The Fourth Industrial Revolution by Klaus Schwab: Growth

The Fourth Industrial Revolution by Klaus Schwab

3.1.1 Growth

The impact that the fourth industrial revolution will have on economic growth is an issue that divides economists. On one side, the techno-pessimists argue that the critical contributions of the digital revolution have already been made and that their impact on productivity is almost over. In the opposite camp, techno-optimists claim that technology and innovation are at an inflection point and will soon unleash a surge in productivity and higher economic growth. While I acknowledge aspects of both sides of the argument, I remain a pragmatic optimist. I am well aware of the potential deflationary impact of technology (even when defined as “good deflation”) and how some of its distributional effects can favour capital over labour and also squeeze wages (and therefore consumption). I also see how the fourth industrial revolution enables many people to consume more at a lower price and in a way that often makes consumption more sustainable and therefore responsible. It is important to contextualize the potential impacts of the fourth industrial revolution on growth with reference to recent economic trends and other factors that contribute to growth. In the few years before the economic and financial crisis that began in 2008, the global economy was growing by about 5% a year. If this rate had continued, it would have allowed global GDP to double every 14-15 years, with billions of people lifted out of poverty. In the immediate aftermath of the Great Recession, the expectation that the global economy would return to its previous high-growth pattern was widespread. But this has not happened. The global economy seems to be stuck at a growth rate lower than the post-war average – about 3-3.5% a year. Some economists have raised the possibility of a “centennial slump” and talk about “secular stagnation”, a term coined during the Great Depression by Alvin Hansen, and recently brought back in vogue by economists Larry Summers and Paul Krugman. “Secular stagnation” describes a situation of persistent shortfalls of demand, which cannot be overcome even with near-zero interest rates. Although this idea is disputed among academics, it has momentous implications. If true, it suggests that global GDP growth could decline even further. We can imagine an extreme scenario in which annual global GDP growth falls to 2%, which would mean that it would take 36 years for global GDP to double. There are many explanations for slower global growth today, ranging from capital misallocation to over indebtedness to shifting demographics and so on. I will address two of them, ageing and productivity, as both are particularly interwoven with technological progress.

Ageing

The world’s population is forecast to expand from 7.2 billion today to 8 billion by 2030 and 9 billion by 2050. This should lead to an increase in aggregate demand. But there is another powerful demographic trend: ageing. The conventional wisdom is that ageing primarily affects rich countries in the West. This is not the case, however. Birth rates are falling below replacement levels in many regions of the world – not only in Europe, where the decline began, but also in most of South America and the Caribbean, much of Asia including China and southern India, and even some countries in the Middle East and North Africa such as Lebanon, Morocco and Iran. Ageing is an economic challenge because unless retirement ages are drastically increased so that older members of society can continue to contribute to the workforce (an economic imperative that has many economic benefits), the working-age population falls at the same time as the percentage of dependent elders increases. As the population ages and there are fewer young adults, purchases of big-ticket items such as homes, furniture, cars and appliances decrease. In addition, fewer people are likely to take entrepreneurial risks because ageing workers tend to preserve the assets they need to retire comfortably rather than set up new businesses. This is somewhat balanced by people retiring and drawing down their accumulated savings, which in the aggregate lowers savings and investment rates. These habits and patterns may change of course, as ageing societies adapt, but the general trend is that an ageing world is destined to grow more slowly unless the technology revolution triggers major growth in productivity, defined simply as the ability to work smarter rather than harder. The fourth industrial revolution provides us with the ability to live longer, healthier and more active lives. As we live in a society where more than a quarter of the children born today in advanced economies are expected to live to 100, we will have to rethink issues such the working age population, retirement and individual life-planning. [Note: UK Office of National Statistics, “Surviving to Age 100”, 11 December 2013, http://www.ons.gov.uk/ons/rel/lifetables/historic-and-projected-data-from-the-period-and-cohort-life-tables/2012-based/info-surviving-to-age-100.html]. The difficulty that many countries are showing in attempting to discuss these issues is just a further sign of how we are not prepared to adequately and proactively recognize the forces of change.

