World Bank: Get Smart About Technology Revolution

Source: Pixabay

2015 was in many was an interesting year in Croatia. Perhaps one of the things that made me worry about the future was the moment public found out about plans to start Uber in Zagreb. The response of the current taxi companies and the way city of Zagreb handled this was the best showcase of the dangers of the way Croatia is being run currently.

Now, a report by the World Bank (PDF)seems to give me even more reasons to be fearful. The message is clear — those who fail to manage this change the right way will not be the ones who are able to reap the benefits.

Some time ago I shared some of my thoughts about the future changes our societies are already starting to experience in a text called The Third Cycle. Perhaps the most important takeaway from that largely unstructured article was the fact that we are not able to use wisdom from the previous large cyclic changes that swept through our societies as a guideline for managing this one.

Many factors are just too different to manage changes ahead by leveraging lessons from the past. However, for Croatia, a middle-income country that needs to catch up with the nations that pull the global technology frontier is not really ready. The powerful alliance of special interest groups and government officials is, however, just one of the reasons why this is happening, even though it may be a major impediment to a healthy development in the future. But isn’t this the same for many other countries? Challenges seem to differ between countries.

Uber comes to Croatia

Source: World Bank “Digital Dividends”

After Uber announced it is planning to offer its services in Zagreb, the country’s capital, the immediate response of the incumbents was to list all the possible regulations that were preventing the taxi sharing service to do business as it is allowed in the US. This was nothing new. Uber failed to launch in several European cities as well.

In Croatia, similar incumbent uprising happened in the moment when new taxi companies asked the city to increase the number of licenses so they can enter the market. What was good for the customers, proved to be a problem for the monopoly association of taxi drivers known as “chess players”, officially Radio Taxi. This was the name given to them as they would hang out by their cars and play chess since due to very high prices and poor service, only a few people used taxi services.

As the new competitors entered the market, fights broke out, as it is customary to handle competition in “Balkans”. Looking at Paris taxi drivers treating Uber, it looked as the West is pretty much like “Balkans” — those that cannot use superior service/price, are used to rowdiness and political connections. In any case, it was clear Uber is going to have a hard time, so they decided to comply with existing regulations. They recruited drivers that already had a taxi license and managed to launch.

The next round happened soon after, in December 2015, when Zagreb city council voted on a new set of taxi regulations that are in Radio Taxi’s favor. Two were most striking — the requirement for all taxis to be in white and the second one, that no free drive distance is allowed to be included in the start price. This was aimed directly at Radio Taxi’s biggest competitor, Cameo and the newcomer Uber, both which had this kind of pricing structure. Uber used it to offer free rides and spread the word about their service.

By doing so, as suggested in the WB report, the city council did not only stop all the benefits that consumers might have from increased competition, but they also managed to set the tone for future of our country in the “third cycle”. This is just a practical example of challenges many countries will be facing in the future. The WB report tries to list challenges, available evidence and suggests a basis for future policies that can help us manage this change.

In many aspects, Croatia’s handling of Uber market entrance was an example of not what to do. This does not mean that full liberalization of the market was needed, but it does raise the necessity for many regulations that are in place. Incumbent taxi drivers listed the fact they need to pass an exam of how well they know the city. Really? How important is it to know the city when you have already a system in all taxis that includes online maps and navigation systems.

It is not a case for abandoning regulation but creating a set of regulations that increase competition while at the same time creating accountable institutions and managing a change that requires a different skill set for the labor force of the future.

The Change Ahead

Croatian local regulators may be shortsighted, however, the capital is in many ways indicative of policies that will be adopted nationally, so one has to wonder if any of Croatia’s policymakers will be moved by news coming from the Davos meeting this week. Headlines coming from Bloomberg to NYT state that 15 major economies are looking at a net destruction of 5 million jobs by 2020 as the consequence of the disruptive technology.

