Artificial Intelligence

It conjures fear for some segments of the world economy and soaring potential for others. For laborers and those who advocate for them, there is fear that jobs will be lost.

Poorer countries fear it because they don’t have the resources to develop it as the richer nations do. These nations will take the lead in its development and will reap more of the benefits as its potential grows.

McKinsey Global Institute, a consulting firm that monitors the evolution of the global economy, developed a white paper on the subject in 2018. Their report was so impactful, the European Union used it to develop a briefing of their own that discusses how AI could affect the countries of Europe and urges them to come up with a strategy to deal with it.

This report is based on the McKinsey white paper.

Although the potential of AI on the world economy is great, there is fear that its benefits will be unequal.

AI’S AFFECT ON COUNTRIES

The fear is that AI could cause a widening gap between the richer and poorer countries. Leaders in the development of AI including the United States and China could increase their lead over developing countries resulting in the gathering of 20 to 25 percent more of the net economic benefits. Meanwhile the developing countries may have to settle for about 5 to 15 percent of the net economic benefit.

As a result, developing nations may be forced to develop AI just to ensure higher growth, but at the detriment of its GDP, which could be slowed. The incentive to grow AI will be present in the richer countries due to higher wages and thus a desire to sacrifice people labor for machines. The developing countries, on the other hand, have less of an incentive to develop AI because of their low wage labor force.

Developing countries will have to restructure their industries to improve productivity so that they can compete or they have to choose the pursuit of AI, with the return being smaller for them than it is for the advanced economies.

AI’S AFFECT ON WORKERS

The same gaps could also occur between front running companies that integrate AI throughout their business and companies that can’t adopt AI or don’t have the ability to integrate it into their business by 2030.

Companies that have a leg up in developing AI are likely to benefit disproportionately. It’s expected that by 2030, these businesses could double their cash flow. In addition, they could have an additional yearly net cash-flow growth of about 6 percent for longer than the next decade. Companies that lead in the development of AI have the advantage of having healthy IT departments, a greater inclination to invest in AI, and an understanding of the increased benefits of AI for their business.

On the other hand, companies that don’t adopt AI could suffer about a 20 percent drop in their cash flow from today’s levels. This is due to the strong competitive dynamics of the frontrunner companies over the companies that are slower to adopt AI and cause controversy over the unequal distribution of the benefits of AI.

GOVERNMENT RESPONSE

Governments will need to create policies that nurture the potential of AI, but, at the same time, address the risks that will arise because of it. Studies have shown that if worker income does not rise as a result of the economic gains generated by AI, then consumption could stagnate and growth could be restricted. Governments will need to figure out ways to distribute the gains achieved due to AI. Changes in tax policy could help rebalance the change from an emphasis on labor to one of capital and protect susceptible groups from a socio-economic upheaval.

CONCLUSION

While the potential of AI is significant, there will be disruptions in the world economy as AI grows.

The expected productivity benefits will not appear immediately. Its effect will probably build at a faster rate over time. So, don’t expect benefits of initial investment in the short term. Companies and countries will need to maintain patience and have a long-term strategy.

It will be up to governments to overcome discomfort among many who will see a threat to their jobs as the automation aspects of AI become widespread. Companies will have to seek solutions on educating and re-educating workers on AI. Workers may have to live with a more frequent turnover of jobs causing them to transition into new types of employment. Workers will be required to regularly enhance their skills to meet the needs of a changing jobs market.