Canada and the Digital Economy

Background

There have been three industrial revolutions in human history. (See also Industrialization in Canada.) Many scholars think the digital economy represents a fourth.

The first industrial revolution began in Britain between about 1760 and 1850. It saw the country’s economic base shift from rural farming to urban manufacturing. This model was then adopted by other countries around the world. China and India were among the last countries to industrialize, doing so in the mid-20th century. The second industrial revolution started in the United States in 1870. It saw the economic base move from individually produced goods to mass production and distribution.

The third industrial revolution started in the 1960s. It saw the rise of information and communication technologies (ICT). The economic base of society shifted to computer-based work. Some think the current digital economy is a continuation of this industrial revolution. Others believe it merits its own distinct phase. (See also Computers and Canadian Society.)

Definition

The digital economy is also called the Internet economy, the new economy or the web economy. The phrase digital economy comes from Don Tapscott’s bestselling book, The Digital Economy: Promise and Peril in the Age of Networked Intelligence (1995). Writing in the early days of the World Wide Web, Tapscott made a number of predictions that he felt the digital economy would bring about.

Tapscott believed the digital economy would shift the base of the economy away from traditional resources and toward knowledge. By digitizing knowledge and freeing it from physical constraints, information would spread freely and rapidly around the world. (See also Information Society.) This would lead to more fluid and flexible work environments. So-called middlemen jobs connecting customers to products would either improve or go extinct. Mass production (making standardized products on a large scale) would yield to mass customization (making products that suit a customer’s needs). Multinational enterprises would yield to global organizations. The gap between the technologically literate and the technologically illiterate would grow and potentially cause major societal problems.

Writing in 2001, American economist Thomas Mesenbourg identified three major parts of the digital economy: infrastructure, business processes and commerce transactions. Infrastructure (or e-business infrastructure) refers to money spent on computers, Internet cables, wires and routers, and the software and applications that run on them. This also includes money spent on tech support and programmers. E-business processes include the shift to selling products online. It also includes shifting logistics, communications and support services to the digital sphere. Finally, e-commerce refers to the value of goods and services sold online.

Evolution of the Digital Economy

The changes Tapscott and Mesenbourg predicted in 1995 and 2001 have largely come to pass. The biggest companies today in terms of market value are tech-based global giants: Apple, Amazon, Alphabet (Google), Microsoft and Facebook. Apple sells computer hardware and software. Amazon dominates e-commerce. Alphabet commands the digital communications sphere. Microsoft leads in software. And Facebook connects more than one billion people daily via its social network and many business ventures. Apple and Microsoft trace their roots back to the 1970s and the earlier ICT revolution. Alphabet/Google and Amazon started in the 1990s and Facebook in 2004.

About 90 per cent of Canadians use the Internet every day. More than 75 per cent own a smartphone and nearly as many own a laptop. Half own a tablet and roughly the same number own a desktop computer. Globally, about 4.39 billion people use the Internet, or more than half the world’s population. That’s compared to about 2.5 million in 1990 and about 44 million in 1995. Developing countries are among the fastest growing Internet users. India, for example, added about 100 million in 2018.

As predicted, this has shifted billions of dollars from the offline economy to e-commerce. Estimates put the total amount of e-commerce in Canada at $877 million per month in 2016. By 2019, it had reached $1.5 billion a month. In 2018, about 1.8 billion people worldwide bought something online, for an e-commerce total of US$2.8 trillion. E-commerce now makes up 14.1 per cent of global retail sales. The fastest-growing online markets are in Indonesia, India, Mexico and China. As online connections strengthen, sales increase.

Impact of the Digital Economy

Statistics Canada has found that advancements in technology and the Internet have “fundamentally changed” how Canadians and Canadian businesses interact, as well as how they produce, distribute and consume goods and services. In 2017, the agency found that the gross domestic product (GDP) connected to the digital economy was $109.7 billion. This represented 5.5 per cent of Canada’s total economic activity. That’s a bigger proportion of the total economy than that produced by mining, oil and gas extraction, or by transportation and warehousing. The digital economy is also growing faster than the overall economy. Statistics Canada found 886,114 jobs associated with the digital economy in 2017. This represented 4.7 per cent of all jobs in the country.

Much of the digital economy has grown through either an economy of scale (reducing costs by increasing production) or an economy of scope (increasing revenue by diversifying the products and services available).

Traditionally, getting an advantage through economy of scale has been the surest way to succeed since the first industrial revolution. If a company is producing and selling stoves, making one stove will be quite expensive. But by streamlining the mass production process that goes into making stoves, the total price drops and each stove can be sold at a lower price. For example, a vehicle manufacturer uses the same type of engine, chassis and gearbox to build several different vehicles. In the digital economy, companies like Uber and Airbnb get their advantage from the scale of their global customer base.

An economy of scope keeps costs down by doing many different things in one spot. Amazon has become a digital department store that sells a wide range of products. It also sells its own products, like the Amazon Echo smart speaker, and runs streaming services for music and videos.

The digital economy has also seen a shift to the gig economy, which often creates a worse deal for workers. Instead of having a permanent job with a regular salary and benefits, workers in the gig economy are hired to work piecemeal. A driver for Lyft, for example, only gets paid per ride. Unlike in a permanent job, the worker gets no health benefits, sick days, or any of the other safety nets found in traditional forms of labour.

The idea of a “gig” comes from the arts community, where a musician would be paid per gig. The digital gig economy has lowered income for many artists by making their products freely available online. Streaming services such as Spotify can let customers play a hit song as often as they like, but the musician may earn under $50 and see a dramatic drop in album sales. Billions of dollars in advertising have also shifted from newspapers to online giants like Google.

Climate Impact

With phrases like “in the cloud” and “virtual assistants,” the digital economy can sound like an environmentally friendly concept without a significant environmental footprint. However, in a 2013 report called The Cloud Begins with Coal, Mark P. Mills notes that the global ICT sector uses as much electricity per year as all the electricity generated in Japan and Germany combined. That’s as much electricity as was used to light the entire world in 1985. It represents nearly 10 per cent of the world’s electricity generation.

Mills calculated that some smartphones use 361 kWh a year, while some refrigerators use 322 kWh. And while most households have just one fridge, they may have several smartphones, tablets and computers, which tend to be left on permanently.

Digital Currency

One of the latest waves of the digital economy is virtual currency or cryptocurrency. Virtual/cryptocurrency is a digital asset that can be used to buy goods or services, usually online. Unlike national currencies like the Canadian dollar, cryptocurrencies like Bitcoin or Facebook’s planned Libra are not controlled by central banks or governments. (See also Monetary Policy.) Cryptocurrencies can be used more anonymously than a credit card or e-transfer of cash.

If a significant chunk of the overall economy shifts from using national currencies to virtual and cryptocurrencies, governments would lose control over that section of the economy. It could lead to a freer market, with currencies exchanging purely at market rate, or to volatile fluctuation, as no central authority oversees the valuation. Similarly, it could give people more anonymity online, which could make money laundering and black-market transactions easier to conduct. (See also Computers and Canadian Society: Dark Web.)

Challenges and Opportunities

Canada is one of the world’s most digitally connected economies. The vast majority of Canadian workers use the Internet every day. As high-speed connections reach out to more rural areas, the impact will grow. The digital economy brings new opportunities, and new risks.