Human Side Of Economics

(Last of the Series)

I have toned down the enthusiasm about the coming of the Industrial Revolution 4.0 (IR4) because the Philippines still has to complete the first three stages of the industrial revolution, especially so that we can attain in the next decade or so not only sustainable growth, but, more importantly, inclusive growth where no one is left behind. There is so much we can still derive from the ages of mechanization (1760-1820), electrification (1871-1914) and digitalization (the late 20th century) that it may be counterproductive to devote too much attention and resources to such technologies as cyber-physical systems, internet of things (IoT), on-demand availability of computer system resources, and cognitive computing. It may not make economic sense to rush the introduction of robots into manufacturing and services when we still have more than 10 million of our workers either unemployed or underemployed. In fact, I just read an advertisement for the Apple car, which is electric and autonomous, that will be ready for the market in 2022. Guess how much it will cost? Only $75,000! No need to rush IR4. As they say in Cebuano, “hinay-hinay pero kanunay,” slowly but surely.

It would be useful, however, to know just exactly what a full-blown Industrial Revolution 4.0 entails so we can picture our country, say, 20 or more years from now (still very much in the lifetime of the millennials and centennials), when we will be a first world country. The clearest vision of IR4 was first presented by Klaus Schwab, founder and executive chairman of the World Economic Forum, in an article he wrote on Jan. 14, 2016 entitled “The Fourth Industrial Revolution: what it means, how to respond.” In this article, he gave three reasons why IR4 represents not merely a prolongation of IR3 (the use of electronics and information technology to automate production), but rather the arrival of a fourth and distinct one: velocity, scope, and systems impact. There is no historical precedent to the speed of the breakthroughs we are witnessing today. Compared to the three previous revolutions, the fourth is evolving at an exponential rather than a linear pace. At least in the upper-middle income and high-income countries, it is disrupting almost every industry. The breadth and depth of these vertiginous changes are transforming entire systems of production, management, and governance.

In countries like the US, Japan, Germany, and China, artificial intelligence (AI) is already ubiquitous, powering self-driving cars and drones to virtual assistants and software that translate or invest. Impressive progress has been made in AI in the last decade or so, driven by exponential increases in computing power and by the availability of vast amounts of data, from software used to discover new drugs (as we have witnessed during the ongoing pandemic) to algorithms that can be used to predict our cultural interests. Digital fabrication technologies, meanwhile, are interacting with the biological world on a daily basis. Highly trained professionals such as engineers, designers, and architects are able to combine computational design, additive manufacturing, materials engineering, and synthetic biology to pioneer a symbiosis between microorganisms, our bodies, the products we consume, and even the buildings we inhabit. IR4 integrates processes vertically, across the entire organization, including processes in product development, manufacturing, structuring, and service. Horizontally, it includes internal operations from suppliers to customers as well as all key value chain partners. It is also able to integrate new methods of data collection and analysis, such as through the expansion of existing products or creation of new digitized products, thus helping companies to generate data on product use in order to refine products. It makes possible business models which can track customer satisfaction as a perpetual, multi-stage process that requires modification in real time to adapt to the changing needs of consumers.

Like the first three industrial revolutions, IR4 has the potential to raise global income levels and improve the quality of life for populations around the world. Predictably, those who have benefited most from it have been consumers who are able to afford and access the digital world. This became very obvious during the pandemic when, as instruction in schools went online, the vast majority of pupils in the public schools have been left behind because of lack of internet connections and of digital devices needed in remote learning. Some 40% of our population who belong to the middle- and high-income classes have been enabled by IR4 to have access to new products and services that increase the efficiency and pleasure of their personal lives. They can now remotely order a cab, book a flight, buy a product, make a payment, listen to music, watch a film, or play a game. The question is how long will it take for the remaining 60% of the population to also reap the benefits of IR4.

Dr. Schwab refers to economists Erik Brynjolfsson and Andrew McAfee who fear that IR4 could yield greater inequality, particularly in its potential to disrupt labor markets. As automation substitutes for labor across the entire economy, the net displacement of workers by machines might exacerbate the gap between returns to capital and returns to labor. A more optimistic view, however, it that it is also be possible that the displacement of workers by technology will, in aggregate, result in a net increase in safe and rewarding jobs. It is difficult to foresee which scenario will actually emerge. One thing we can be sure of, however, is that in the future, talent, more than capital, will represent the critical factor of production. This will give rise to a job market increasingly segregated into “low-skill/low-pay” and “high-skill/high-pay” segments, which in turn may lead to social tensions. For this reason, inequality represents the greatest social concern associated with the IR4. Those who benefit most from innovation tend to be the providers of intellectual and physical capital — the innovators, entrepreneurs, knowledge workers, shareholders, and investors — which explains the rising gap in wealth between those dependent on capital versus labor. This means that the demand for highly skilled workers will increase while the demand for workers with less education and lower skills will decrease. The result is a job market with a strong demand at the high and low ends, but a hollowing out of the middle.

Such prospects for the future (say, 10 to 20 years from now) make it very important that we address the education crisis that is upon us now. The quality of education that is being received by those who will be in the workforce 10 to 20 years from now is one of the lowest in the world as numerous international tests have discovered. Our present-day primary and secondary school pupils receive very low ratings in international tests in reading comprehension, science, and math. We may have a window of some 10 years during which our economy will still be at a stage of growth in which the demand of workers will be mainly at the low end (construction, labor-intensive farming, hospitality, retail services, OFWs). We must be ready for the day when our middle-income households may account for 80% to 90% of the entire population. If these future workers and consumers are receiving very low-quality education today, they will not be ready for the predominantly high-skilled jobs that will be needed in the future. We will then be left behind once again when we enter fully the stage of Industrial Revolution 4.0. We must make sure that the Administration that will be elected in May 2022 will give the highest priority to addressing our educations crisis. There is no time to lose.


Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is Professor Emeritus at the University of Asia and the Pacific, and a Visiting Professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.