Robots! Clear and Future Danger For Economies

I was at a conference recently and there was a speaker who was extolling the power of robots, technology, automation and artificial intelligence (AI) in the modern workplace and how it was going to revolutionise the global economy.

There was quite a catalogue of achievements as a result of increased robotics and AI including lower ‘FTE’ (or ‘Full Time Equivalent’ of human labour) requirements and greater efficiency, productivity and decreased errors and mistakes. These were achievements that were backed by undisputed statistics and data.

The ability to create consistently high economic value using systems, robots and AI which do not make mistakes, which do not break down often, which can even be self-correcting becomes very appealing.

However amidst the glories of robotics and AI, I felt increasingly concerned about where the world was heading with the increased introduction of automation, robotics and AI and the impact this was going to have on employment, social mobility and income equality.

My concerns

Technology as a displacer of jobs.

Technology, automation and robotics initially replaced blue-collar jobs and roles from the economies. Increasingly greater sophistication of AI means that white-collar jobs are also being replaced. We read various reports about the jobs of the future being technology-related roles that help create, maintain and repair robots and their related technology, but I postulate that robots can fix themselves (and their ‘peers’) better than people ever can and over time, robots can create other robots to do the tasks which they need done.

In the past, technology was an enabler. It was a great source of enhanced productivity for nations’ economies.

However, technology has now become a replacer or displacer – of jobs, of people, of roles. It has now become a tool to enhance economic output but ends up depleting people and their earnings.

This is going to be a longer-term fundamental problem and challenge to societal and economic growth and development.

The impact on developing economies

Let us consider Philippines and India. They have spent billions of dollars investing in the infrastructure and ecosystem to help create thriving shared services and business process outsourcing (SSCs / BPOs) businesses. This was to help meet the needs of multinational companies. However, with AI and automation increasingly taking on a majority of the roles and jobs that are currently being done by millions of people in both countries, it is going to lead to a significant job loss and risk the potential collapse of the SSCs and BPO sector in both countries.

Over time, with increasing automation and AI, multinationals need not outsource various roles to locations of lower labour cost. They will instead seek to outsource the roles to nations with the lowest tax and the best technology infrastructures in which they can base their systems and robots. 

The moral obligation and income inequality

With increasing AI and automation, I struggle to see how the job losses faced by millions as a result of robots taking on their roles are going to be mitigated. There also seems to be little alternative sources of formal employment.

Whilst it is easy to highlight how automation can reduce expenses by 66% and reduce ‘FTEs,’ I think we need to look at people beyond merely being an ‘FTE’ or as a mere factor of production.

 

Over time, it is going to also exacerbate the issues of income inequality which is already one of THE pressing moral issues of our time. I’ve covered this topic at length previously.

The factors of production, the technologies, the AI and robots are going to be in the control of a very small segment of society. Whilst it may create vast economic growths, it does not lead to growth in income or wealth for the majority of the people. This will lead to societal fractures which can be devastating to nations and society.

What then the moral obligation to people and society?

Possible solutions?

Leaving this issue to be dealt with purely by market forces will not result in resolution and frankly will be disastrous in my opinion. There needs to be a concerted governmental approach to resolving this and finding solutions that work.

Using levers such as tax policies will be ineffective, particularly in a world with little tax harmonisation. For instance, increased taxation for robotics-led solutions will only encourage a beggar-thy-neighbour policy and in a world with little tax harmonisation, it becomes a useless endeavour.

 

If we accept that robotics and automation are an inalienable part of the development of society, then we need to accept that the current economic models  will not be best suited for what the world needs. Maybe it is time for us to seriously consider and contemplate universal income as a way to mitigate and tackle some of the problems coming our way as a result of robotics and automation.

Universal income is something a number of countries are experimenting with to tackle income inequality which as I’ve explained earlier will only be growing with greater automation and robotics. Finland for instance has started a pilot programme, the Swiss held a referendum in June 2016 to consider universal basic income which did not pass as only a quarter of the Swiss agreed with it, the Dutch will be carrying out a pilot programme this year, and this is just a start.

What is increasingly clear is that it is not enough to simply hope the challenges brought on by AI and robotics are going to go away, there needs to be a concerted and strident efforts made to mitigate them.

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FW: INCOME INEQUALITY RE: MAJOR PROBLEM

 

“I believe this [income inequality] is the defining challenge of our time.”
Barack Obama (2013)

 

“One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy.”
Christine Lagarde (2015)

 

There is a clear recognition of the risks, dangers and the pain which income inequality imposes on society. Despite the recognition, it is a problem which seems to constantly be forwarded on to successive generations to resolve rather than finding a decisive set of solutions.

