Digital Disruption: What do governments need to do?

Australia's Productivity Commission has just released it's report on "Digital Disruption: What do governments need to do?".

It's not too long a read. The key findings fit into a few pages, and provides enough of a helicopter view to get a clear view of the direction the Productivity Commission believes agencies should take.

There's implications for every area of government, with many underlying potential impacts on how government operates, how our society functions and how government, businesses and citizens interact into the future.

Some of the recommendations include more assertively addressing risk aversion in government, properly considering the emerging skills needed for public servants and how to train or acquire them, taking a more flexible, iterative and adaptable approach to policy development to address the issue that technology is outpacing decision-making and improved collaboration and sharing throughout government and with external players to ensure the right mix of ideas and skills is in the room for complex decision making.

To make it quickly review, I've included the key findings below:

Impacts of disruption on markets and competition

Finding 2.1

The distinction between services and manufacturing is declining, with design and pre and post sales service parts of the production cycle becoming increasingly important sources of value added. This has implications for:

• the importance of scale in production
• the types of capital firms need
• how much work happens within the firm and how much is outsourced
• the types of jobs that will be created and replaced
• the dynamics of the business cycle.

It also has implications for the National Accounts, including adjusting for changes in quality, and the long term comparability of industry classifications.

Finding 2.2

Clarity in how and when infrastructure investment decisions will be made assists firms that are developing and adapting new technologies. Uncertainty around future technology and infrastructure needs is not a reason for inaction by governments — the costs of inaction, in terms of slower diffusion in technology, can be widespread and significant.

Finding 2.3

Digital technologies are allowing firms to outsource more of their production. This outsourcing is based on access to skills as much as low cost labour, offering greater opportunities to firms in high labour cost economies. Trade policy has been slow to adapt. Substantial increases in outsourcing across international borders may necessitate government attention to:

• secure movement of data across borders
• regulatory requirements for delivery of service exports in other countries
• barriers to outsourcing imposed by differential treatment across industries and products in bilateral and regional trade agreements and in behind the border policies
• workability of rules of origin with many disparate sources of inputs to production.

Finding 2.4

Digital platforms allow households and non market organisations, such as research facilities, to engage more in the market economy by 'sharing' access to their under utilised assets. This poses structural adjustment issues for industries that have traditionally faced little competition due to regulations, such as taxis and short term accommodation. More effective utilisation of under employed assets, whether market or non market, is a positive economic outcome.

Finding 2.5

Digital technologies are changing the sources of market power, with control over data and networks providing new means for firms to hinder entry and extract rent from customers.

• The length of time and extent to which firms can exercise market power is highly uncertain, requiring active monitoring rather than pre emptive action.
• New regulatory tools may be needed to address these very different sources of market power arising with the digital economy. Aspects of third party access regimes could be explored as a relevant approach.

Finding 2.6

Digital platforms can help overcome information asymmetries, which have been a common justification for regulation. This can allow governments to reduce the restrictiveness of regulations seeking to provide consumer protection, subject to confidence in the information provided.

Finding 2.7

Like previous waves of technology, digital technologies should translate to productivity improvements. Indeed, the low marginal cost of replication means that intangible inputs should fall in price, boosting firm profits. However:

• consumers may capture a larger share of growth in productivity where this is delivered in terms of higher quality products, and where enhanced competition drives down prices
• some digital products can be difficult to monetise
• the value of data and networks can result in a winner take all model in some digital services.

Impacts of disruption on workers and society

Finding 3.1

Developments in digital technologies, such as sensors and machine learning, are expected to widen the boundary of the types of tasks that can be automated. But there remain tasks that have proven difficult to automate, including those requiring perception, or creative and social intelligence. Just because a job can be automated does not mean that it will be.

Finding 3.2

The 'gig' economy is in its infancy, making its future effect on the nature of employment uncertain. But if the gig economy develops quickly and its spread is wide, there will be risks that need to be managed. While governments need to address real concerns, blocking these technologies is not an appropriate response.

In the longer term, depending on the scale of change, governments may need to consider whether:

• changes to workplace relations regulations are required to accommodate a growing category of employment
• the income support system needs to be changed to ensure it is not a barrier to workforce engagement and helps reduce income volatility for low income workers.

Finding 3.3

Simply increasing the share of STEM graduates is unlikely to resolve the low rates of adoption of digital technologies by firms. Given the relatively high underemployment of STEM graduates and apparent underutilisation of STEM skills, the current approaches are not delivering the problem solving skills needed for technology rich work environments. Beyond delivering a high competency in literacy and numeracy at the school level, initiatives could include reviewing teaching methods, increasing flexibility of university degrees and improving information on employment outcomes for students to help inform student choice.

Finding 3.4

The automation of many tasks in the workplace, with large labour saving technological advances, has not led to unemployment rates trending upwards over long periods of time. However, there is concern in parts of the community that the pace of change will accelerate, leading to substantial unemployment in the future. But dire employment scenarios remain speculative given the considerable uncertainty about the impact of automation on employment.

Past experience with structural change suggests some workers will find it difficult to secure new jobs. Government should focus their efforts on assisting displaced workers and resist pressure for industry protection or assistance.

