Is technological change creating a new global economy?

Our lives are being shaken to their very core by technological change, with the Fourth Industrial Revolution transforming economies as never before.

The unprecedented speed of change, as well as the breadth and the depth of many radical changes unleashed by new digital, robotic and 3D technologies, is having major impacts on what we produce and do, how and where we do it and indeed how we earn a living. And while the transformation will proceed differently in advanced and developing parts of the world, no country or market will be spared from the tidal wave of change.

To appreciate the changes at hand, two interrelated aspects of the economy are particularly illustrative: growth and productivity on one hand, and employment on the other.

As the World Economic Forum highlights annually in its Global Competitiveness Report, productivity is the most important determinant of long-term growth. Yet productivity growth has stagnated around the world, particularly since the great recession, putting into question our ability to provide rising living standards for the world’s citizens. While arguments abound as to what has been driving the productivity slowdown, an important question is how the Fourth Industrial Revolution will drive it in the years to come.

In theory, the application of new technologies to existing problems should improve efficiency and thus productivity. Technological innovations tend to raise labour productivity by allowing the existing workforce to do more with less, by replacing existing workers with technology (with an obvious downside, as I will come to later), and they also usher in new products and processes that open up new sources of growth.

Techno doom, or techno utopia?

Yet there is much debate on the likely size of the impact. On one hand, experts such as Robert Gordon of Northwestern University believe that the most important contributions of the digital revolution have already been made, and that the productivity impact of the current technological revolution is almost over. That would be worrisome indeed, particularly given the present slowdown.

On the other hand, “techno optimists” such as Eric Schmidt, the chairman of Google, believe that the world has reached an inflection point and will soon be experiencing faster growth and a major surge in productivity.

Perhaps there are such divergent views because the impact of technology is so difficult to measure. Even back in 1987, the Nobel-winning economist Robert Slow noted: “You can see the computer age everywhere but in the productivity statistics.”

The trouble with Airbnb and GDP

Regardless of the precise effect on traditional measures of productivity and growth, inadequate measurement is an issue. The Ubers and Airbnbs of the world are clearly providing efficiency and productivity gains. Yet many of the benefits of these new activities are not accounted for in the calculation of GDP, in the same way that private housework and childcare are neglected.

In other words, we are increasingly producing and consuming much more value than our economic indicators measure. This suggests that we need a new way of measuring output and productivity, since we are not sufficiently taking into account the value that is being produced in the economy.

This can be seen as part and parcel of the “beyond GDP” debate, which argues that GDP is simply not a sufficient measure of societal progress. It will be particularly important to revise the traditional growth and productivity numbers, since most of these new productivity gains will be achieved in a way that makes our world more environmentally sustainable. Indeed the examples cited above are emblematic of the new “sharing economy” where we make better use of existing products rather than merely producing more “stuff”, which while good for the GDP statistics, is not necessarily so for the planet.

What happens when robots turn white-collar

And while discussions of productivity and measurement remain somewhat theoretical, nothing can be more concrete than the potential impact on what is arguably most fundamental to our sense of economic worth: gainful employment.

Throughout the ages, technology has replaced human effort, which while good for productivity growth (as mentioned above) and growth overall, is disruptive for those workers who lose their jobs. And this is no longer just about repetitive factory jobs: new computing and robotics technologies now threaten many professions that had seemed “safe territory”, such as accountants, taxi drivers and paralegals.

Given the speed and breadth of the changes now being unleashed, it is clear that new technologies will dramatically change the nature of work across all industries and occupations. And as automation will inevitably replace labour in providing existing goods and services, the main question is how long this will take and how far it will go. A recent study estimated that 47% of total employment in the US is at risk, over the next decade or two.

It has always been the case that technological innovation destroys some jobs and replaces them in turn with new ones, in a different activity and possibly in a different place. As technological innovation forges ahead, one can expect that low-skill activities will be progressively replaced by tasks that require creativity and social intelligence. And as the job market becomes increasingly segregated into “low-skill/pay” and “high-skill/pay” segments, social tensions will inevitably rise.

We have already seen an increase of inequality within most OECD countries in recent decades, and institutions such as the IMF and the OECD are quantifying the extent to which this inequality is hampering growth and development.

School, work, retirement – RIP

Given that the dislocation will be significant and that the transition between the old and the new jobs will take time, the main question is what to do to foster more positive outcomes and best manage those caught in the transition. In a working environment that evolves so rapidly, the ability to anticipate future requirements in terms of the knowledge and the skills necessary to adapt becomes increasingly critical.

All stakeholders – business, government, society and individuals – will have to work together to adjust education and training systems that can continuously reskill and “up-skill” workers. The traditional model of school-work-retirement will simply not cut it any more. This will be particularly important if we are entering an era when jobs are being rendered obsolete much faster than new ones are created.

Will developing countries leapfrog ahead – or be left behind?

Finally, it is important to reflect upon what this might mean for developing countries. Given that many of the past phases of the industrial revolution have not yet reached many of the world’s citizens (who still do not have access to electricity, tractors, etc.), the Fourth Industrial Revolution mainly characterizes what is transpiring in the advanced (and to a certain extent middle-income) economies.

Over recent decades, although there has been a rise in inequality within countries, inequality across countries decreased significantly as developing countries began to catch up. Does it risk potentially reversing the catch up we have seen to date in terms of income, skills, infrastructure, finance, etc? Or on the other hand, will these technologies and rapid changes be harnessed for development and faster catch up through leapfrogging?

The homo economicus of tomorrow

It is hard to answer these questions, but they will require significant thought as advanced economies contend with their own challenges. It is not only a moral imperative to ensure that swathes of the globe are not left behind; such a scenario would also pose a risk to global stability through channels such as global inequality, migration flows, and even geopolitical relations and security.

Ultimately, developing countries have the greatest gap to close, but can also benefit from learning from the mistakes of the advanced economies, leapfrogging to more prosperous and technologically enhanced futures. The successful homo economicus of tomorrow will certainly be different from today: she will be highly creative and adaptive, she will have many jobs in her lifetime where unthought-of technologies support her extreme efficiency, and she will probably not bother to own (or drive) a car to work, in the case that she even has a physical office to go to. She will live in a world that has been profoundly altered by the Fourth Industrial Revolution. Now is the time to make sure it is changed for the better.

More on the Fourth Industrial Revolution
The 7 technologies changing your world
The Fourth Industrial Revolution: what it means
What is the Fourth Industrial Revolution?