Productivity growth in advanced economies is one-tenth this decade what it was in the decade prior. Emerging economies are not looking much better. Many risk getting stuck in the middle-income trap, getting old before they get rich. To see the consequences that flow from weak and unequal growth in living standards, look no further than Trump, Brexit and the rise of political extremes. As the old saying goes, things can always get worse. On the current trajectory, they almost certainly will.
In this context, it is (almost) unbelievable that countries would risk damaging one of the most substantial potential sources for future growth in productivity: digital innovation and the rollout of 5G. 5G represents the next generation of wireless technology. It has the potential to increase download speeds by more than 10 times what is possible under 4G.
5G is not just about faster Netflix. Reduced latency — the time it takes for signals to travel through the network — will be critical in supporting robotics and the Internet of Things. 5G has the potential to become what’s called a ‘general-purpose technology’, analogous to electricity and the internet, which spawns the creation of whole new markets, goods and services that we cannot even imagine, with dramatic improvements in growth, business efficiency, health and social outcomes.
Harnessing this technology represents an unparalleled opportunity to shift the dial on productivity. So, what’s the problem?
The problem is that 5G is steamrolling through almost every controversy imaginable. It has implications for geopolitics, US–China tensions, concerns over Chinese influence, the trading system, international institutions, the global financial system, competition policy, privacy, consumer protection, automation, robotics, the future of work, the protection of children online and the use of the internet by terrorists and other criminals.
With so many controversies, the scope for competing systems and regulatory frameworks to emerge between countries is enormous. This is a problem.
It is a problem because the extent to which advances in technology boost productivity hinges on two things: diffusion and scale. Bell Labs show this in analysing major advances in technology throughout history and how they have shaped productivity growth. They show that advances in technology only boost productivity growth once they reach a tipping point in terms of the adoption of the technology. It is only once the new technology reaches this level of diffusion and scale that it begins to boost productivity.
If competing legal and regulatory frameworks emerge between countries, then the scale and diffusion of these technologies is reduced. This reduced scale and diffusion, in turn, means the productivity benefits from these digital innovations will be lower. While some economies have markets which are big enough to achieve sufficient scale on their own — such as the United States, China and Europe — most do not, including Australia and the rest of Asia. The forgone benefits aren’t small fish, either. Warwick McKibbin and Adam Triggs show that a takeoff in global productivity growth from singularity could boost Australian real GDP growth by 1 per cent within three years, climbing to a whopping 6 per cent increase by 2040. Comparable results are found for Japan, South Korea and India.
In this week’s lead essay, Christopher Findlay argues that 5G will drive innovation towards many things not yet imagined, noting that ‘it is likely to be truly transformative’. But he warns that these benefits are at risk from a ‘digital iron curtain’.
Western policymakers are worried about Huawei’s governance and reliability and, most pressingly, that Huawei is a cyber intrusion risk. The United States has responded by banning sales of US technology to Huawei and developing regulations for an Executive Order to secure the ICT supply chain, which are expected to impede Huawei sales to US networks. The United States has asked others to follow its path. Australia has effectively banned Huawei from participation in 5G and others are considering different options, given the costs of alternatives to Huawei.
Findlay warns that the situation will be difficult to resolve in the context of the ‘punch and counter punch’ environment in which China and the United States are now conducting their relationship. The most likely consequence, he warns, is a new global digital divide: a lower degree of integration across the Pacific in these key sectors and slower growth for all.
What’s the solution?
Banning Huawei outright is not the solution, warns Findlay. A more efficient solution would be to identify the real risks involved and to design good regulatory and business responses in an internationally cooperative manner. The world needs cooperation, not confrontation. Findlay shows that the national interests of countries are broadly aligned in needing to develop consistent legal and regulatory frameworks to deal with the multitude of issues raised by 5G: from cyber security to consumer protection, competition policy and the impacts on trade and finance.
International cooperation is fundamental for an efficient solution. This includes work on the alignment of regulations, the definition of such concepts as personal data and critical information infrastructure, the design of intellectual property protection systems in this sector and the development of principles governing the application of artificial intelligence.
But most fundamentally, countries need to cooperate because beggars can’t be choosers. With the driver of long run living standards so perilously absent, countries need all the help they can get.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.