Finding 3.5

Wages in Australia have increased at all income levels in recent decades, however they have increased more in higher deciles. Technological change that increases demand for high skilled workers has played a role in the widening of the wage distribution.

Ensuring the benefits from future technological change are shared will be an ongoing policy challenge for government. Raising the supply of skilled workers will be part of the solution, along with the continued role of Australia's tax and transfer system in reducing income inequality.

Implications of disruption for how governments operate

Finding 4.1

The pace of change has implications for how governments undertake regulatory functions. Some regulations and regulatory approaches are explicitly preventing the development and efficient adoption of technologies. In principle, governments should:

• adopt a 'wait and see' approach to new business models and products rather than reacting quickly to regulate what may be unrealised risks
• where relevant regulations already exist
  • adopt fixed term regulatory exemptions for innovative entrants that maintain overarching regulatory objectives (as recommended by the Business Set up, Transfer and Closure inquiry)
  • use the opportunity of disruption to reform markets where there have been undue regulatory restrictions by removing restrictions that impose a competitive disadvantage on incumbents rather than extend existing restrictions to new business models
• where regulation is needed to manage negative externalities, take a proportionate approach (that is, balance the benefits and costs) and regulate outcomes not technologies.
• take an evidence based approach drawing on Australia's scientific agencies in making assessments of the risks to the community from new technologies
• regularly review regulations affected by digital technologies, especially where an increasing share of activity is mediated through digital platforms
• assign the responsibility for reporting to the parties best able to comply at least cost, and design transparent mechanisms for dealing with complaints.

Finding 4.2

Governments do not necessarily need to be involved in the development of standards, but where standards are mandated (as a form of technical regulation), following good regulatory principles would mean that standards:

• are the minimum necessary to achieve regulatory objectives
• maximise interoperability
• follow international standards where practicable and relevant, unless use of standards based on Australian technology would deliver higher net community benefits
• are developed in consultation with the private sector.

In negotiating international standards, the interests of the Australian economy rather than individual businesses should be of primary consideration.

Finding 4.3

Governments contribute to promoting innovation across the economy by delivering a low cost operating environment for innovative activities. This could include:

• removing disincentives for universities to work collaboratively with business and encouraging the sharing of knowledge
• ensuring transparent policy objectives and predictability in those areas most affected by developments in technologies
• improving the functioning of cities to attract and retain highly skilled workers and innovative firms.

Finding 4.4

To improve the reliability and usefulness of information provided by digital intermediaries governments could:

• reduce regulations aimed at the provision of information on a product or service, where consumers are more effectively able to get this information through another avenue (such as an online rating system)
• encourage digital platforms to develop industry standards to improve the reliability of feedback and right of reply and prevent the use of gag clauses on consumers
• encourage industries to develop a common or standardised language around product offerings to assist consumers in making comparisons
• ensure existing broader governance structures for consumer complaints are sufficient to give consumers and businesses confidence in the use of digital intermediaries.

Finding 4.5

Digital technologies allow for more pervasive collection of data on individuals and firms and can be a medium for harassment and security breaches. This may change what is needed in order to:

• protect individuals privacy
• prevent the unlawful use of information
• maintain the integrity of digital networks.

The case for government action in these areas relies on ensuring that the likely benefits of any restrictions outweigh the costs of restrictions to the community.

Finding 4.6

There remains further scope for regulators to adopt new technologies that reduce the burdens incurred in obtaining regulatory outcomes, undertake more effective risk based assessment, and substantially improve engagement and the targeting of monitoring and enforcement activity.

Finding 4.7

Better information systems and scope to monitor services delivered and their outcomes could improve the efficiency and timeliness of human service delivery by:

• allowing consumer choice to play a greater role in the delivery of human services
• using linked information on services and customers to better target service delivery and introduce more integrated services
• reducing the cost and improving the safety of people involved in areas such as environmental management and emergency services.

Finding 4.8

Technologies embedded in infrastructure and greater use of digital platforms to link infrastructure with users and suppliers offer governments considerable scope to:

• assess infrastructure usage and the responsiveness of demand to pricing and to introduce efficient pricing technology
• augment and maintain public infrastructure in ways that minimise disruption to its use
• optimise investment in public infrastructure, better matching the build requirements to evolving needs.

Finding 4.9

Governments (particularly at a subnational level) have already made increasing use of digital technologies in on the ground service delivery. Some adoption of technology in regulatory processes is also evident. There remain, however, issues that governments need to confront before the benefits of digital technologies can be more widely realised.

• A risk averse culture in the development of policies that are wide reaching within the relevant jurisdiction could be assuaged by measures such as: greater use of policy trials, relying on precedents from other jurisdictions; and drawing on recommendations and advice of independent agencies.
• Skill sets within the public service need to evolve in tandem with technological change. The capacity of agencies to recruit staff with relevant skills and shed those with inadequate skills could be enhanced by more flexible performance management and termination conditions in agency enterprise agreements.
• A sharing of data and cooperation between agencies would improve capacities to solve complex problems that do not fit neatly into the competencies of a single agency.
• Governments need to find ways to:
  • exploit, in their program delivery and policy making processes, the increased transparency that comes with digital technologies
  • avoid locking in details of policy responses at early stages without scope for genuine re evaluation 'en route' to the end objective.