We live in an age of technological transformation. Advances in digital technology have transformed economies and societies, and the latest innovations in artificial intelligence (AI) have the potential to take the ongoing technological transformation to a whole new level.
New technologies open up exciting new possibilities. They create new opportunities and pathways for increasing economic prosperity and human well-being. The potential to increase productivity and economic growth is great. But they also bring new challenges and risks. As today’s technologies drive change, they can deepen economic and social fissures. Participation in new opportunities created by the digital transformation is unequal. Across industries and the workforce, many are being left behind. Economic disparities are widening in many economies.
Rising inequality and the associated disparities and insecurity are fueling social discontent, political polarization, and populist nationalism. More unequal societies can weaken trust in public institutions and undermine democratic governance. Rising global inequality can jeopardize geopolitical stability. Managing the technological transformation in ways that foster its benefits, mitigate its risks, and build inclusive prosperity is the central public policy challenge of our time.
It is against this backdrop that a new book, Harnessing Technology for Inclusive Prosperity: Growth, Jobs and Inequality in the Digital Age, has been published.,” seeks to catalyze ideas and actions to manage the latest technologies of digital transformation and AI with foresight and purpose to shape a more prosperous and inclusive future. The book, which we had the opportunity to co-edit, includes contributions from scholars from the Brookings Institution, academia, and institutions in different parts of the world, bringing unique perspectives and expertise to the multifaceted challenges posed by the complex interplay between technology, growth, work, and inequality.
New technologies have altered market dynamics in ways that tend to increase inequality among firms and among workers. Firms at the leading edge of technology have outdistanced others, dominating in increasingly concentrated markets and earning supernormal profits (and rents). Increasing automation of low- and medium-skill jobs has shifted labor demand toward higher skills, adversely affecting wages and jobs lower down the skill spectrum. As new technologies favor capital, winner-take-all business outcomes, and higher skills, the distribution of capital and labor income has become more unequal, and income has shifted from labor to capital. These dynamics have been more pronounced in developed countries, but as new technologies penetrate deeper into developing countries, they are likely to increasingly affect these countries as well.
How will AI, the next phase of the digital revolution, affect the relative demand for skills and income inequality? There remains a great deal of uncertainty about how the scope of AI capabilities will evolve. As AI advances, it is likely that some more advanced skills will also be at risk of replacement, in contrast to previous waves of automation. However, replacement risk at higher skill levels may apply more at the task level than at the overall job or occupation level, as is the case for low- to mid-level skills. High-skilled workers also typically have a better ability to adapt by acquiring new skills and new employment than low-skilled workers.
Not only are inequalities widening. The productivity dividends expected from digital technologies have yet to fully materialize. These technologies make measuring productivity more complex, but data show that in many economies productivity growth is slowing rather than accelerating. Firms that lead the adoption of new technologies are capturing most of the gains. These companies, the big technology companies, have seen robust productivity growth, while most other smaller businesses have stagnated or slowed, weighing on overall productivity growth. Technology diffusion across firms is weak.
Without counter policies, current high levels of inequality are likely to continue or even increase. Even if a new wave of innovation increases productivity, increases economic wealth, and creates new jobs and roles to replace those who lose their jobs and prevent large-scale technological unemployment, inequality could reach much higher levels. The continuation and significant increase in inequality may not be a sustainable path, given the associated social and political risks. The lesson of history is that a significant increase in inequality, if left unchecked, can have bad consequences for society.
In contrast to the widening inequality within countries, inequality between countries has been narrowing in recent decades. Faster-growing emerging economies have narrowed the gap in per capita income relative to developed countries. However, technological change poses new challenges to this global economic convergence. Manufacturing-led growth in emerging economies has been driven by a comparative advantage in labour-intensive products based on a large supply of low-skilled, low-wage workers. This source of comparative advantage will increasingly be lost with the growing automation of low-skilled labour, disrupting traditional development trajectories.
Public policy challenges
A significant increase and persistence of inequality is not an inevitable outcome of technological progress. The history of major technological breakthroughs shows that policy choices play a key role in whether technology serves the interests of a few or becomes the foundation for broader prosperity. Technology can be a catalyst for shared prosperity; the challenge is to harness it to promote inclusive growth and development.
Public policies have generally been slow to respond to this challenge. As technology has transformed markets, business models, and the nature of work, policies have lagged behind changing growth and distribution dynamics. As a result, we have not been able to fully harness the productivity potential of new technologies and counter some of their increasing inequality effects. More responsive policies would likely lead to better outcomes.
We need to expand the digital economy and spread new technologies and productive opportunities to a broader range of businesses and workers. This will help us avoid widening inequalities and reap the productivity dividends of the digital transformation across a broad range of sectors of the economy. Combating inequality as technology drives change is therefore not just a distributional issue, but also a growth issue. The paths to harnessing new technologies to achieve stronger, more inclusive economic growth are inextricably linked.
The policy issues detailed in the new book are wide-ranging and range from competition policy and regulatory frameworks, research and development policy, digital access, education and training, labour market policies and social protection, and taxation. The issues go well beyond the often narrow focus on redistribution in debates on fighting inequality, to encompass a range of “pre-distributive” policies to make technology-reshaped markets and economic growth more inclusive.
Given the major technology-driven changes in the functioning of markets and economies, many areas of reform will require much more research, novel thinking, and experimentation. Adapting to new technologies will be a major challenge for policymakers. But the challenge does not end there. A related challenge will be shaping the technological change itself to support broader economic and societal goals, rather than the interests of a narrow group of investors.
As technology shifts patterns of international comparative advantage, it may slow the convergence of the world economy. But while technology disrupts traditional paths to growth and development, it also offers new opportunities for developing countries that successfully adapt their growth models to the changing economic paradigm. These range from exponential development opportunities opened up by new technologies, to significantly improved international connectivity, to new areas of comparative advantage that go beyond traditional manufacturing, including services, which technology is making increasingly easier to trade across borders.
While many of the policy challenges above are at the national level, there are also important new challenges at the international level. Not only do past achievements in establishing a rules-based multilateral system for trade and investment need to be defended against today’s growing protectionist pressures and a resurgence of nationalistic industrial policies, but new rules and disciplines must be devised for an increasingly digital globalization. In particular, international cooperation in the governance of powerful emerging technologies such as AI will be key to realizing their benefits while managing their risks. In the current geopolitical environment, greater international cooperation may seem challenging, but it is essential to harnessing technological advances for the benefit of all.
