Luohan Academy

Measuring the New Economy and Its Intangibles | Frontier Dialogue

Long Chen, Executive Director of the Luohan Academy, explains how digital technology can lead to inclusive growth as well as introduces cursory research into the intangible economy and thoughts on how to measure it.

Drawing on examples from China’s e-commerce sector, Dr. Chen discusses how important economic benefits such as increased product variety, greater geographic integration, and more inclusive entrepreneurship are currently escaping measurement. This structural change in the relationship between producers and consumers requires new metrics in order to be properly expressed and understood.

The inaugural Frontier Dialogue focuses on the measurement of the new economy, a crucial step in the direction of better understanding the impact of digital transformation. This forum allows prominent scholars, policymakers and industry experts to exchange views and collaborate on possible new and better measurement approaches.


Long Chen: Okay. so it's my turn. Actually there's a lot of good experts in the audience who are better than me to talk on the subject, but I guess I'm entitled to talk a little bit for a couple of reasons. I'm going to use the colored PPT and there was difference, but probably more important. So I think China is different, but I'm going to come back to this to this point here. So there was an excellent review earlier by Erik to talk about the potential explanations for the for the slowing down of the productivity puzzle.So there are four possibilities of why it's probably false hope. So second is the probably mismeasurement and another reason is redistribution.

So maybe the impact is just distributing some areas or some players. Finally, it's probably the implementation lag. So we have to wait. Now, so the reason I think it's particularly worthy to talk about China is that China is, in a sense, digitalization has become macro phenomenal in many areas, but I'm coming back to that. So I think that can help to clarify some of the potential explanations to help to push ahead a little bit. Now, but before I get into China's case, I'm going to give several comments. One is that, in addition to the productivity puzzle, there are several more puddles. I think there are some are related. One is, for example, the low inflation puzzle. That is a lot of the price, especially manufacturing  goods, the price doesn't really go up.

So the inflation we see in many countries are going down, as you can see that compared to the primary commodities, manufacturings, that the price are not kind of stagnant. So that means that the price of a lot are not coming in the same direction. So that's one of the puzzle, let's say, it's the low inflation puzzle. Now another puzzle that the guest talked about is the free goods puzzle. And that is that, increasingly we can see that the free apps are dominating and people spend one more times on them. So I'm not exactly sure that they are gonna exactly replace the original time that people spend on television or other the old hobbies, but I think that it's obvious that we spent a lot of the time on the free apps these days. So if you think about it. For the consumers, if they spend a lot of the chunk of the time on the free goods, then somehow that part is not quite measured up by the GDP. How should we think about that?

So that's another puzzle that Mike mentioned earlier, but I'm going to give some concrete evidence. So what I do here really is to provide some material hopefully today to stir up that talk a little bit.S o that is the intangible asset puzzle. So now I'm going to give you some numbers. So if you look at it on the left, if we look at the percentage of the market value, that is kind of representing the intangible assets. So if you look at them, then it's clear that it's in the technology companies, electronic equipment, softwares and including S&P 500.For S&P 500 firms, about 70% of their asset is kind of intangible. That relative to their real assets is about only 19%.

And the car industry is very little. So the point here is that, it's not just about very high tech companies. And so this is becoming more and more intangible. Another point is, I'm trying to look at the price to sales ratios. That is that, I'm trying to think that the company sales is a bit like the GDPs representing the business economic activities.So that ratio is much higher for the companies that digitized industries or companies, softwares, big tech, electronic equipment, S&P 500 companies, real estate, car industry is similar. So if you look at the assets or their revenue activities, then you can see that, before the more digitized industries it tends to be higher. So that is another point.Now, let me move quickly to China. China's case is worthy to talk about because in the past 10 year or so people have...We already know that China has become the second largest economy in the world, but what is somehow under appreciated is that China's digitization is making good progress.

So, back in 2009, China's e-commerce, online consumption, only accounted for less than 1% of the retail sales, which is kind of lower than a lot of other countries. But in the last 10 years, not only China's economy has progressed, actually its percentage, the online consumption's percentage of the retail sales is now about 25%, a quarter of the retail sales.So what I'm trying to say here is that it has become a macro phenomenon. So in this sense, we don't need to worry as much about implementation lag. It also involves the hundreds of millions of users and the tens of millions of the companies, SME startups. So I would say in terms of the impact it has on the people, on the companies as well as a percentage of the GDP, they all become kind of macro phenomenal.

So we can focus on some of the cases that we can maybe that can help the people here to understand a little bit more.So here, so the first thing we're trying to look at is that, does the online e-commerce improves the productivity of the retail.So if you look at numbers, if you look at this, this gray line here is coming down.So like Bob talked about earlier that even in China, the labor productivity is going down just like the Western Europe or United States.And if we look at the red line, which is the labor productivity of the retail sales, you can see that it kind of fluctuates, and then it goes up.

And the other line is the share of the online retail sales.It's kind of going up.So we kind of see that the productivity of the retail sales, that industry is going up.The trend is different from the overall trend of the other sectors in China.And the retail sales in China is a more digitized industry, as I mentioned.So that's one thing, but probably what I should mention more is that, I think if you look at the e-commerce as the use case, a lot of stuff that not quite measured in GDP, probably they are important.So if we think about that, digital technology tremendously reduce the cost of the producing and sharing information.So because of that, the market, the boundary of the market has been broken.So the fixed cost of market access have become much lower.

Now, a lot of the small startups, the Papa Mama stores, now they can get easy access to e-commerce, to sell to people thousands of kilometers away, and the cost of contract enforcement has become much lower.And also there's a lot of algorithms nowadays to improve the information efficiency helps that supply and demand match each other.And there is also more competition because the market becomes so much bigger.The examples are, you can think about the hundreds of millions of people online every day and there's tens of millions of company.So, there's much more competition.That also leads to reduction of the price discretion.So these are actually, all of these things are observed and are memorable.So, but other things are kind of intangible.So they're important, but they are not entirely surely captured in GDP.