We will all do well to pay heed to the US Senator John Sherman who in 1890 when he introduced his landmark Sherman Antitrust Act said that he sought to “put an end to great aggregations of capital because of the helplessness of the individual before them” and also because he fundamentally believed that amongst all of the nation’s problems, “none is more threatening that the inequality of condition, of wealth and opportunity.”

So why does inequality matter? Why is it important that we all strive towards resolving it? Societies that are hugely imbalanced and unequal ultimately become fractured which in turn lead to painful social and economic consequences that affect everyone. Neither the rich nor the poor will be able to avoid the huge social costs of a fractured society.

The stark facts

  • 62 of the richest people in the world own what the bottom 50% of the world’s population own.

  • 1915: The richest 1% of Americans earned 18% of the national income.
    1930s to 1970s: The share plummeted and remained below 10%
    From the 1970s: The share has increased to almost 30%

  • 1980: The top 0.1% wealthiest Americans controlled about 9% of all household wealth
    2015: The top 0.1% own 22% of all household wealth.

  • USA: The top 1% of America control 40% of America’s wealth

  • Germany: Poverty has risen by half since 2000.

  • 1965: CEO pay at the largest 350 U.S companies was 20 times as high as the pay of the average workers
    1989: The figure is 58 times as high
    2012: The figure is now an astounding 273 times as high.
    (It is worth bearing in mind that Peter Drucker argued that the pay ratio between the top executive and the humblest worker should be no greater than 20 to 1.)

  • OECD: The gap between the rich and poor is now at its highest level in OECD economies in 30 years according to a report produced in 2014. The overall increase in income inequality has been driven by the richest 1%.
  • 2008: The United Nations University (UNU) and the World Institute for Development Economic Research (WIDER) estimate that the global Gini coefficient (a measurement of inequality between 0 – representing complete equality and 1 – representing complete inequality) was 89.

    An alternative way to interpret this is that in a population of 10 people, if one person had $1000, the other nine have only $1 each.

  • 2014: The Credit Suisse Global Wealth report estimates that that the richest 0.7% (who hold over US$1 million in wealth) held 44% of the global net worth.

Some context

The economic success stories of many countries hides a dangerous truth – that a significant majority of economic gains are going to those at the very top of the income distribution whereas those lower down have seen real incomes stagnate or diminish.

This has in turn perpetuated further inequality as those in a position of privilege often use their wealth and influence to shape policies that further increase their concentration of power. These policies have not necessarily been in the interests of those lower down the income ladder.

A research conducted by Martin Gilens, a political scientist at Princeton, lends credence to the notion that the US government responds more positive to the most affluent ten percent of Americans whilst “the preferences of a vast majority of Americans appear to have essentially no impact on which policies the government does or doesn’t adopt.” (A video of Gilen’s lecture can also be viewed here.)

The erosion of the social compact

This wasn’t always the case though. Whilst there has always been inequality, it has never been to this extent or been as pervasive. There was also more concerted effort to reduce the level of inequality and dampen its deleterious impact on society.

The experience of the First World War revolutionised American attitudes towards taxation and redistribution of income. When the War Revenue Act of 1917 was passed, there was talk of “conscription of income” and “conscription of wealth” at a time when young men were enlisting en masse. “Let their dollars die for their country too,” one congressman said. The call for fiscal patriotism helped legitimate the progressive income tax in the United States, and by 1944 the top marginal rate had risen as high as 94 percent.

Across Europe, a fear that the lack of reform could lead to social and political turmoil and the horrors of two World Wars meant that policies such as social insurance, minimum wage, a strong welfare state and progressive income tax were implemented leading to more egalitarian societies and economies.

inequality 2The experiences of global ears produced visions of a social bond holding countries together and nurtured the notion that every single person owed a debt to the welfare of the broader community and society.

However since the 70s, the disappearance of these conditions has meant that the support for egalitarian public policies has also diminished.

We now live in a world where even high skilled jobs are being commoditised so that even highly educated workers are not making sufficient progress as gains in economic growth are limited to a very elite group of financiers, entrepreneurs and managers. In the past only unskilled workers lost jobs to automation, now even highly skilled occupations are at risk with the advancement of artificial intelligence, robotics and automation.

The social structure of Silicon Valley provides us with an instructive view of the future: One where expert systems have replaced the majority of people and a tiny but well-remunerated minority direct the economy whilst the majority exist to serve them alone.

The conflict is no longer just between the working class and the middle and upper classes – it is now between a tiny elite and the great majority of citizens. As the majority develop a sense of common interest, or what Marx may have termed ‘class consciousness’, the need to resolve inequality will become more acute as the resentment of it intensifies.

 

What happens when income inequality starts to become entrenched?

