Data Localisation Leads To Economic Growth: Myth Or Reality
A wide range of positive economic impact stems from the free flow of digital data across borders. The United Nations Conference on Trade and Development (UNCTAD) estimates that about 50 percent of all traded services is enabled by innovation stemming from the technology sector including the facilitation of cross-border data flows. In 2014, the United States International Trade Commission (US ITC) stated that encouraging the free flow of digital data would result in an estimated USD 16.7 billion to USD 41.4 billion increase (a 0.1 percent to 0.3 percent increase) in U.S. GDP, and U.S. real wages would be 0.7 percent to 1.4 percent higher. Further, the international dimension of flows has increased global GDP by approximately 10 percent to a value of USD 7.8 trillion in 2014. Data flows account for USD 2.8 trillion of global GDP and cross-border data flows generate more economic value than traditional flows of traded goods, according to a report by McKinsey & Company in 2016.
Cross border flows of data hence lead to improved productivity and growth as shown by the data provided on trade and GDP. Beyond this economic effect, the free flow of data is, itself, a significant driver of innovation. It allows the sharing of ideas and information and the circulation of knowledge as well as collaboration among individuals and companies. Cross-border flows of data help reduce costs related to both trade and transactions. A report by US ITC in 2014 estimated that the Internet reduces trade costs by approximately 26 percent on an average.
However, with increasing competition among countries, identity thefts, leakage of information regarding the government and military are on the rise. This leads to increasing concerns of government around privacy, security, and local competition, and has resulted in some policy and regulatory impediments. Hence, restrictions are being imposed by countries on cross border data flows and all important data and information is being stored within the country’s jurisdiction. However, overly burdensome regulations can slow or prevent business transactions, which increase costs and obstructs the delivery of products to the market. The number and impact of restrictions on the free flow of data that are implemented around the world appear to be increasing. The US ITC identifies localization requirements as a barrier for many enterprises in the digital communications sector.
Such a restriction on the free flow of data across borders is known as Data Localisation.
Data localisation is the act of storing data on any device that is physically present within the borders of a specific country where the data was generated. Free flow of digital data, especially data which could impact government operations or operations in a region, is restricted by the governments of some countries. Several countries have over the years, come up with various data localisation laws that require certain types of data to be stored within a country before being allowed to move outside that country’s borders. Other laws require companies to process data locally, and make individual or government consent for data transfers mandatory.
Today, 34 countries have laws and regulations that obstruct the free flow of data across borders, either making such flows more expensive or restricting them altogether, according to the Information Technology & Innovation Foundation. The extent of the data localisation laws in different countries varies with the threat to privacy and safety as perceived by their governments. These policies can be found in countries spanning multiple regions, in Africa, Asia-Pacific, Europe, and North and South America. In China, for example, companies must store their data on servers that are based in the country, and there are a large number of restrictions on transferring any data outside the country. Whereas, in India, there are more restrictions on personal data, government data, and data involving national security.
In recent times, there are broadly two schools of thought regarding data localisation. One group believes that imposing restrictions on the flow of data will increase privacy and safety and hence lead to development. Whereas, the other group thinks that the costs of data localisation, that is, the cost of not being able to participate in the transfer of data, outweighs the benefits from increased privacy and safety, leading to an overall negative impact on growth.
Policymakers offer one of the following motivations when introducing policies that restrict cross-border data flows: privacy and cybersecurity, and economic mercantilism. In pursuing these goals, some countries simply apply a blanket ban on data transfers. Others only apply restrictions to certain types of data. But, in all cases, in the long run the result is harmful to global trade and economic growth as well as to the host country’s own economy.
Many policymakers believe that data is more private and secure when it is stored within a country’s borders. This tends to decrease the instances of identity thefts, illegal usage of data and helps keep confidential data more secure. This way the countries can enjoy the entire benefits without needing to share the knowledge gained from the data processing and analysis.
Other countries believe data localization brings about prosperity by encouraging, and in fact forcing, high-tech economic activity to take place within their borders. This is a new form of digital mercantilism or profitability and is similar to how countries use local content requirements and tariffs to protect local manufacturing operations. Given that traditional trade-protectionism tools, such as tariffs, do not work as effectively on digital economic activity as they do in the trade of goods, countries pursuing digital mercantilism are relying on data localization. Some policymakers believe that if they restrict data flows, their countries will gain a net economic advantage from companies that will be forced to relocate data-related jobs to their nations.
Hence, the economic reasoning behind localisation efforts is a desire to attract investment, fuel innovation and create a competitive advantage for local companies, aiming for overall prosperity and development. It is often believed that with data localisation there is an increase in the security of data of a nation and its citizens too, along with increased privacy.
However, these supposed benefits of data-localization policies are misunderstood and are advantageous only in the short run. A rising trend in forced data localisation measures could result in companies either avoiding certain markets altogether or being forced to create and maintain numerous data centres.
In certain cases, data localisation requirements permit the cross-border transfer of data, but only after storing a localised copy. This practice increases the locations where the data is stored, which in turn increases the number of times the data set must be revised or deleted to remain up to date, thus increasing the possibility of occurrence of errors.
As a result of the restrictions put on the free flow of data, many companies are forced to create offices in every jurisdiction. This increases the costs, raising prices for the consumers and decreases international competition. The benefits in the short run such as privacy and safety discussed above are overrun by the substantial costs of setting up new centres and this cost is then passed on to the consumers in the form of high price, showing that the effects of the entire process are usually not favourable for any rational country aiming for development and an increase in profits.
Data localisation, thus, threatens productivity, innovation and competitiveness, as it inhibits innovation by shutting out international exposure and has an overall negative impact on growth and productivity.
An analysis shown by Bauer et al. in 2014 in the ECIPE Occasional Paper aims to quantify this negative effect. Bauer analyses the effects of data localisation policies of seven countries namely, the European Union, China, India, Brazil, Indonesia, South Korea and Vietnam. The study shows that the Gross Domestic Product (GDP), investments, exports, and net welfare are inversely related to the extent of data localisation policies. More the restriction of free flow of data, greater is the negative impact on these economic variables.
Thus, data localisation potentially affects any business that uses the internet to carry out its processes. Many countries are lured by the short-term benefits of restrictions on data flows and often tend to ignore the mounting costs. However, the findings regarding the effects on GDP, investments and welfare from data localisation policies are too considerable to be ignored in policy design.
A good way forward would be if the policy makers try to strike a balance. They can limit the restrictive policies to an extent such that the benefits override the costs or just offset the costs. That is, reach a situation where the losses of a country are minimum. Restrictions, when put in a correct manner and extent, can be of use to nations for keeping confidential data safe and private. Data localisation should be employed only for data related to defence, matters of national security, and classified information.
Forced localisation is often the product of poor or one-sided economic analysis, with the surreptitious objective of keeping foreign competitors out. The gains that stem from data localisation are too small to outweigh losses in terms of welfare and output in the general economy.
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