Blogposts » Digital Economy: How is digitalization changing global competitiveness and economic prosperity?

Digital Economy: How is digitalization changing global competitiveness and economic prosperity?

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Digital Economy: In several articles we have shown what consequences digitalization can have for the labor markets of developed economies, what influence digital technologies might have on the cross-border relocation of production sites and how 3D printing technology could change world trade.

This article deals with the question of how digitalization can change the international competitiveness in the entire world economy in the future – and thus also the material prosperity of the people.

How does digitalization change production processes?

Almost all economists agree that digital technologies will become increasingly important for production processes in the future. It can therefore be assumed that production processes will become increasingly capital- and technology-intensive over time – not only in developed economies, but worldwide.

The increasing capital and technology intensity of production has an impact on the international competitiveness of all countries in the world (see figure 1):

  • When human labor is increasingly used by robots, computers and machines, the labor-intensive developing countries lose their decisive competitive advantage: cheap labor.
  • At the same time, the competitive situation of rich industrialized countries is improving be-cause they are better able to finance the costs of digital transformation.

Digital Economy Competitiveness

Digital Economy: How does digitalization change the competitiveness of individual economies?

In the future, the international competitiveness of individual economies will depend crucially on how quickly digital technologies are used in production processes. This digital transformation in turn depends on whether a country has the necessary resources for this transformation.

The resources available depend largely on the level of economic development achieved. As a rule, this is measured by the level of real gross domestic product (GDP) per capita. With this indica-tor, the world can be divided into three groups of countries – exemplarily and roughly simplified – (see figure 2).

1 Western industrial economies

If we look at the current situation of GDP per capita, the western industrialized countries have the highest per capita income.

  • If these countries succeed in promoting the use of digital technologies, they will become even more competitive. The result will be a further increase in GDP per capita. This includes the U.S. in particular.
  • Those industrialized countries that fail the digital transformation are losing competitiveness. This applies to economically weak countries that are also heavily indebted, such as Greece and possibly Italy. Ageing societies can also fall into this group of countries because the innovative power and productivity of an ageing society tends to be lower.

2 Asian emerging economies

Many emerging Asian economies have experienced strong economic growth over the past two decades. They therefore have the financial resources for digital transformation. This applies not only to China, but also to other Asian economies such as South Korea, Indonesia, Thailand and Taiwan.

3 African developing countries

A mixed picture arises with a view of Africa:

  • On the one hand, African countries have a young and growing population. If these countries succeed in building a digital infrastructure and promoting the education sector, strong economic growth can result.
  • Some of these countries may even be able to skip a technology step. Economists call this leapfrogging. For example, a country that does not yet have a landline for telephony is setting up a mobile network and is therefore on the same technological level as an industrialized country.
  • On the other hand, it becomes problematic for poor, underdeveloped economies that have no valuable raw materials and no access to the capital market. They are in danger of being left even further behind in economic terms because they are losing competitiveness.

Digital Economy: Changing competitiveness and the distribution of global wealth

The international competitiveness of a country is crucial for the prosperity of its people. If an economy is competitive, domestic companies can sell their products at home and abroad. This secures jobs and generates income for employees.

With improved competitiveness, the country can produce more goods and services and thus increase GDP – and GDP per inhabitant. Global prosperity is being redistributed: A successful digi-tal transformation increases people’s prosperity. In countries that fail to do so, GDP per inhabitant falls.

The digital transformation of one’s own economy thus becomes a prerequisite for securing and improving a country’s prosperity.

Digital Economy Impact

Reading recommendation: The effects of digitalization and international division of labor are analyzed in more detail in our megatrend report “The Bigger Picture”, published last week. The report examines the central interactions between the megatrends of globalization, digitalization and demographic change and their effects on people’s employment and income opportunities.