Don’t Regulate the 4th Industrial Revolution to a Standstill

A recent World Bank report highlighted the increasing role of Internet communication technologies in our economy. Among mature countries, these account for an average of 21 per cent of GDP growth. And only a portion of the benefits of the Internet for businesses and individuals are captured by GDP figures. Yet unwise regulation could threaten the goose that lays the golden eggs.

Access to the Internet and its economic ecosystem increases productivity in virtually all sectors of the economy. Not only does it provide small and medium enterprises with access to the global marketplace, it also gives them access to the back office, shipping, tracking logistics, and other support capabilities that were once restricted to large corporations. Google's chief economist, Hal Varian, coined the term "micro-multinational" to describe how the Internet has levelled the playing field for mom and pop shops.

For individuals, Internet computing has created new markets and employment opportunities, helping supply to meet demand by making markets more efficient and competitive for everyone's benefit. It is now increasingly easy to expand one's business abroad without a physical presence. In turn, these technologies have helped consumers' voices be heard. Tapping into the world's cognitive surplus has allowed markets to become increasingly transparent through such things as product reviews, niche market blogs, social networks, and crowdsourcing, thereby reducing middlemen's ability to jack up prices.

Most of these technologies and services that have radically impacted our routines have been developed in a business environment characterized by soft regulation. This can be attributed, to some extent, to the difficulty governments have had in dealing with a rapidly changing market. Internet applications that have made the news worldwide of late are good reasons to celebrate this lag in regulation. Not that Internet ecosystems have been completely unregulated, since the same civil code, and common law, which apply to the traditional economy also apply to Internet transactions.

But as the Internet revolution is spilling over from screens and handheld devices into the real economy, it has been greeted coolly by governments. As older industries' market shares are being challenged, it is tempting for elected officials to halt this fourth industrial revolution by renewing barriers to entry for protected sectors of the economy.

By and large, these barriers to entry are ossified, outdated regulations that place strict limits on consumers and providers of digital services. Taxi companies and hotel chains, for example, feel threatened by the new global competition represented by ride-sharing applications and accommodation-booking sites that are able to evade regulations, the effect of which was to harm consumers in the first place.

The Internet is a phenomenon that we often take for granted. Yet reasserting needless regulation, or adopting new, seemingly benign rules, could have significant negative effects on the virtuous circle of digital innovation, whereby productivity gains related to the Internet feed further investments.

In particular, small businesses benefiting from the Internet, and innovative start-ups that drive Internet innovation, have little or no presence in discussions about public policy. Laws and regulations that are directed at certain industries can have significant adverse effects on other industries.

It has been difficult for government officials to see intrusions into traditional industries as anything other than a misuse of new technologies. Ill-conceived regulations could slow the pace of the development of this ecosystem that underpins the investment of billions of dollars and benefits virtually everyone. When it comes to the Internet, as with the rest of the economy, the best regulation is that which is enacted sparingly.

Mathieu Bédard est économiste à l'Institut économique de Montréal et l'auteur de « Les retombées économiques sous-estimées d’Internet ». Il signe ce texte à titre personnel.