These number may not be reliable, however, many trends are already visible and felt around the globe. We can only expect them to become even more pronounced in the future. Not only will developments in artificial intelligence, machine-learning, robotics, nanotechnology, 3D printing, and genetics and biotechnology influence our lives for the better, there will be a price to pay, especially for those without the ability to adapt.

World Bank report calls this “The fourth industrial revolution”

Source: WEF

In the past, new technologies were disruptive as well, however, as the pace of advancement moves faster, the adjustment left to institutions and people is getting shorter, meaning ever more structural imbalances that require a change in the course of policies that shape our daily lives. Jobs destruction will hit rich and poor nations in different ways and sectoral distribution will be unequal as well. Automation and disintermediation trough digital technologies will cause greatest losses in sectors that can easily be automated. Job growth will come from new jobs in tech sector exacerbating the skill-biased inequality we have seen in the last three decades.

This does not mean we should panic. There is a need for a rational approach to the techno optimism. One of my favorite books I read on this subject was “The Second Machine Age” by Erik Brynjolfsson and Andrew McAfee, who list all the amazing advancements the world will see in the future, however they also list the possible disruptions to our economic system and society.

The lagging state

They also propose a set of policies, like the negative income tax in order to enable some basic level of income for those that will be mostly affected by this change. Problem is, as Croatian example illustrates is to get these solutions past the political process. And as problems move further, the gap that the lagging policy response will leave might have terrible consequences for the most vulnerable groups.

The scale, speed and depth of current transformation is without precedent. The report states:

The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.

Since I started looking at the growth theory, one of the most interesting models I found was the Schumpeterian model by Aghion and Howitt. It was a really nice way to describe the different dynamics we were seeing in Europe as opposed to the US. The key takeaway was that after a rapid catch up growth by 80s, European most powerful economies never managed to get closer to the US level of productivity.

This is a failure of institutions (rules of the game). Where US had institutions (regulations, financing…) that support the ability to move the technological frontier, Europeans got lost in their attempts to live in the past by preserving the traditional welfare state and policies that define markets without any consideration of the challenges ahead.

This shows that the US will probably have to use a different way to approach the third cycle, and European developed democracies will need a different set of policies.

Mid-income countries have a different set of focus areas. Some of them carry a burden from the past (improved governance, accountability and market institutions), others arise from the need to keep up with the changes transforming their post-industrial peers. Their development will be unable to follow the pattern industrial nations have seen in the past.

Danni Rodrik, a professor at Harvard’s John F. Kennedy School of Government notices that developing countries are experiencing a premature deindustrialization before they reached the level of income of the most developed nations. This means that changes in these societies might carry a double weight reforming for the future as the path forward is less clear.

Techno-optimism obviously has its roots in a brighter future we all expect, however, the dynamics of our governments adapting to the challenges ahead will determine how bright it will be.

In many ways, so-called digital technologies are spreading more equally over the world as the innovations of the past, however, the global outlook is dim despite that optimism. It has a lot to do with various factors, one of them being the fact that many countries do not have yet set up institutions that can help them create a net gain of this change. The WB report sees three main groups of risks arising from the future developments. All of these should be tackled by changes in government policies.

Source: World Bank “Digital Dividends”

Technology for all, with unequal opportunities

The internet population is more equally distributed than income, and internet and mobile phones have managed to become part of lives in citizens of developing countries faster than basic infrastructures like water and electricity. However, most of them are not experiencing the growth velocity they need to move closer to the rich club.

Source: World Bank “Digital Dividends”

As New York Times notes, this shows that the optimism related to these technologies is not warranted in face of the risks and the inability of individual countries to face them.

The bank’s findings come at a time when the technology industry — which sometimes tends to see itself as the solver of the world’s greatest problems — has been rushing to expand Internet access through a variety of new means. Google, through its Project Loon, aims to use a constellation of balloons to beam down wireless signals to places that lack connectivity. Facebook has offered a limited sphere of the World Wide Web for users in some developing countries — and in turn, has come under intense criticism, especially in India.

