Economic growth has been moderate for more than ten years, and this happened when economies were going through many changes. What are the forces of change, how do they influence growth dynamics and what are the implications for policy? A recently published book, “Growth in a Time of Change,” addresses these questions.
Three basic ingredients drive economic growth: productivity, capital, and labour. All three face new challenges in a changing context. The main driver of change is technology, with digital transformation as its spearhead.
A Delay in Productivity and Investment
Productivity is the main long-term propeller of economic growth, and Technology-assisted innovation is the main driver for productivity growth. But paradoxically, productivity growth has slowed as digital technologies have boomed. In the advanced economies of the past 15 years, it has averaged less than half the pace of the previous 15 years. Companies on the technological frontier have made significant productivity gains, but the impact on broad productivity across all firms has been small. New technologies tend to produce winners that deliver the most results. Dominant firms have gained more market power, market structures have become less competitive, and business dynamics have declined.
The investment was also weak in most major economies. Despite historically low interest rates, the continued weakness in investment has raised concerns about the risk of “secular stagnation”. Productivity growth has been weak, investment has been weak, too, and both have been bolstered by changes in market structures and dynamics.
CHANGE IN LABOR MARKETS
Technology has profound implications for labour markets. Automation and digital advancements are shifting the demand for labour from low-to-mid-level routine skills to higher and more advanced analytical, technical, and managerial skills. However, on the supply side, equipping workers with skills that complement the new technologies has lagged, hindering the wider diffusion of innovation within economies. Education and training are losing the race to technology.
Most major economies face the challenge of an ageing population. Many of them also see a levelling off in increasing the population’s labour participation and primary education. These trends place an even greater emphasis on productivity and the technological innovations that drive it to deliver economic growth.
Growth has also become less inclusive. Income inequality has increased in most major economies, and in some, such as the United States, the increase has been particularly pronounced. The new technologies in favour of capital and higher skills have contributed to a decrease in the share of labour in income and increased wage inequality. They have also been associated with more concentrated industry structures and high economic rents enjoyed by dominant firms. Income has shifted from labour to capital, and the distribution of income from labour and capital has become more unequal.
Rising inequality and fear of jobs have contributed to heightened social tensions and political divisions. Populism has increased in many countries. The nationalist and protectionist sentiment is on the rise, with a backlash against international trade, which, in addition to technological change, exacerbates inequality with job losses and wage stagnation for low-skilled workers.
CHANGING GROWTH PATHS
While income inequality has increased in many countries, inequality has decreased as faster-growing emerging economies narrow the income gap with advanced economies. Technology poses new challenges for this economic convergence. Production-led growth in emerging economies has been the dominant driver of convergence, fueled by their comparative advantage in labour-intensive manufacturing based on their large pool of low-skilled, low-paid workers. Such a comparative advantage fades when low-skilled jobs are automated, making it important to find new ways to grow in line with technology.
AI, ROBOTICS, AND THE FOURTH INDUSTRIAL REVOLUTION
Technological changes that reshape growth will only accelerate as artificial intelligence, advanced robotics, and cyber-physical systems take the digital revolution to another level. We may be on the cusp of what’s been called the “Fourth Industrial Revolution (4IR).” Globalization is also becoming more and more digital, called “Globalization 4.0.”
Recently, technological changes have not reached their full potential in terms of boosting productivity and economic growth. It has exacerbated income inequality and raised fears of an “apocalypse,” or massive job losses due to automation. However, this should not cause despair.
Advances in digital technologies have significant potential to boost productivity and economic growth and create new and better jobs to replace old ones. Two-thirds of the potential productivity growth in major economies over the next decade could be related to new digital technologies. But technological change is inherently disruptive and involves difficult transitions. As does globalization, it also inevitably creates winners and losers. Policy plays a crucial role. Unfortunately, they have been slow to adapt to the challenges of change. Better results are possible with improved and more responsive policies.
An Agenda to Maximize the Potential of New Technology
The core of the future policy plan is to better utilize the potential of new technologies. Reforms should aim to improve the favourable environment for businesses and workers—to broaden access to opportunities arising from technological change and increase their ability to adapt to new challenges.
- As technological change transforms the business world, policies and institutions that drive the markets must keep pace. Competition policy needs to be revised for the digital age to ensure that markets continue to provide an open and level playing field for businesses, keep competition strong and curb the growth of monopolistic structures. New regulatory issues related to data, the lifeblood of the digital economy, need to be addressed. Market flexibility will be key to facilitating adaptation to disruptions and structural shifts from digital transformation.
- The innovation ecosystem must continue to push the technological frontier and promote the wider economic impacts of the new developments. Research and development systems and patent systems need to be improved as knowledge becomes more important to economic success. This is because new technologies that use new knowledge must spread more widely.
- The foundation of digital infrastructure and digital literacy needs to be strengthened. The digital divide is narrowing, but large gaps remain.
- Investment in education and training should be stimulated and refocused to focus on the skills for future jobs. As the old career path of “learning-work-retirement” gives way to continuous learning, employee upskilling and lifelong learning programmes need to be scaled up. The key to winning the race with technology is not competing with machines but competing with them.
- Labour market policies need to become more forward-looking, shifting the focus from protecting existing jobs to improving workers’ ability to change jobs. Social protection systems, traditionally based on formal, long-term employer-employee relationships, need to be adapted to a more dynamic labour market. Social contracts need to be realigned with the changing nature of work.
- Tax systems need to be reviewed in light of the new tax challenges of the digital economy, including the implications of the transformations taking place in business and work and the new dynamics of the income distribution. The potential tax reform plan includes labour, capital, and wealth taxes.
Reforms are also needed at the international level, although the dominant part of the agenda to make technology and globalization work better rests above all on policy at the national level. Not only do past successes in building a rules-based international trading system need to be protected from protectionist headwinds, but new disciplines need to be devised for the next stage of globalization, led by digital flows, to ensure open access and fair competition. Sensible migration policies can complement national policies, such as pension reforms and lifelong learning to mitigate the effects of an ageing population.
The era of smart machines promises a lot. With smart policies, the future can be stronger and more inclusive growth. Software like Roofing software helps in city planning very easily.