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British economic journalist Martin Wolff recently suggested that the stagnation of productivity in the developed world could probably be a lull before the storm. Article from the Financial Express.

The current global economy is caught in a major paradox. We live in a world where systems using artificial intelligence (AI), robotics and automation are matching or exceeding human performance in more and more domains. Yet, global productivity levels have been stagnant since the economic crisis of 2008.

The global total factor productivity (TFP), which measures the efficiency with which inputs such as labour and capital are used, grew at 1.2 percent per year on an average between 1999 and 2008, slowed to 0.3 percent till 2012, and has stagnated since then.

For the advanced economies, including the US, Japan and the Eurozone, TFP growth has either stagnated or fallen into negative territory while the developing countries have shown a mixed performance. India and China have experienced a TFP growth of 1 per cent and 0.8 per cent, respectively, while Brazil and Mexico have witnessed a fall of 0.4 per cent and 0.9 per cent, respectively.

These trends are more problematic for the developing world than the advanced nations. After all, rising productivity, or output per worker, directly determines the improvements in the standard of living of a nation’s citizens. And, in absolute terms, the TFP levels of advanced nations are almost five times higher than the emerging economies. So, low growth or stagnation of TFP can grossly undermine the ability of poorer nations to catch-up with their richer counterparts.

As economist-columnist Paul Krugman aptly commented: “Productivity isn’t everything, but in the long run it is almost everything.”

However, it is almost inexplicable to experience such productivity trends in the face of rapid technological advancements. British economic journalist Martin Wolff recently suggested that the stagnation of productivity in the developed world could probably be a lull before the storm.

A similar productivity pause was seen in the US in the 1920s when electricity was revolutionising lives. Soon after the lull, productivity levels shot up rapidly. If that is the case, the emerging economies have all the more reason to be concerned about rising cross-country disparities. A sudden acceleration in productivity growth of advanced nations, as suggested by Wolff, will make it even more difficult for poorer nations to catch up; it will also introduce extreme levels of cross-country inequality.

One of the reasons for the low productivity growth levels of developing nations was suggested by Diego Comin and Marti Ferrer of Dartmouth University in a 2013 paper. In a cross-country analysis, they showed that even though these nations have been quick to adopt technologies from the industrialised nations, their penetration rates have been low. This has sustained the gap in productivity levels of the Western and non-Western world.

To make matters worse, the various channels of technology adoption are under threat these days. There are three broad channels for knowledge and technology flows between advanced and emerging economies: International trade, foreign direct investment and cross-country research collaborations. Firms regularly gain access to technology through the process of reverse engineering after importing goods from abroad. Investing in other countries also results in a transfer of technology. Finally, location of research centres abroad to take advantage of cost differences can lead to knowledge flows between countries.

However, in a post-Trump world, as countries close up their economies, these synergies can come to nought. In such a scenario, the adoption of technologies could take a hit and the productivity disparities between advanced and emerging economies. It is crucial that the rate of productivity growth in developing nations rebound as broad-based increases in standards of living are at stake.

The best way for these nations to climb up the ladder of prosperity would be to eliminate all structural impediments to the adoption and penetration of newer technologies. The popular fear of job losses due to higher automation has also been negated by a recent analysis by the Asian Development Bank. In an analysis of 12 developing Asian economies between 2005 and 2015, it was found that a rise in demand more than compensated for the job losses that resulted from automation. In particular, it was estimated that during this period, about 134 million new jobs were created as opposed to a loss of 101 million jobs to technology. So, contrary to expectations, the adoption of newer technologies has induced higher productivity and economic growth in Asian economies.

In the light of these facts, the NITI Aayog’s latest move to shift the policy focus on AI to stimulate social and inclusive growth is a positive step. Such applications of digital technology can unleash higher levels of productivity gains and push the envelope on the delivery of public goods on a national scale. The real litmus test will be the execution of the policy, but for now it can be said that India has entered the AI playground at the perfect time.