For example, on the consumer side, there's a lot of more varieties, I'm gonna give the numbers to back this up.They spend much more time.The quality of the stuff they get is much improved because of the much bigger market.There's a lot of the reduced spatial consumption inequality.And on the business side, there's so much more inclusive entrepreneurship.So if you only look at Alibaba as a platform now, each day, we have the more than 10 million active startups and half of the entrepreneurs are women.So they get opportunity to serve customers [inaudible] which were impossible.Also the market evaluation part is also measured.So what I'm trying to say is a earlier point, and that is that, the market cap, they actually captures this part of the thing that might not exactly show up in the productivity or revenue per se.

So let me give you some concrete cases to hopefully help you understand what's happening in China.So if you look at this graph here on the right hand side, just looking at the different, a lot of industries, the average distance between the buyers and sellers is about a thousand kilometers, which was...We know that traditionally local stores can only serve people within several kilometers.On left hand side is something interesting.We just we just made this graph.So what this really is that, this is China.So what we're trying to see?So we say, if we only use the e-commerce activities to define the network, how does that look like?It's very interesting.You can even see the different regions of China, so they are not bounded by the province, nor are they bounded by how the government defines this supposed to be the area that linked together, but actually you can see that the market somehow, because of the digital technology, they are combined in different ways.

So this network is spreading.It covers all of the China's markets, because there's some areas...We are looking at area that has over one million population, or cities of that size.So it's not including all the areas, but you can be seen that it's interesting from this networks.We also see the clear reduction of the price discrepancies.So the price increase, or you can think about inflation growth variations, has becomes much smaller in the past 10 years or so.Because the online markets integrated together, that makes the price variation much smaller, except for the most recently, probably because of the COVID and other reasons, it's going up a little bit, but otherwise it's clear trend it's going down, the price discrepancy.

And this part is interesting.You look at the variety and...Give you a particular example, women's sweater.So if you separate two dimensions, one is the design characteristics, another is the style.Style like to do it where it was kind of closest to for the work for the leisure time, for the different styles.And the different styles are going to have lots of different designs.So if we combine them, of course, you're going to have the, a lot of the combinations.You can see that there's thousands of combinations that are actually available nowadays for a woman to pick up that variety.I'm not sure it's gonna be captured.My point here is that, let's say, I'm going to spend 50 dollars to buy a sweater, but there's so much more variety, which is not exactly captured by the 50 dollars.

So that's something we observed and continue with disparities.So this on this graph, the horizontal axis is the per capita GDP RMB, the vertical line is the variety of the goods consumers buy.You can see that in the less development regions in China, they actually buy many more varieties.Then there are the more advanced regions.The reasons, of course, are very simple.So in the less advanced regions, they're going to enjoy the possibility to buy many more varieties.And in the big cities, you can go to the local malls to do that.So that the variety is particularly important for the less developed regions and the people there, in terms of equality.And so this is the regression from research and from general marketing research, but you can see it's similar.This is from the online ratings.

So the consumers actually, they provide the information themselves because the customer producing information is so cheap, they rate the goods, and by doing so then that promotes the branding.But you can see that this is particularly useful for the goods to improve the sales, but it's particularly useful for the products that do not have such a strong branding to start with.So that is helpful for the goods with less branding.Now what's really behind this is actually the information.It's the information.You can see that information flow.So we ask what happens if you do not have the information.So this is a very dramatic pattern.And you can see that, if we do not recommend based on the personal information, then you can see that recommendation quickly goes down to top 1000 commodities where there are billions of commodities online, and then quickly if you'll have to look at the top commodities like the industrial times, then you can see that's the sales.

So we look at this.This is this is the experiments, randomized field experiment.You can see that the sales just drop, like, more than 80%.It's very...77%.80%, yeah.It's viewing those down 70%, 77%, especially for a small brand.So that you can see that it's really what is really behind it is the information.So I'm going to skip this in the interest of time.So let me put together what I'm trying to say here.So I think what we experienced here in China is that we all know that, because of the Moore's Law, there's a tremendous drop of the cost of producing information, and that, you know, I'm not talking about ICT here.So, what I'm trying to talk about is that this is really transforming the relation between the producers and the consumers, and what it is really transforming is that from on a consumer side, they're going to enjoy much more variety and the quality of the goods.

So anybody in China knows that in the past that 10 year or so, you can see that by the similar price of goods, but the quality is so much better.It becomes so much more affordable, and they're going to save much more time.And for the producers, they're going to have a lot of the opportunity to serve the customers they never had before.Valuation is the intangible asset product I'm talking about.And there's also much more competition.So what this does is that, I'm not that sure it's the online consumption that make the total consumption so much bigger.Maybe it's a bit bigger, but what we really see is that the structure of the whole market is completely transformed.It is that consumers enjoy much more variety and quality and that there's a surplus point that Erik and Mike talked about, and on the supply side...I'm going to finish within 30 seconds.I'm sorry.On the supply side, it's the producers.They also have this opportunities and all those puzzles we talked about earlier, the free goods puzzle.So it's a lot of the free services there's of the intangible economy.It's a low price.And also the productivity puzzle means that transformation is much bigger than product itself.

I think probably they are all related.So regardless of what we measure, what we do see from our experience, from data, is that, the economy is moving into a more customer-driven economy with more competition.It seems to be more and more intangible in the sense of the GDP measures.So that is that the big picture, what are seeing here.So I'm gonna, in the interest of time, stop now.


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