Science, tech and a new course for growth

Productivity growth has emerged as an important global issue, which is why the theme of the Annual Meeting of the New Champions 2015 is Charting a New Course for Growth.

Last year, output per worker grew at its lowest since the start of the millennium. In the United States, annual productivity growth from 1995 to 2010 was 2.6%; it is now down to 0.4%. In the United Kingdom, productivity is even on the decline. To economists like Robert Gordon or John Fernald, this drop in productivity growth demonstrates that gains from the digital boom of the 1990s were short-lived and much weaker than expected. Other economists take the opposite view and suggest the problem is merely a statistical illusion.

The way output is measured in national accounts, some argue, under-records progress by failing to capture properly the increase in the range of products in the economy. In fact, we’ve seen some major revisions in GDP figures, as was the case in 2014 when Nigeria provided a truer picture of its economic growth by integrating growth figures from such sectors as telecommunications, banking and cinema.

Economists from all sides would agree that productivity defines how rapidly an economy can grow without rampant inflation. Higher output per worker is also a precondition for more equitable growth, as most people derive their income from work. Moreover, growth based on more rather than more efficient resources is the economic equivalent of empty calories: delicious but not nutritious, and with hidden health risks – think of unmanageable fiscal deficits and excessive carbon in the atmosphere. But there is a third view on productivity that is the “red thread” throughout the discussions at the Annual Meeting of the New Champions: that we are at the beginning of a fourth industrial revolution.

Erik Brynjolfsson and Andrew McAfee posited in The Second Machine Age that the first machine age began with the steam engine that substituted our physical power, while the second age will be driven by artificial intelligence and ubiquitous connectivity. In short, machines will substitute for and augment our cognitive power. Indeed, many technologists expect that artificial intelligence will go beyond recognizing our friends’ faces to driving our cars for us.

The utopian scenario is that technology is making rapid communication, information acquisition and knowledge-sharing more democratic and egalitarian. A dystopian view is that as technology enables productivity in manufacturing to rise and more routine brainwork is computerized, middle-income jobs could diminish. One recent study by Carl Frey and Michael Osborne suggests that 47% of US jobs are at risk of computerization.

Whichever hypothesis you embrace, there is one inconvenient truth that cannot be avoided: much of the productivity gains of the digital age must be credited to the expansion of international trade and global production networks. This expansion has come to a halt. Before 2007, trade grew twice as fast as GDP, stimulating technology transfer and economic diversification in rising export nations from Mexico to Turkey to China. Potential growth in these economies soared to 7.4%. Today, trade grows at only half this speed and so does total factor productivity, a measure of technological progress. According to the IMF, the post-crisis slump in technological progress could account for almost the entire decline of potential growth in emerging markets.

The deceleration of trade expansion and the related slowdown in technology convergence pose significant problems to export nations like China. Premier Li Keqiang’s recent call for greater industrial cooperation to couple Western know-how and China’s industrial capacity is just one of several initiatives to counteract China’s troubling productivity slump. Moreover, China’s rise to an industrial powerhouse was largely enabled by rural labour flowing to urban factory floors. This flow is drying up. China’s demographic transition is compounded with the long shadow of its one-child policy. It remains to be seen if the resulting upward pressure on wages will bolster consumption – or be consumed by caring for the elderly. Regardless, China will need to boost its productivity to continue raising its living standards and to maintain its competitiveness.

China is of course not the only country that needs to face up to changing demographics. Worldwide, an unprecedented boom in the working-age population is ending. Today, roughly four people of working age cover one person aged 60 or over. By 2050, the ratio will be two-to-one. In that regard, the growing concern from east to west that robots could steal our jobs is probably exaggerated: greater automation will be inevitable to sustain ageing populations. This above all requires unlocking innovation. Scientific and technological breakthroughs not only hold the key to greater productivity but carry solutions for pressing global challenges from providing safe drinking water to countering antimicrobial resistance.

But what drives innovation? This question is sparking renewed debate. Economists such as Nobel Laureate Edmund Phelps deplore corporatist values like “solidarity, security and stability”, dismiss industrial policy and praise the spirit of private entrepreneurship. Meanwhile, Marianna Mazzucato argues that the entity that often accounts for the boldest risks and the biggest breakthroughs is not the private sector but the state. All the technologies which make the iPhone “smart”, Mazzucato writes, are also state-funded, from the internet to the voice-activated personal assistant Siri.

What counts in the end is the delicate interplay of all stakeholders. “Saying that governments should get out of the way and let the private sector do its thing is like saying that air traffic controllers should get out of the way and let pilots do their thing,” writes the Harvard economist Ricardo Hausmann. Governments and the private sector need to collaborate, which first and foremost requires trust – a scarce resource in a context of cyber threats, surveillance attacks, public fear and misperceptions.

Building trust is also critical for spreading innovation across borders. With trade liberalization reaching its limits as a vehicle for technological progress, the focus needs to shift from the globalization of production to the globalization of research and development – from corporate R&D centres to partnerships among leading academic institutions. This not only requires education and infrastructure but trusted collaboration on issues including regulation and intellectual property.

Science and technology remains the greatest agent of change in the modern world. In China, change is already under way, with a new generation of digital entrepreneurs disrupting industries, and a new generation of researchers filing more patents than any other country in the world. But as the last productivity boom has shown, confidence must not turn into delusion. We need to rethink the productivity formula in Dalian and beyond.

Under the theme “Charting a New Course for Growth”, the ninth Annual Meeting of the New Champions will convene the best and brightest from industry, academia and government to explore new paths to prosperity based on innovation, collaboration and partnership.

Author: Lee Howell, Managing Director, Member of the Managing Board, World Economic Forum; Sebastian Buckup, Head of Programming, World Economic Forum 

Image: An employee works at a logistic center in Huaibei, Anhui province, January 20, 2015. REUTERS/China Daily