From Near and Afar: How Digitalization Is Shaping the Economic Geography and Conditioning Regulation

In this chapter, I describe how technological progress triggers and shapes structural change within the economy and society, which in turn—if the resulting changes are significant enough—may shift the scope and outcome of established legislation and regulatory frameworks. The argument presented focuses on the ongoing digitalization, using its common technological characteristics to identify and describe structural changes in the economic geography and how these may challenge or shift the function and outcome of pre-existing regulation. At the end of the chapter, I sketch an approach to regulation and regulatory reform in a digitalized economy and discuss some of its implications for the tax system. The term regulation is used here in a wide sense to describe legislation and regulatory frameworks imposed and enforced by governments, including tax rules. Regulation depends explicitly or implicitly on the state of technology—the conditions it sets for economic and social behaviors—at the time of its formulation and enactment. If technological progress changes the conditions for specific activities, the outcome of regulation based on these conditions may also shift and cause unintended or even undesirable consequences. Part 1 describes the generalized relationship between technology, economy, and regulation, using computerization and digitalization as examples. Part 2 provides a more formalized definition of digitalization and its core characteristics. Part 3 builds on this to describe digitalization in terms of structural change within the economy, focusing on five broad categories of change with respect to economic geography: (1) Reach and scale of economic activities, (2) materiality and value, (3) the rise of digital multi-sided platforms, (4) AI and the automation of analytical work, and (5) increased economic complexity. Digitalization does not remove the role of geography, but changes it. Finally, part 4 summarizes and sketches a tentative approach to coarse-grained regulation and regulatory reform in a digitalized economy, countering economic and technological complexity with regulatory simplification.