The powerful effect of digitalisation on GDP and job creation

By Farhan Kamarulzaman,

A 10-percentage point increase in digitalisation triggers a 0.50 to 0.62 per cent increase in per capita Gross Domestic Product (GDP) and at the same time a decrease in the unemployment rate of a nation by 0.84 percent based on a study by PricewaterhouseCoopers (PwC).

In light of the worst economic performance in two decades when the second-quarter GDP growth (2Q20) showed a deep contraction of 17.1 percent, it is of the utmost importance and urgency for all to heed the call of the government to adopt digitalisation in our business and work processes.

This is a golden opportunity that should be taken to capture the positive values of digitalisation to stimulate the economy based on its robust impact on GDP and job creation.

It will also spur a resumption of economic growth by maximising the use of emerging, frontier technologies and help us to move in tandem with the developed economies.

The powerful conclusion of the PwC study is based on using a classical production function model to assess the economic effects of digitalisation in 150 countries.

Even in 2011, several economists have reported that amid the unfavourable global economic climate, digitalisation provided US$193 billion (RM806 billion) boost to world industrial production and generated six million jobs worldwide.

Besides, one of the best potentials of digitalisation is its essential role in assisting policymakers to increase economic growth and job creation in a sluggish environment such as the current global economy during the Covid-19 pandemic, especially in the aftermath of the pandemic.

In line with the maxim “modern problems require modern solutions”, it is good that we can see people’s attention has shifted to digitalisation and has succeeded in convincing them that it is part of the “modern” solution.

In light of the worst 2Q20 performance, perhaps digitalisation can be the saviour here in bringing a positive influence to our GDP figure.

Yet some have assumed the detrimental impact of digitalisation and utilising the frontier technologies of the fourth industrial revolution (4IR) would be the loss of job opportunities and that the unemployment rate would be negatively impacted.

This is incorrect as PwC’s report mentioned earlier indicated that digitalisation has a substantial effect on job creation in the overall economy – a 10 per cent rise in digitalisation decreases the unemployment rate of a nation by 0.84 per cent.

The other outcome of digitalisation is innovation. Using the Global Innovation Index, Malaysia can measure the progress of its innovation readiness, and the report showed that a 10-point increase in digitalisation contributes to a 6-point increase in the country’s score on the Global Innovation Index.

Most developing countries have started to recognise digitalisation as a future economic boom. The reality that stands out is its ability to help them sustain their competitiveness with fast-developing countries like America and China in the global technology arena, as well as Asian tech giants like Japan, South Korea and Singapore.

But our country is not lagging far behind in realising the intention of moving towards digitalisation as it has introduced many exciting initiatives to take us to the next level.

For example, the Malaysian Digital Economy Corporation (MDEC) has launched a significant initiative to encourage and promote digitalisation among the small and medium enterprises (SMEs), as they are Malaysia’s vital driver of employment and economic development.

Not just that, our country has made a significant investment in the National Fiberisation and Connectivity Plan (FCNP) from 2019 to 2023. But the government should monitor the plan consistently so that it can be on track to be implemented effectively for the sake of our economic growth.

Experts also claimed that in Asian countries, including Malaysia, digital transformation is not impossible, because many emerging Asian economies have experienced strong economic growth over the past two decades.

Digitalisation has now become a crucial and important component of economic development that will affect production processes as all economists agree that in the future, digital technology will become increasingly important for production processes.

They firmly believe over time manufacturing processes would become frequently used resources and technology-intensive globally. It is thus quite telling that in the estimated monthly GDP for June that was recently released together with the 2Q20 result, only manufacturing and agriculture have a positive growth – 4.5 percent  and 11 percent respectively.

It means these two sectors are beginning to heed the government’s call for applying digitalisation in their business and work processes.

It is important to note that digitalisation is not just about putting your products on e-commerce platforms like Lazada. It is more than that. It refers to a business model which allows firms and individuals to buy and sell things over the internet, which operates based on four main segments – business to business (B2B), business to consumer (B2C), consumer to consumer (C2C) and consumer to business (C2B).

What’s more important is e-commerce adoption, defined as using Internet-related applications with a purpose to support marketing, operations and management in their decision-making process.

However, the real digital transformation requires not only financial investments and public spending but also an investment on human capital in order to achieve an adequate level of growth that will have some positive effects on macroeconomic indicators.

Farhan Kamarulzaman is a Research Assistant at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.