  • Health: Societies that are more unequal tend to have lower life expectancies, higher infant mortality, higher levels of infant mortality and high levels of diseases and conditions such as HIV/AIDS.
  • Human capital development: As inequality rises, scores on the UNICEF index of child well-being become significantly worse. Literacy rates are also lower and youth unemployment also becomes a major issue. A higher level of equality also leads to a greater level of innovation as a result of greater access to opportunity.
  • Social mobility: Inequality restricts social mobility – equality of opportunity is enhanced by greater income equality. Reduced social mobility further exacerbates income inequality and this becomes a vicious spiral from which an effective functioning economy becomes more and more difficult.

    inequality1 2
    (C) Walt Handelsman
  • Economic progress and stability: An IMF report highlights that by reducing inequality and bolstering longer term economic growth are “two sides of the same coin.” In both rich and poor countries, inequality is strongly correlated with shorter spells of economic expansion and growth over time. Unequal economies are also more susceptible to severe boom-and-bust cycles leading to greater volatility and crisis. Extreme levels of income inequality depress economic growth. An OECD report estimates that inequality has had a cumulated loss of GDP across OECD economies of 8.5% over twenty-five years.
  • Social challenges and issues: Inequality breeds corruption. Unequal societies also lead to greater economic instability. If one considers the root causes of the Arab Spring, the lack of economic opportunity or equality is one of the main drivers leading to revolt.

A blueprint for change and resolution

The solution and change required for income inequality is not a zero-sum game. There will be those who are impacted more than others, but it is essential in calibrating the world in a more equal way.

It is very easy to be dangerously complacent and ignore equality, but chronic economic inequality hurts everyone, both the rich and the poor.

Resolution of a problem like inequality requires a revolutionary approach. We need to accept a fiscal revolution or risk a social one.

I’ve highlighted below briefly some key practical steps that need to be considered as we seek an urgent resolution to the problem of income inequality.

  1. Tax reforms – Income taxes need to be more progressive (the way they were previously in times of greater equality). There needs to be a reform in the way the transfer of wealth is also taxed. The OECD has suggested that attempts to reduce inequality tax and transfer policies will not harm growth as long as the chosen policies are well designed and implemented. The OECD further argues that redistribution efforts should focus on families with children, on the youth and the improvement in human capital investment through the promotion of skills learning and development.
  1. Continued focus on economic growth and employment – Policies targeting economic growth need to continue as growth ensures jobs are created and ensures employment. Employment will support social mobility which is essential to the reduction of inequality.
  1. Ensure emphasis on social mobility – Social mobility is a key driver towards the reduction on inequality. Emphasis on education, skills learning and development is vital to support social mobility.
  1. Support small savers and small businesses – Policies should not be tilted towards just merely taxing the rich but also be aimed at increasing the wealth of small savers and businesses. For instance we should consider the introduction of accounts for small savers and businesses that guarantees positive returns in excess of inflation. It is also a widely observed phenomenon that lower income families borrow more to support their consumption and this in turn creates a systemic risk.
  1. Enhanced social policies – Governments and policy makers should also consider more directed interventions to enhance the social conditions of lower income families. For instance, in the UK, the Child Benefit offers a weekly allowance to parents for every child they raise. The transfer could be better targeted by making the income taxable as personal income, which will reduce the size of the benefit for those in higher tax brackets or who do not have face any other mitigating circumstances. In the UK, child poverty has dropped sharply whilst in the USA; it has risen by a third between 1969 and 2013. A child-benefit programme will help make a major dent in child poverty and also represent a powerful investment in the future. Introducing a child-benefit program in the US will make a major dent in child poverty and represent a powerful investment into the future.
  1. Minimum wage – Governments should also take an active review of the minimum wage policies in their countries and recalibrate them to local conditions. There is always a temptation to keep minimum wage lower because neighbouring countries are keeping theirs lower, but this beggar thy neighbour policy will not benefit anyone in the long run. Countries that make the effort to ensure greater equality will be healthier in the long term.
  1. Automation and technological change – Governments should take an active interest in the direction of technological change. It is mostly governmental grants and labs that are responsible for the underlying research that has led to the progress in automation and technology and they therefore have the right to ensure a clear review is undertaken to mitigate the social impacts of technological change through appropriate fiscal and taxation policies.

It is crucial that we as a collective rise up to face the challenges of income inequality and work closely to create a more equal society. The corrosive impacts of inequality will affect us all and the sooner we can find solutions to achieve an equal society, the better, for all.

Indonesia’s Economy – Opportunities and Challenges – notes from a lecture by Bapak Gita Wirjawan, Minister for Trade, Indonesia

ImageS Rajaratnam School of International Studies (RSIS) Distinguished Public Lecture by Bapak Gita Wirjawan, (GW) Minister of Trade, The Republic of Indonesia. (2nd September 2013, Pan Pacific Singapore) on “Indonesia’s Economy: Future Challenges and Opportunities.”

