Can AI unlock productivity and growth?
If you watched Nvidia CEO Jensen Huang's remarkable presentation at Taipei Computex last month, you would be convinced that AI has ushered in a new Industrial Revolution, in which accelerated computing with the latest AI chips unleashed the power of doing everything faster, more efficiently, and with less energy.
In this age of intense global rivalry and competition, including military power, AI, robotics, and improved engineering, it promises a techno-utopian way to achieve dominance over rivals. McKinsey estimated that Generative AI's impact on productivity could add between $2.6 trillion to $4.4 trillion to the global economy annually. That's like adding one UK economy to the global economy every year.
For all latest news, follow The Daily Star's Google News channel. Roughly three-fourths of productivity will come from business improvements in four areas - customer operations, marketing and sales, software engineering, and R&D. Think about it, instead of training everyone to learn coding, we bypass coding because the AI can actually translate what you would like done through writing the script, creating the video, and even designing the process. Just ask ChatGPT's latest version.
The machine has the answers, but ultimately, it is the human being who will either execute what is needed or just not do anything.
The reality is that even though Generative AI will have a significant impact across all industry sectors, such as retail, banking, high tech, and life sciences, whether the productivity (measured as output per capita) is achieved depends on how individuals, companies, communities, and nations are driving the productivity change. Since Generative AI changes the way we work by automating many individual activities, this is a social and political question. Cross-border language barriers are removed when AI can do the automatic translation, print the transcript, and even indicate the next work agenda. Since McKinsey estimates that current generative AI and other technologies can automate work activities by as much as 60 to 70 percent of present employee time, no wonder many in the workforce fear AI adoption with huge resistance and reluctance to change.
The latest European Union Competitiveness and Industry Benchmarking Report 2024 indicates that, at a high level, the EU realizes that the region is racing against the clock as the EU industry has been continuously losing ground on global markets in terms of market share. EU companies are becoming less relevant, and the EU's future technological leadership is at risk. The reason is obvious to all – the EU's market is much more fragmented than either the US or China, being a collection of national markets rather than a Single Market with one currency, the Euro.
The metrics speak for themselves. EU's share of global trade has fallen by one-third to second place (16% of global trade in 2021), compared with China (28.3%) and the US (14.5%) since 2001. In terms of market revenue of companies in the Fortune Global 500, EU companies have fallen to third place between 2005-2023 whereas American companies lead with 31.8%, Chinese 27.5%, and EU companies lag with 15.5%.
Europe's adoption of 5G technology is way behind that of China or the United States. Since R&D is a key driver of innovation and technological leadership, the EU lagged with 2.3% of GDP spending by 2021, behind China (2.4%) and the US (3.5%). This is particularly evident in industrial R&D investment amongst the world's largest 2,500 companies. The EU's market share has fallen to third place of only 17.5%, overtaken by China (17.8%), whereas the US leads with 42.1%. Chinese EVs and engineering products (including industrial machinery) are already taking EU markets by storm.
Add to the fact that the EU's energy costs are higher than the US or China and that EU regulations are the most complex relative to other markets, and it is not surprising that EU companies have been shifting their production overseas. Labour productivity has stagnated for years due to the highest social protection standards. As the report says, the EU's regulatory environment needs an upgrade to empower and reward innovators, a reduction of EU and national regulatory silo-thinking, and enhancement of technology deployment with stronger public-private collaboration.
These European lessons are salutary for real sector transformation for almost all emerging developing market economies (EMDEs). Despite being shocked by the global financial crisis of 2008, Europe has not undertaken structural reforms in the labour and corporate sectors to improve overall competitiveness. The financial sector, dominated by the fragmented banking system, remains risk-averse. German, French, and Swiss banks are a shadow of their former global prowess, having been hit hard by tighter regulations and inept consolidations.
The real issue is who drives the structural changes. In America, it is quite clear that the private corporate sector remains dynamic and committed to profits and innovation. In China, the government or Party takes the lead but allowed enough corporate competition that is aligned with national goals.No one pretends that American or Chinese corporations are neoliberal by inclination.
EU and many EMDEs still suffer a schizophrenic tension between the old neoliberal aim of free markets, with a newer liking for state intervention and industrial policies. The neoliberal approach failed where governments and the public think that just passing more laws and regulations would solve social and market ills. As we all have learned from bitter experiences, policies, and programmes are easily frustrated at the legislative or political levels, or mired in forever legal suits by vested interests against change.
Eco-system change is complex and requires not only the construction of a common narrative of why you need change, but also the concrete execution of visible projects that demonstrate determination and engender public trust. If you want the economy to change, appoint business leaders who understand how to manage institutional change that remains business-friendly. Indonesian President Jokowi's appointment of former tech platform Gojek President Nadiem Makarim as Minister of Education is an example of how to shake a traditional educational bureaucracy toward technological eco-system change. Radical change needs radical thinking, but by someone like Jensen Huang who understands both the role of technology and markets.
The AI revolution is already happening at a frightening speed. Economies that mess up the transition will be marginalized. Those companies and communities that adapt well will not only survive but thrive. That is the cruelness of Darwinian competition.
Copyright ANN
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