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A role for the state in the digital age?

A multilingual transport information service in Japan (Photo by Yoshio Tsunoda/AFLO)

A multilingual transport information service in Japan (Photo by Yoshio Tsunoda/AFLO)

January 24, 2018   6 mins

Many Silicon Valley entrepreneurs and market “fundamentalists” believe that business alone drives innovation and technological transformation. Governments have no role.

They argue that the wide diffusion of mobile, the Internet, and information have made markets efficient, and citizens empowered. There is little need or room for government to play a role in the digital age. In the United States and other market economies the role of the state in innovation is being pushed back.

Yet, as Mariana Mazzucato argues in her celebrated 2013 book The Entrepreneurial State, what happened in recent U.S. history shows otherwise. The state not only facilitated the digital knowledge economy, but actively created it with bold vision, enabling policies, and targeted investment. For example, her in-depth examination of all the key technologies that make iPhone so smart shows they were government funded, including the Internet itself, GPS, the touch screen display, and the Siri voice-activated personal assistant. 1

Big projects such as the Internet require vision, a mission, and creating dynamic institutions such as DARPA, 2 with the ability to attract talent and create excitement. The U.S. government also funded the development of Google’s search engine.

The disconnect between the thinking of digital economy entrepreneurs and the realities of the digital economy is increasing – at a time when the challenges of digital transformation are rising and the new wave of technologies demand a much more engaged, risk-taking, market-creating, “entrepreneurial” state.


A state fit for the digital age

Managing digital transformation and creating the digital economy pose novel challenges for governments on multiple fronts. Moreover, investment in the digital sector alone will not secure the promised digital dividends. Such investments must be complemented by alignment with new development strategies, new policies, new skills, and new institutions where the state must play new roles.

These roles include:

First, supporting R&D and playing an entrepreneurial role in researching and testing promising new digital platforms and technologies. This R&D will not only focus on the new technologies, but also on their human complements and adaptation to local context. The digital technology revolution has been the most broad and fast-paced technological revolution in human history. An activist, innovative, and risk-taking state is necessary.

Second, creating new policies for the digital age. The fast pace of the digital technology calls for policy innovation, and agile policy making processes and institutions. The presence of strong network and scale economies, and the tendency for them to lead to the development of monopolies, call for policies to ensure healthy competition. Policies are also needed to ensure privacy and cybersecurity.

Governments are also required to manage the growing risks of concentration, inequality, and control that can undermine the promised shared prosperity. 3 When the Internet and digital platforms deliver scale economies, but without competitive environment, the outcome could be excessive concentration and monopolies. When tasks are fast automated but workers skills are not continuously upgraded, the outcome will be greater inequality. When digital technologies help overcome information scarcity, but governments remain unaccountable, the outcome will be greater control rather than citizen empowerment and inclusion. Policies and investments in the digital sector must be complemented by complementary policy reforms in the analog sectors.

Third, investing in human and organisational complements and institutional learning. Substantial investment is needed to implement organizational changes, process innovations, and other intangible digital assets (such as digital data and content) to realise the promised digital dividends. These capabilities involve deep changes in skills, roles, norms, routines, teamwork, cross-sector partnerships, and leadership and managerial practices. The state also needs to leverage the digital revolution to make the public sector more capable and responsive, to expand citizen participation in service delivery and policy making, and enhance accountability and citizen voice in service delivery.

Creating state capabilities for the digital age

State capabilities are needed to engender shared vision and mobilize far-sighted commitment to digital transformation. Digital disruptions to jobs, skills, and institutions are likely to be deep and long-lasting, so long-term commitment to the transformation process is equally necessary.4

A state focused on innovation thus plays multiple roles.  It assesses, coordinates, and nurtures the digital ecosystem at the national and local levels. It integrates ICT 5 opportunities and investments into a national development strategy. It partners with the private sector to invest in the national digital infrastructure. It leads regulatory and competition policy reforms. It secure wide access to the Internet and digital technology tools. It enables local initiatives, adaptation, and learning. These roles call for building new competencies within the public sector.  They also call for an enhanced capacity to partner with both the private sector and civil society.

Meanwhile, governments all over the world face a potent combination of challenges today: increasing budget constraints; 6 rising citizen expectations for responsive public services; growing inequalities in access, incomes and opportunities; rising popular demand for transparency and accountability; declining trust in government for failing to deliver on promises; and the need to compete in a fast-moving, knowledge-based global economy.

