email protected]

ADB and WEF, 2017: ASEAN 4.0.

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