In Europe’s digital policy, digital managerialists, digital frontrunners, and digital convergers have emerged as coalitions among EU member states. This paper lays a focus on their stances on digital-policy reform and on their own understanding of the costs and benefits of the growth of the digital economy. The paper also suggests new ways for countries to cooperate in current or new constellations, which will allow them to profit from other countries’ experiences, and to fully develop their own policy preferences as well as a clear understanding of appropriate digital reforms for them.
Digitisation has the potential to support growth in many different sectors and the growing digital economy will make positive contributions to the productivity of non-ICT sectors as well. This is especially true for the services sector. However, countries with smaller digital endowments (e.g. digital infrastructure like networks) often believe that they do not stand to profit as much from digitisation as countries with bigger endowments. That is a profound misconception. Here, it is crucial to note that economic success in the digital economy is actually not merely the absolute level of digital endowments, but rather the way in which these endowments are effectively employed.
Reaping the rewards in the digital economy is based on an exchange that exploits the comparative advantages of countries and here, digital frontrunners, but also digital convergers, are performing well. Digital convergers are well established in international value chains and they create significant output from their digital endowments. They have an interest in improved regulatory conditions as a result of their trade and economic integration that is shared with frontier economies.
The future task for digital convergers lies in both increasing their output from accumulated digital capital via climbing the value chains of the digital economy, as well as increasing their digital endowments. In order to do so, digital convergers require better market conditions and increased investment in digital capacities and skills. The ability of digital convergers to profit from digital value chains also depends on their trading partners and on their proximity to these frontier economies. Digital convergers can thus profit from a more rapid pace of digital economy growth by tying themselves closer to frontrunner economies.
In addition, they can profit from the experience of digital frontrunners in developing their digital economies both for benefiting from lessons learned in their process of doing so, but also for further identifying and clarifying their own policy needs and position. Accordingly, this paper suggests that digital convergers could join more closely in cooperation with digital frontrunners and potentially form a D16 group to articulate their policies and priorities, and to devise strategies to shape EU digital policy.
The authors gratefully acknowledge the research assistance by Nicolas Botton and Julie Richert
Convergers, Frontrunners and their Digital Performance
There is one aspect where digital convergers differ from frontrunners: their digital endowments are less well developed. Consequently, a key ambition for increasing the growth potential of the digital economy in converging countries is to expand their ICT capacity and their digital human capital. Using the two main global digital indexes from the previous chapter as a benchmark, digital convergers only perform with an average of 4.6 in the Networked Readiness Index and 7.0 in the ICT Development Index – scores that can be compared with those of EU frontrunners (5.5 and 8.0) and non-EU frontrunners (5.8 and 8.6). The same is true for the total average group scores in the European Commission’s Digital Economy and Society Index (DESI) as well as the standard digital performance indicators outlined in tables 2-4 in the previous chapter: digital convergers are still catching up.
Their lower level of digital endowments is often translated, also within the countries in question themselves, into a perception that they have a low ability to profit from opening up to the digital economy. Smaller endowments are often seen as reducing the competitiveness of these economies – and a reason to be hesitant about promises of growth to follow on the heels of digitisation. However, that is a gross misreading of the economics of the digital economy. Endowments are only one side of the equation. What is key for economic success in the digital economy is actually not the total amount of digital endowments, but rather how the endowments are employed in the economy. Or to put it in different terms: how countries are using their comparative advantages.
Obviously, all countries cannot be at the top at the same time, but just because endowments are smaller does not mean that countries do not stand to benefit from new digital opportunities. Just like the entire economy, the patterns of rewards in the digital economy are based on an exchange that exploits the comparative advantages of countries. And by that standard, both digital frontrunners and convergers are actually doing pretty well. To see how – and what different countries can do to improve their relative performance – let us consider the chart below.
