The new normal after Covid-19 requires a re-imagining of macroeconomics: we need to start defining the contours of, and measuring, the fourth sector. (First of a two-part article)

“There are three estates in Parliament but in the Reporters’ Gallery yonder there sits a Fourth Estate more important far than they all. It is not a figure of speech or witty saying, it is a literal fact, very momentous to us in these times.” Edmund Burke’s quote highlighted the rising of the Fourth Estate as press and media became an important pillar of the society. A similar momentous time is upon us again, courtesy the pandemic, as we recognize what brings income and wealth to the society.

In an earlier article, “Getting India digitally ready: COVID-19 pandemic highlights urgent need to build digital cocoons for the whole population” (May 15, 2020, The Financial Express), we had looked at the importance of and need to build “digital cocoons” for a large segment of India’s population. As the impact of Covid-19 lingers on globally, it is abundantly clear that those who were part of the digital cocoon have done much better than those outside. Indeed, many activities, from office work to schooling, from ordering groceries to entertainment, the trend unmistakably is to move to a digital mode. Anyone who serves within the digital cocoon, or any sector which has evolved to serve within the cocoon, has been spared the worst of the crisis.

Macroeconomics has traditionally looked at the break-up of a country’s income in three buckets: primary (largely agriculture, mining, etc.), secondary (which includes factories and industrialization), and tertiary (all other value-creating services that did not require land and machinery). It is time now to start to think about a sector of the economy as distinct from the “three-sector view”.

The idea of a “quaternary sector” has been around for some time. However, it is not tightly defined – sometimes it is taken to be a sub-sector of the tertiary sector, sometimes as a placeholder for the knowledge-based sectors of the economy. Pre-Covid, there was limited reason (or push) for this concept to become mainstream. Now, with a significant proportion of the value in the “digital cocoon” having been relatively resilient, it is important that we explicitly call the sector out to understand its nuances. This will help deepen the understanding and shape the response that policy makers should have towards this sector.

What counts, needs to get measured 

As the fourth sector is now more deeply and firmly entrenched, it is imperative that tools to measure it are now developed and refined. We need to make it more widely understood so that it can become commonplace and not a walled garden for those who are lucky or can afford to be in the “cocoon”. An important element will be to name the sector which encompasses all the various aspects: digital, connected, and knowledge-oriented. While professional macroeconomists can formally name the sector, for the time being, we will refer to it as the D-sector. This links it both to the digital world and the fourth letter of the alphabet as a placeholder!

There are two ways in which D-sector will grow: (1) many activities of the “traditional” sectors will move into the virtual domain creating a new set of processes and solutions – think Uber-ization of various activities or any of the work-from-anywhere or gig initiatives of various organizations, (2) completely native elements will spring up thereby creating new work and income streams – think e-gaming, for example. As the sector grows, a larger proportion of the value addition will come from the latter heralding many changes in the society and the distribution of incomes and wealth.

Changes will be very long-drawn

As agriculture gave way to the industrial revolution, it led to significant social, political and economic changes: the fall of feudalism, the exploration of the world, and large increases in global incomes and wealth (if very unevenly distributed) were some of the key changes that reverberated across the globe and the centuries. As the services sector began to take shape, newer professions emerged, the education landscape changed, and a middle- and upper-class emerged on the back of sectors that were previously unimagined. The D-sector will also create similar large scale changes. The most promised one currently seems to be “geography will be history” – if this were to even partly come true, it will have massive ramifications.

Note that the D-sector is not just the digital sector – which has now been around for long and is a key component of the services/tertiary sector. The defining aspect of the D-sector is that value is created and consumed in the digital ecosystem itself. There is no need for the participants to step out the ecosystem.

Public policy for the D-sector remains to be shaped. What aspects of the new sector should be governed centrally, what should be left for the markets to decide? Should the government “guarantee” access to the sector by getting high-quality, low-cost digital infrastructure to all? What education and employment policies will facilitate the growth of this sector – and indeed prepare more people to come into these sectors? What geopolitical implications does this have if services can be offered from anywhere across the world without a “visa”?

These will be contested issues and there is no currently obvious equilibrium. Solutions will evolve as we step into the New World that the pandemic has required us to imagine. The impacts will parallel those of the European explorers as they stepped out in search of new worlds.

The author is with Axis Bank. Views are personal.

Originally published in The Financial Express.

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