I had the pleasure of attending the distinguished public lecture by Pak Gita last week and I wanted to share some salient points from the discussions

 

Key highlights and introduction

  • July results for trade is a continuation of the trends observed in June – and are actually worse. (There was a US$2.3 billion trade deficit in July 2013 alone – cumulative deficit of US$6 billion for the whole of 2013). (Click here to see news on the latest trade deficit)
  • Continued outflow of capital resulting in a downward pressure on the currency.
  • The ongoing slowdown in Europe and uncertainty in the US/Middle-east is also having knock-on effects on Indonesia.
  • We are witnesseing a “recalibration of the global economic outlook.”
  • However, Indonesia has seen significant progress made under the Susilo Bambang Yudhoyono (SBY) presidency – Under Sukarno’s era, the GDP per capita was around US$500 per  capita – this went up to US$1,200 under the Suharto era. However the Asian Financial Crisis in 1997-1998 had a catastrophic impact on Indonesia, where the GDP per capital plummeted to US$600 per capita. Indonesia also very narrowly avoided the Balkanisation of the country during that period.
  • After the political reforms post-Suharto, GDP climbed steadily to US$1,100 under the Megawati presidency and today (2013), the GBP per capita has just about exceeded US$5,000 per capita under the SBY presidency. This has also resulted in the increased purchasing power of Indonesia leading to heightened domestic consumption, particularly from a growing middle class.

 

Can Indonesia emerge from the middle-income trap?

  • Indonesia’s improved its policy and position in the fiscal space.
  • However in the social space, the gini coefficient (one indicator of income inequality) has risen, which implies a widening income gap and disparity. This remains a critical issue which the government needs to resolve.
  • Furthermore, there is still an over-reliance on the commodities sector which is prone to very violent swings and shocks.
  • Infrastructure development remains a challenge for the country.
  • The needs to be further work done in the educational space as well.

 

Education and the economy

  • In 15 years, there will be 150 million Indonesians under the age of 30.
  • There remains an urgent need to sharpen the educational infrastructure.
  • As GW says, “It is important that we need a good runway, not just to land, but to also support us in taking off.”
  • Between 2012-2022 – it is estimated that Indonesia’s accumulated GDP be will be over US$60 trillion – on a cumulative basis.
  • There needs to be a supply side narrative to realise this estimated accumulated GDP and that remains the challenge.
  • The SBY government leaves a sustained economic trajectory for Indonesia.

 

The woe of the number of taxpayers (or lack thereof!)

  • For an economy in the top 20 largest economies grouping – the G20 – there are fewer than 20 million tax payers! (comparatively?)

 

Indonesia and her geopolitical relevance

  • GW highlighted the example of how South Korea has used its soft power effectively (from Gangnam style to Samsung products) to drive international trade and economic growth. What can Indonesia do to achieve a similar impact?
  • GW also highlighted that Indonesia has the ability to develop a high degree of political relevance because:
    • Indonesia has the potential to serve as the ‘middle power’ to narrow the gap between the Middle-East and the West
    • Indonesia can also narrow and bridge the gap between China and the US (a slightly debatable claim?!)
    • However, Indonesia needs sustained political order in order to develop and create this geopolitical relevance.
      • Indonesia must engage in Democracy 2.0 – the next iteration of her democratic freedoms enjoyed post-Suharto.
      • Improve her manufacturing and technological sector (invest in high-quality and high-yield technology and sectors).
      • Without Democracy 2.0 – it is highly unlikely that Indonesia will sustain her political and economic reforms and progress. Areas such as corruption must be tackled with and though there has been some good initial progress, this must remain sustained for there to be tangible returns and a progressive shift.

Indonesia as the ‘middle power’

  • Indonesia believes in regional cohesion and solidatiry.
  • ASEAN is a great example of multilateralism – socio-political, cultural and economic solidarity have helped ASEAN overcome initial challenges and be a more cohesive and effective regional bloc.

 

The future of Indonesia

  • Indonesia must continue her path of bundling pluralism and democracy.
  • Economic growth must be achieved hand in hand with economic equity – otherwise the unbalanced growth will have severe social impacts and fractures.
  • Without this economic equity – all of the work being undertaken now will be an exercise in failure.
  • This will take time to achieve.
  • Indonesians have now come much closer together than ever before (Indonesia has the second highest Facebook usage and the third most users on Twitter).
  • Indonesia and Indonesians must have the ability to say and proclaim that they have the wherewithal to move on with the necessary reforms and changes required for Indonesia’s sustained progress.