The state is therefore a major user of the new digital technologies–to fulfill its roles in securing public service delivery, meet increasing standards for transparency and social accountability, offer its data stores to businesses and citizens, and reduce transaction costs and regulatory burdens for business.  The state needs to leverage the digital revolution to make the public sector more capable and responsive, as a partner to business in meeting global competition. Rising citizens expectations also compel the state to expand citizen participation in service delivery and policy-making, and enhance accountability in service delivery.  Digital transformation of government and its services is no longer optional.


An evolving role for government

Governments play varying “activist” roles, not only in innovation and the adaptation of new waves of digital technologies, but also in the assimilation and diffusion of these technologies. 7 Digital technologies call for investing in complementary factors such as enabling policies, human resources, new institutions, and targeted infrastructure and platform investments, to secure the promised digital dividends. 8

In best-practice countries, governments have played key roles, in partnership with business, to promote a dynamic ICT ecosystem, create a highly networked system of actors, and invest in the platforms and human capital required for the digital economy. Again, the US government played a prominent role in fostering an indigenous ICT sector, acting as a backer and vanguard, providing public venture capital for early commercialization of risky innovations, ensuring that intellectual property laws as enforced worldwide, and providing various tax and procurement support.

Korea, Singapore, Finland, Sweden, Israel, Estonia, and China are among the leading examples in pursuing digital transformation across their whole economy. Key lessons can be learned from examining and comparing emerging best practices of governments in leading digital transformation. 9

The digital age asks more of governments than ever before. Innovation economy demands innovative government, not only to transform itself into an agile and responsive actor, but also to create the necessary policies and platforms to facilitate the workings of a dynamic digital economy. Governments must build their capacity over time and learn to play new and expanded roles fitting with the digital age.

The appropriate role of government in the economy is not static. It must evolve as the economy and technology do. This evolution has to take a faster pace than has been in the past in response to the fast-paced digital revolution and arising novel policy challenges. There is no one-size-fits-all for government role in the digital age. Understanding the political economy of the country, and the past history of government successes and failures, can provide a guide to a progressively agile and entrepreneurial government, fit for the “learning society” of the digital age. 10

The state can learn to pick winners, rather than have losers picking the state. 11 The state can learn to work with startups both to foster competition – and to regulate rising monopolies. Conversely, if we doubt the state’s ability to work as an innovative agency for the public interest, and focus on its failures, we risk government becoming timid – and easily captured by lobbies, monopolies, and the status quo. Mastering digital transformation by governments, businesses, and societies is likely to be the defining core competency of the 21st century.


The Financial Times  reviewed Mazzucato favourably.  Here she summarises her case in the Harvard Business Review.

For a contrary view, this in Forbes.

  1.  Mariana Mazzucato, The Entrepreneurial State, 2013, chapter 5.
  2.  The Defense Advanced Research Projects Agency – the U.S. government department responsible for developing many of these key innovations.
  3.  Digital Dividends, World Development Report, World Bank, 2016.
  4.  This ecosystem includes such components as: information and communication infrastructure (connectivity), digital platforms for identification and payments, a local ICT services and digital entrepreneurship sector, technical ICT skills and leadership, content and media industries, digital applications for government and business, digital service provision for all sectors, e-education, enabling cyber policies, and ICT-sector management and regulatory institutions.
  5.  ICT: Information and Communication Technologies
  6.  For example: the UK Government’s Digital Efficiency Report suggests that digital transactions are 20 times cheaper than by phone, 30 times cheaper than by post, and 50 times cheaper than face-to-face meetings.
  7.  Nagy Hanna, Mastering Digital Transformation: Towards a Smarter Society, Economy, City and Nation, 2016
  8.  Digital Dividends, World Development Report, World Bank, 2016.
  9.  Nagy Hanna and Peter Knight, Seeking Transformation Through Information Technology: Strategies for Brazil, China, Canada and Sri Lanka, 2012
  10.  See Dani Rodrik, One Economy, Many Remedies, 2007. Joseph E. Stiglitz and Bruce C. Greenwald, Creating a Learning Society, 2014
  11.  See Mazzucato, pp. 18-21

Nagy Hanna, former head of corporate strategy with the World Bank, is author of several books on global innovation including Transforming Government and Building the Information Society (2010), and Mastering Digital Transformation: Towards a Smarter Society, Economy, City and Nation (2016). He is a Visiting Professor at Wits University in South Africa, and Senior Fellow of the Center for Policy on Emerging Technologies in Washington, DC.

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