Can an inclusive future be envisioned in the digital era?

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We are living in what has been aptly termed the digital era, a time of rapid technological change led by digital technologies. The new technologies are reshaping economies—and societies. We may be on the cusp of a significant deepening and acceleration of the ongoing digital transformation of our economies and societies as artificial intelligence (AI) generates a new wave of innovations. The COVID-19 pandemic has given added impetus to automation. The future is arriving at a faster pace than expected.

Advances in digital technologies hold great promise. They create new opportunities and avenues to boost economic prosperity and raise human welfare. But they also pose new challenges and risks. As the new technologies transform markets and nearly every aspect of business and work, they have highlighted, and can deepen, economic and social fault lines across advanced and developing economies.

One major fault line is economic inequality, which has been rising in many countries over the period of the boom in digital technologies. The rise in inequality has been more pronounced in advanced economies, notably the United States. Rising inequality and related disparities and anxieties have been stoking social discontent and are a major driver of the increased popular disaffection and political polarization that are so evident today. An increasingly unequal society can weaken trust in public institutions and undermine democratic governance. Rising inequality has emerged as an important topic of political debate and a major public policy concern.

Against this background, a recently published report, An Inclusive Future? Technology, New Dynamics, and Policy Challenges, examines the opportunities and challenges of digital transformation. This report is part of a current initiative at Brookings—Global Forum on Democracy and Technology—that seeks to promote ideas and policies to manage technological change to build inclusive prosperity and strengthen democratic societies.

Technological transformation has been altering market dynamics in ways that push inequality higher within economies. This has been happening through three channels: More unequal distribution of labor income with rising wage inequality as technology shifts labor demand from routine low- to middle-level skills to new, higher-level skills; shift of income from labor to capital with increasing automation and decoupling of wages from firm profitability; and more unequal distribution of capital income with rising market power and rents in increasingly concentrated and winner-takes-all markets. These dynamics are more evident in advanced economies but could increasingly impact developing economies as the new technologies make deeper inroads there.

Not only has inequality been rising, but the expected productivity dividend from digital technologies has not fully materialized. The potential of the new technologies to deliver higher productivity and economic growth is sizable. But productivity growth has slowed rather than accelerated in many economies as digital technologies have boomed. Firms at the technological frontier have captured the lion’s share of the returns from the new technologies. Productivity growth in these firms has been strong, but it has stagnated or slowed in other firms, depressing aggregate productivity growth. With slower productivity growth, economic growth has trended lower. So, the proverbial economic pie is not only more unequally distributed, it is also growing more slowly.

Looking ahead, absent countervailing policies, AI and related new waves of digital technologies and automation could increase inequality further. Even as new technologies increase productivity and produce greater economic affluence, and new jobs and tasks emerge to replace those displaced to prevent large technological unemployment, inequality could reach much higher levels. Continuing and large increases in inequality may not be a sustainable path given associated social and political risks.

While within-country inequality has been rising, inequality between countries has been falling. Faster-growing emerging economies have been narrowing the income gap with advanced economies. But technological change poses new challenges for this global economic convergence. Manufacturing-led growth in emerging economies has been driven by their comparative advantage in labor-intensive manufacturing based on large populations of low-skilled, low-wage workers. This source of comparative advantage increasingly will erode as automation of low-skilled work expands, disrupting traditional pathways to development.

The title of the new report poses a question: Can an inclusive future be envisioned in the digital era? The answer to that question is yes. Large and persistent increases in inequality are not an inevitable consequence of technology.

The challenge for policymakers lies in harnessing transformative change spawned by current and prospective advances in technology to promote more inclusive growth and development. Public policy in general has been slow to rise to the challenge. Policies have lagged shifting growth and distributional dynamics as technology reshaped markets, business models, and the nature of work. The result has been both a failure to capture the full productivity potential of the new technologies and a failure to counteract some of the effects of these technologies that increase economic inequality. With more responsive policies, better outcomes are possible.

The reform agenda spans product and factor markets to enable broader participation of firms and workers in the opportunities created by the new technologies. It includes competition policy, regulatory frameworks governing the new digital economy, the innovation system, education and training, labor market policies and social protection, and policies to reduce the digital divide. It also includes tax policy reform. A theme unifying much of this reform agenda is that, in capturing the full promise of digital transformation, economic growth and inclusion are not competing but complementary objectives.

In many of these areas of national policy reform, more research, fresh thinking, and experimentation will be needed to align institutions and policies with the profound technology-driven changes in the functioning of markets and economies. At the international level, new global frameworks and rules will be needed as globalization goes increasingly digital.

Technology can potentially slow global economic convergence by altering patterns of comparative advantage. But as it disrupts some traditional pathways to growth and development, it also offers new opportunities for developing countries that successfully recalibrate their growth models to the new technological paradigm.

Adapting to the new technologies is a big challenge for policymakers. But that is not the only challenge. A related challenge is to shape technological change itself to put it to work for broader groups of people and better meet the needs and interests of economies and societies.