Accessibility of many of these technologies is important, but it will not be enough without “analog complements” that enable people to harness them. For that, governments will need to do their part. This is what is making me the most pessimistic about the future since one of the most important factors in development through history, as shown in Acemoglu and Robinson’s “Why Nations Fail” are institutions.

Inequality and future of work

Inequality has been a topic that dominated 2015. While the inequality was not seen as an issue since it started to rise in the 70s, the levels that, for the US, are reaching levels of the so-called Gilded age have started to make it a hot topic. It is a consequence of change as well as a possible cause of problems. It can affect growth in various ways, and even worse, concentration of wealth is a threat to democracy as wealthy exert influence on politics

Source: World Bank “Digital Dividends”

On the global scale, the inequality has been falling, as previously low-income countries joined global economy in the globalization era and managed to pull billion people out of poverty. However, the inequality within countries has been declining and the global upper middle class has felt this the most. That segment has seen almost no income growth when compared to other income levels on a global scale as the graphs show.

On the other hand, it is also a symptom of changes we are experiencing. One of the theories to explain the rise in inequality was so called “skill-based technological change”. New economy favors people with skills that new technologies require, leaving the rest to “basic” service jobs.

However, the future is more complex. All sets of skills are now facing the march of big data, machine learning, AI advancements and automation. Brynjolfsson and Andrew McAfee notice this too. They claim that jobs that stand the best chances are those that have cognitive skills that technology cannot match.

Source: World Bank “Digital Dividends”

In many cases, these are basic service jobs or knowledge that enables these new technologies to be developed and operated. The middle is disappearing, ensuring a polarization in the labor market.

Source: World Bank “Digital Dividends”

The outcomes we have now are just the start. The government must manage this switch by enabling accumulation of human capital in line with the new times ahead. This means reducing barriers to entry and smarter approach to education policy.

Source: World Bank “Digital Dividends”

This transition may be really painful as many more jobs are currently protected by restrictive regulation that in the end will only make everyone worse off unless adapted to reflect the new reality.

Source: World Bank “Digital Dividends”

This will naturally affect different sectors of the economy. The next chart shows the most vulnerable positions/sectors. This is another indication that the low skill workers might be the ones to bear the brunt of the transformation.

Source: World Bank “Digital Dividends”

The manufacturing sector that created the middle class has been slowly losing the share in employment, and this is what has also heavily tilted the distribution to both poles. Median income in the US has been stagnating as seen in this video with Nobel laureate Robert Shiller from Davos.

Inequality trough abundance of opportunity

Source: World Bank “Digital Dividends”

Overall it was a shift from labor to capital reflected in the share of the income workers earn that also heavily influenced the rise of the inequality.

As services like Uber, Freelancer, Airbnb help everyone become an entrepreneur, it is a fact that the real winners are platform owners. In a way, the gig economy is making opportunities more abundant, but it is also skewing the distribution of income and possibly causing concentration problems that are in some sense similar to, but again different than monopolies of the past.

In advanced economies, where wages are higher, the substitution is causing disruptions faster than in low-income economies that may still benefit somewhat trough the opportunities these new services provide.

The global divide in inequality is seen easily as more of these jobs can be done anywhere in the world, placing further pressure on low income/skill workers in advanced economies

Source: World Bank “Digital Dividends”

The effects on the society

As the third cycle advances, contours of the new rules of the game are being shown and as with any challenge our societies faced, it will require a new and different approach to the way our politics, our business and our economy are managed. Challenges ahead are new and they are scary in many ways.

The notion of widespread wealth that keeps increasing generation after generation is not a fact anymore. The winner takes all business models and labor markets are a threat to the social fabric that was built in the several decades. In order to keep prosperity and opportunity attainable for everyone, a lot more will need to be done than in the past.

A lot more will be required from our political system to deliver — in terms of the scope and the frequency of reforms. This will not be an easy task. Let’s hope we can do it. It’s not so much about getting outcomes that are similar to scorched earth dystopian movies, as it is about harnessing the transformational opportunity provided by the rapid technological change in order to ensure widespread prosperity for all.