Chart 5 shows that countries do not need to be equally endowed with a stock of digital investments and capacities in order to reap positive economic benefits: what is more important is how the stock of endowments, in this case measured by software capital per worker, is used in order to generate output. Some countries have built up a very large stock of data or computerized information – in the digital economy, this is a good benchmark of digital endowments – and, as can be seen, frontrunner countries like Sweden and the United Kingdom are well ahead of other countries. The size of the endowment – measured on the x-axis – does not say anything about whether Sweden and the UK are performing well, if they are utilizing that endowment or if there is a lot of underemployed capacities in the economy. The important metric is how close they are to the mean or fitted-values line, which measures how they – relative to other countries – are embedding their data endowment in the economy, in this case a measure of output like data traffic per worker (the y-axis). The conclusion is that countries above the line are, relative to others, using their digital endowments more and that for every unit of software capital added to the endowments, more data traffic is generated than in other countries. Just like with other investments in endowments, output is not generated just by adding more endowments – and the real key to economic success is to improve the utilization of the stock of capital that exists.
Source: ECIPE calculations based on van der Marel (2016). Data does not exist for other EU countries.
Using the same concept of performance relative to others, is there a way to get a sense of what factors are preventing countries from better exploiting their digital endowments? Take the case of Germany, a leading digital managerialists in Europe. Obviously, what sets Germany apart from the rest of the EU is not poor digital endowments: its digital capacity is comparatively strong. But the digital intensity of its trade is below what is expected from a country with Germany’s digital capacity, and what stands in the way is not policies that prevent individuals to exploit their digital skills. A larger problem is gap between German firms and EU frontier firms in their use of digital technologies, services and business models. Policy initiatives are currently lacking a focus on removing obstacles and creating incentives for businesses to make use of these endowments. However, such increased usage of digital endowments by businesses would be crucial for increasing the competitiveness of Germany’s economy in the future (Deringer, Erixon, Lamprecht and Van der Marel, 2017). Germany is not alone in Europe of underperforming relative to its capacity, and table 5 shows the result for the EU membership.
Table 5: Over and under trading by digital services sector
Source: Bertelsmann Stiftung
Another way of illustrating the same conclusion is to look at factors such as the position of countries within the value chains of the digital economy. In view of their endowments, digital convergers perform rather well as many of them are already plugged into the value chains of ICT manufacturing or ICT services such as back-office operations. Forward linkages, i.e. the domestic value added embodied in foreign exports, can be seen as a measure of integration into international supply chains. Chart 6 shows these linkages in international supply chains of digital convergers from 2001 to 2011. While their contributions to forward linkages were already significant in 2001, they have further increased in the case of all digital convergers. This shows that many of the convergers are generally creating more value-added in their economies by connecting their economies to the arteries of the value and supply chains of foreign companies. In other words, even if many countries in this group have few multinational companies that trade directly from their home country with the world, the countries have prospered by a smart use of endowments in international value chains. The same logic also applies to digital value chains.
Digital convergers are already established in international value chains and, even if their endowments remain distant from the frontrunners, the output they create from current digital endowments is significant and contributes substantially to their economies. They are in competition with other economies in the world that have similar positions in international value chains and they are on a trend of fast acceleration of their digital competitiveness. This is illustrated, for example, by the fact that the digital economy has contributed to the centre of economic gravity shifting away from Europe to Southeast Asia in recent years. This trend is estimated to continue with the centre of economic gravity further shifting to the Asia-Pacific region until 2025 (Erixon, 2017).
Their shared interest in improved regulatory conditions for the digital economy is based on trade and economic integration, especially with frontier economies that have reasons to worry about regulations that are restricting output. In that way, the ability of many convergers to prosper in the digital value chain depends on the countries they trade with and their proximity to these frontier economies. Hence, it becomes clear that digital convergers can profit from a faster pace of digital economy growth by tying themselves closer to frontrunner economies. And in that way, the future shape of the digital economy in this group hangs together with the future of digital frontrunners: the more the latter group expands their digital economy, the greater the benefit will be for convergers that are integrated with them.
The integration of digital convergers into international value chains has further contributed to the openness of their economies. Their economies show a significant degree of openness which is comparable to that of digital frontrunners. As chart 7 below points out, the trade ratio of digital convergers is comparable with that of almost all digital frontrunners, and their average trade ratio is even higher than that of non-EU digital frontrunners. In other words, these are already economies for whom openness and linkages to other economies are crucially important. In that way, they are similar to the digital frontrunners. They are both damaged by digital restrictions that prevent these linkages to operate fully.