Productivity

Over the past decade, productivity around the world (whether measured as labour productivity or total-factor productivity (TFP)) has remained sluggish, despite the exponential growth in technological progress and investments in innovation. [Note: The Conference Board, Productivity Brief 2015, 2015]. This most recent incarnation of the productivity paradox – the perceived failure of technological innovation to result in higher levels of productivity – is one of today’s great economic enigmas that predates the onset of the Great Recession, and for which there is no satisfactory explanation. Consider the US, where labour productivity grew on average 2.8 percent between 1947 and 1983, and 2.6 percent between 2000 and 2007, compared with 1.3 percent between 2007 and 2014. [Note: United States Department of Labor, “Productivity change in the nonfarm business sector, 1947-2014”, Bureau of Labor Statistics; http://www.bls.gov/lpc/prodybar.htm]. Much of this drop is due to lower levels of TFP, the measure most commonly associated with the contribution to efficiency stemming from technology and innovation. The US Bureau of Labour Statistics indicates that TFP growth between 2007 and 2014 was only 0.5%, a significant drop when compared to the 1.4% annual growth in the period 1995 to 2007. [Note: United States Department of Labor, “Preliminary multifactor productivity trends, 2014”, Bureau of Labor Statistics, 23 June 2015; http://www.bls.gov/news.release/prod3.nr0.htm]. This drop in measured productivity is particularly concerning given that it has occurred as the 50 largest US companies have amassed cash assets of more than $1 trillion, despite real interest rates hovering around zero for almost five years. [Note: OECD, “The Future of Productivity”, July 2015; http://www.oecd.org/eco/growth/The-future-of-productivity-policy-note-July-2015.pdf]. For a short discussion on decelerating US productivity, see: John Fernald and Bing Wang, “The Recent Rise and Fall of Rapid Productivity Growth”, Federal Reserve Bank of San Francisco, 9 February 2015; http://www.frbsf.org/economic-research/publications/economic-letter/2015/february/economic-growth-information-technology-factor-productivity/]. Productivity is the most important determinant of long-term growth and rising living standards so its absence, if maintained throughout the fourth industrial revolution, means that we will have less of each. Yet how can we reconcile the data indicating declining productivity with the expectations of higher productivity that tend to be associated with the exponential progress of technology and innovation? One primary argument focuses on the challenge of measuring inputs and outputs and hence discerning productivity. Innovative goods and services created in the fourth industrial revolution are of significantly higher functionality and quality, yet are delivered in markets that are fundamentally different from those which we are traditionally used to measuring. Many new goods and services are “non-rival”, have zero marginal costs and/or harness highly-competitive markets via digital platforms, all of which result in lower prices. Under these conditions, our traditional statistics may well fail to capture real increases in value as consumer surplus is not yet reflected in overall sales or higher profits. Hal Varian, Google’s chief economist, points to various examples such as the increased efficiency of hailing a taxi through a mobile app or renting a car through the power of the on-demand economy. There are many other similar services whose use tends to increase efficiency and hence productivity. Yet because they are essentially free, they therefore provide uncounted value at home and at work. This creates a discrepancy between the value delivered via a given service versus growth as measured in national statistics. It also suggests that we are actually producing and consuming more efficiently than our economic indicators suggest. [Note: The economist Brad DeLong makes this point in: J. Bradford DeLong, “Making Do With More”, Project Syndicate, 26 February 2015; http://www.project-syndicate.org/commentary/abundance-without-living-standards-growth-by-j--bradford-delong-2015-02]. Another argument is that, while the productivity gains from the third industrial revolution may well be waning, the world has yet to experience the productivity explosion created by the wave of new technologies being produced at the heart of the fourth industrial revolution. Indeed, as a pragmatic optimist, I feel strongly that we are only just beginning to feel the positive impact on the world that the fourth industrial revolution can have. My optimism stems from three main sources. First, the fourth industrial revolution offers the opportunity to integrate the unmet needs of two billion people into the global economy, driving additional demands for existing products and services by empowering and connecting individuals and communities all over the world to one another. Second, the fourth industrial revolution will greatly increase our ability to address negative externalities and, in the process, to boost potential economic growth. Take carbon emissions, a major negative externality, as an example. Until recently, green investing was only attractive when heavily subsidized by governments. This is less and less the case. Rapid technological advances in renewable energy, fuel efficiency and energy storage not only make investments in these fields increasingly profitable, boosting GDP growth, but they also contribute to mitigating climate change, one of the major global challenges of our time. Third, as I discuss in the next section, businesses, governments and civil society leaders with whom I interact all tell me that they are struggling to transform their organizations to realize fully the efficiencies that digital capabilities deliver. We are still at the beginning of the fourth industrial revolution, and it will require entirely new economic and organizational structures to grasp its full value. Indeed, my view is that the competitiveness rules of the fourth industrial revolution economy are different from previous periods. To remain competitive, both companies and countries must be at the frontier of innovation in all its forms, which means that strategies which primarily focus on reducing costs will be less effective than those which are based on offering products and services in more innovative ways. As we see today, established companies are being put under extreme pressure by emerging disruptors and innovators from other industries and countries. The same could be said for countries that do not recognize the need to focus on building their innovation ecosystems accordingly. To sum up, I believe that the combination of structural factors (over-indebtedness and ageing societies) and systemic ones (the introduction of the platform and on-demand economies, the increasing relevance of decreasing marginal costs, etc.) will force us to rewrite our economic textbooks. The fourth industrial revolution has the potential both to increase economic growth and to alleviate some of the major global challenges we collectively face. We need, however, to also recognize and manage the negative impacts it can have, particularly with regard to inequality, employment and labour markets.