This essay by Oliver Stone was entered into the DUES Essay Competition 2021 and was in the top 10%
Assess whether continued technological innovation and the emergence of the digital economy will benefit developing countries.
For decades, the understanding of the development of economies has been simplified by models such as the one designed by Clarke Fisher and Warren Thompson’s Demographic Transition Model. Now with the aid of globalisation and in particular, the progress in technology that it brings, many countries are developing more quickly, more sustainably and more unpredictably than in centuries past. There are, however, countries that are being left behind. Technology lays traps, structural unemployment being one of them, which countries must avoid, particularly in their recovery from the COVID-19 pandemic, to be able to utilise technology as a tool rather than it being the cause of stagnation.
In 2018, Forbes named Estonia as one of the most technologically advanced economies in the world. On gaining independence from the Soviet Union in 1991, the Estonian government, facing levels of GDP per capita at just $5,500 (inflation-adjusted) and inflation at 40%, recognised the need to modernise the economy. In 2001, it was one of the first countries in the world to classify internet access as a human right. Come 2002 the government established an online national ID system allowing Estonians to vote online, see their doctors online and allow the payment of taxes online, something 95% of the population now does. As Richard Davies says in his book Extreme Economies, “the only official things you cannot do online in Estonia are marry, divorce and buy a house.” All personal information about a person is stored on a single card, allowing the country to have one of the world’s most advanced digital signature systems. Now having experienced two decades of an e-economy and a pandemic in which the country’s education and health systems thrived, both fundamental aspects of a successfully developing economy, as stated in the World Economic Forum’s 12 Pillars of Global Competitiveness, Estonians are on average, $35,000 better off than they were in 1991. Therefore, most Estonians would blow the digital trumpet of technological innovation.
Prospects are bright for the Baltic state. Having seen a 17% rise in productivity since 2010 (compared to the UK’s 2.8% – both pre-COVID), the CEPII, the leading French institute for research into international economics, predicts that by 2050 Estonia could become the second most productive country in the EU and one of the top five most productive countries in the world. But, as Ahti Heinla, one of the founding developers of Skype, an Estonian start-up, is seeking his next challenge by trying to make the production chain of all products bought online fully automated from purchase to doorstep, are the prospects for some areas of employment in developing countries bleaker?
The aforementioned Clarke Fisher Model suggests that as a country starts to develop, employment will shift away from the traditional primary sector of the economy, jobs such as farming and mining, into the better-paid manufacturing, or secondary sector jobs. But with these jobs at risk and technological unemployment set to increase following the pandemic which has seen unprecedented technology development, governments will have to make sure that employment is found elsewhere in new sectors.
Not only are manufacturing-based economies at risk, but some services based ones are as well. According to the Guardian, “the hospitality industry, which has been one of the hardest-hit by the pandemic, has seen a clear uptick in the adoption of new technology during the pandemic.” The number of waiters is being cut in restaurants as iPads replace notepads, mobile check-ins are replacing front desk staff in hotels and high street tourism businesses are shutting down following the rise of apps such as TripAdvisor and Booking.com. Additionally, new technologies are becoming cheaper and more accessible to a greater number of firms, but there is also an added incentive to make the running of the hospitality industry COVID friendly by reducing human to human contact. Redundancies will inevitably follow. For developing economies such as Greece and Thailand who have a significant proportion (22% and 21% respectively) of their workforce employed in the tourism sector alone the impacts of COVID-19 will not only have been felt over the last year, but will continue to have an effect as they accelerate the transition into an increasingly technology reliant industry. For countries such as these the pandemic has come at the cruellest of times. The changing world provides opportunities for developing economies – especially for those in Africa. As Paul Jackson from the FT, and others, have said, “this will be Africa’s century.” Kenya’s economy is no exception. Having liberalised the sector at the turn of the century, Kenya now has one of the most developed telecoms markets in Africa (95% of Kenyans have a mobile phone or access to one), and a major use for these phones is for online banking. According to the Central Bank of Kenya (CBK), and as can be seen in the figure below, in 2019 the average Kenyan moved almost $190 per month through mobile accounts. This sum totals equivalent to half of the country’s GDP annually. Traditionally in low or middle-income countries, the marginal propensity to consume (MPC), the proportion of income spent on consumption, is relatively high compared to that of higher-income economies. MPC is combined with the marginal propensity to save (MPS), the proportion of income allocated to savings, and other withdrawals to add up to one. Therefore, where MPC is high, the level of saving is likely to be low. This is a common factor of LIC economies. However, improvements in the telecoms infrastructure within a country such as Kenya lead to greater accessibility to, and incentive to use, online banking, resulting in increased levels of saving. The Harrod Domar model suggests that the rate of growth of GDP = the savings ratio/the capital-output ratio. Therefore, by this measure, to make the GDP growth rate increase a country has three options. Firstly, to increase the savings ratio; secondly, to decrease the capital-output ratio; and thirdly, to do a mix of the two. When savings increase, there is a larger net investment made by firms. This causes an increase in the capital stock which can benefit productivity and incomes, especially in rural areas.
However, this falling MPC could have an adverse effect on a growing economy. Globalisation has meant that countries often look outwards for an injection into their economy. Transnational corporations, or TNCs, are often at the forefront of these injections, investing in countries where they see opportunities: cheap labour, low environmental or worker standards, and access to new markets. These firms cause potential positive impacts on their host country which can include: increased employment, improving infrastructure and improving the skills of the workforce. When employment increases or the workforce is being paid more because they are more highly skilled there is an increase in the disposable income available to households. If MPC is 0.6, 60% of that extra income will be reinvested into the economy, boosting AD and therefore GDP. However, as MPC falls less is consumed and the growth rate of GDP suffers accordingly. This has the potential to reduce the positive impact of the Harrod Domar model.
There is a risk however that this is an outdated view. In the wake of the COVID-19 pandemic and with capital becoming increasingly more attractive to employ than labour, we could see the number of TNCs that are seeking to locate in countries abroad decrease in the coming decade. With that in mind, countries would be wise to follow Kenya’s example and embrace the potential that technology has to aid economic growth.
Six months ago, Ken McCarthy and Kevin Thorpe from the Business Times said, “Covid-19 is hitting the reset button on the global economy.” Instead, I think that it has pushed a much more concerning button, the accelerator. Chancellors around the world will need to fight hard and be innovative to resist the potential negative consequences on employment which will follow the end of job retention schemes. Combining this with the increased incentive for businesses to employ more capital, makes for disturbing reading. However, as Adam Saunders from the University of British Columbia notes, technology may take jobs but it also makes new ones. Since 1980 the share of American employees in low, medium, and high skilled occupations has shifted from being dominated by medium skilled jobs to having a balance of medium and high skilled jobs. The key to success for developing economies will be to what extent they are willing and able to adapt as new opportunities arise. Embrace change, and technology will aid in the growth of their economy.
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(Featured Image: © Jean Rebiffé)