Source: World Bank
The future task for digital convergers lies in both generating more output from their accumulated digital capital, through climbing the value chains of the digital economy, and expanding their digital endowments. To do so, they need better market conditions for the digital economy and more investment in digital capacities and skills. Better market conditions will enable them to exploit their comparative advantage in the sectors in which they are specialised. Indeed, better conditions are necessary for the efficient use of these countries’ accumulated digital capital, which in turn also incentivises more investments.
For digital frontrunners, the future challenge is more skewed towards improving market and regulatory conditions to allow for more output on the back of their digital endowments.
Different aspects are important for achieving such improved market conditions. The overall reduction of the total number of product market regulations, as well as reducing the restrictiveness of existing regulations, are effective policy measures. Heterogeneous product market regulations across the economy prevent competition in the economy (Bauer and Erixon, 2016). This is especially true when it comes to the crucial role of non-digital sectors for the growth potential of the overall economy. Product market regulations prevent the use of ICT from entering into non-digital sectors, where it can especially result in efficiency gains and contribute to enhanced economic growth.
Table 6 outlines the product market regulation index with different indicators for digital frontrunners and digital convergers. Considering the overall product market regulation index value, the restrictions of digital convergers are on average still higher (index value of 1.4) than those of digital frontrunners (1.37) and non-EU frontrunners (1.35). This is especially true for the indicator of state control, where digital convergers on average score higher (2.22) than the group of digital frontrunners (2.03) and non-EU digital frontrunners (2.13). These stronger existing barriers again illustrate the potential for digital convergers not only to profit from further openness to the digital economy in the future, but indeed to profit from it to a larger extent and at a faster rate than digital frontrunners.
Existing product-market regulations prevent competition from improving the use of ICT into these non-digital sectors. This is particularly true for the services sectors. For example, especially digital-intensive services such as telecommunications and computer services, but also business services, are important input services for industries. They are crucial for generating productivity and increasing competitiveness. Both direct and indirect value added of such digital services plays an important role for exports, for example in the manufacturing industry (Deringer, Erixon, Lamprecht and Van der Marel, 2017).
As indicated by the OECD’s Services Trade Restrictiveness Index, services restrictions among the digital convergers are relatively higher than those in the frontrunners group. Further reduction of the amount of regulations and of the restrictiveness of existing regulations would allow these countries to profit from increased efficiency gains, as well as resulting economic competitiveness and growth. However, their level of restriction is still broadly comparable to those of the frontrunners and it is even lower than the average level of restriction among the non-EU frontrunners. Note that the level of restrictiveness of Lithuania, and especially Latvia, is below the average of digital frontrunners, further justifying their inclusion in this group.
Other crucial elements for achieving improved market conditions are high employment protection, private credit provision, patent application open to non-residents as well as high R&D expenditure (Van der Marel, 2016). In addition, policies supporting the entrepreneurial spirit is a key element for taking and further developing comparative advantage. Support for start-ups especially in non-digital sectors is key, as start-ups rely heavily on the use of software and ICT for their business models in these sectors, too. Companies have to adapt to modern forms of operation due to technological change, which can be described as the process of digital business transformation (Forbes, 2017). In order to remain competitive and to withstand digital disruption, companies have to be able to develop their digital business agility. Environmental factors, such as policy intervention, are a crucial factor for this process, especially for SMEs and start-ups.
Reduced product market regulations in these sectors are an important factor for attracting investment and increasing economic growth. According to the World Bank’s Doing Business database, digital convergers could still improve their position in this area. Their average position in the ranking from 1 – 190 is only 74.7, which is behind the average of the digital frontrunners with a score of 24.8 and of the non-EU frontrunners with a score of 36. Also, note again that Lithuania, and especially Latvia, have rankings that are fully in line with the digital frontrunner average, again confirming that they can be considered to be part of this group (see the table below).
Sources: World Bank; OECD
 See: Van der Marel, E., Lamprecht, P., Deringer, H. and Erixon, F. (2017). Boosting Services Trade in the Age of Digitalization: What is the Potential, What are the Obstacles? Gütersloh: Bertelsmann Stiftung.