The other side of the pandemic

The International Monetary Fund’s (IMF) recent issue of Finance and Development for March highlighted the other side of the health pandemic. The virus that we dread helped accelerate the digital future and its good and bad consequences. The Fund drew global attention to its potential impact on poverty and inequality following the pandemic shock and the quality of public health response.

IMF’s chief economist Gita Gopinath estimated that 90 million people are likely “to fall into extreme poverty during 2020 and 2021, reversing the trend of the past two decades.”

The Philippines is no stranger to poverty. This is a reality close to the experience of at least the families of the four million unemployed as of January. In addition, underemployment prevents people from mitigating their material lack. Between October 2020 and January 2021, underemployment rose from 14.4% to 16%, or nearly seven million Filipinos.

Labor market statistics here and in other countries would confirm that unemployment has exacerbated pre-pandemic poverty and inequalities.

Work automation, the threshold to the digital future, has no doubt contributed to labor redundancy.

Gopinath explained that the upgrades in the growth projections in the January’s World Economic Outlook assumed mass vaccination, sustained policy support in large economies and adherence to social distancing rules. With uncertainty in the implementation of public policy, the Fund was concerned with divergences in the growth prospects of member countries.

How did the Fund propose to achieve minimal economic scarring?

We completely agree that the “the pandemic is not over until it is over everywhere.” Thus, the Fund proposed global action to increase vaccine production, additional funding for the COVAX initiative to scale up coverage beyond 20% of the global population, and greater logistics support for administering the vaccines.

On the economic side, the Fund reiterated the need for expansion of public spending even by borrowings. Those with limited fiscal space should prioritize health mitigation and cash transfers to the poor. Support can also be extended to small business. The Philippines supported the poor and the vulnerable during the pandemic and helped small business. However, we failed in our pandemic mitigation. Therefore, we also failed in protecting our livelihoods. Today, we continue struggling with surges in new cases and mortalities, and weak business activity.

With a longer-lasting scar, school closures can also threaten the livelihood of a generation of children. This could widen the divergence in growth prospects.

The IMF believes in the primacy of addressing the pandemic first through strategic and quick deployment of multiple vaccines and the orchestrated moves of all sectors to “avert a great divergence in prospects across countries.”

MIT’s Daron Acemoglu of Why Nations Fail fame with James Robinson, raised the need to regulate automation if we wish to reverse the widening inequality.

Acemoglu observed what seems obvious to many. Economic growth in the US and the rest of the industrial world has become much less shared since the 1980s. It has been less inclusive. This phenomenon involves widening inequality, the disappearance of good, high-paying jobs; and the drop in the real wages of those with less education. These factors were behind the pervasive discontent and social protests across the political spectrum. Populism and authoritarianism are fueled by social alienation.

Acemoglu found that automation, among other factors, would explain this phenomenon of less inclusive economic growth. With more advances driven by machine learning and artificial intelligence, automation could increase inequality. The challenge is to properly harness it and direct it through appropriate public policy to contribute to more inclusive growth.

True, automation has been an engine of growth since the Industrial Revolution. Its labor-saving effect has been more than matched by the significant gains in labor productivity and employment opportunities.

However, the pandemic has recently incentivized employers to explore various ways to further intensify machine use and recent evidence confirms this. The evidence also disproves that idea that “new technologies will increase productivity and enrich us, even if they dislocate some workers and disrupt existing businesses and industries.” Industries that are more reliant on these new technologies have not performed better in terms of total factor productivity (TFP), output, or employment growth. Acemoglu claimed that the gains in TFP in the last 20 years of technological leaps and bounds paled in comparison with those after World War II.

Why this irony?

Acemoglu explained that automation has been quite excessive. Businesses automate beyond those levels that reduce production costs. Social costs actually increase because jobs are lost and labor wages decline. Productivity growth is also weak because the singular focus on automation technologies may lead businesses “to miss out on productivity gains from new tasks, new organizational forms, and technological breakthroughs that are more complementary to humans.”

This disconnect between technology use and productivity gains may not be true as yet in the Philippines but with globalization and business process outsourcing, spillovers may not be too far behind. We need to keep a good balance between automation and human creativity especially during this pandemic.

We share Acemoglu’s assertion that the path of future technology centered on automation is not “preordained.” The choice made in the past should be rectified to direct the technology of automation to boost productivity rather than simply to save on labor.

Acemoglu’s recommendation might surprise many. He would like the government to provide incentives that would shift the composition of innovation from undue focus on automation to more human-friendly technologies. Government is not expected to block or discourage technological progress but to keep the mantra of business to provide job opportunities and allow for a more inclusive growth.

This can be done in education and healthcare to better equip their constituencies through AI and machine learning. In manufacturing, the so-called augmented reality and computer vision could enhance labor productivity.

Indeed, Zoom and digital payments have multiplied people’s coping capability during the pandemic and therefore technological innovations should continue with the same thrust of helping people. People can be retooled and technology should be able to create new opportunities by pointing the way.

This is not to make governments authoritarian. Acemoglu suggested the same direction that was followed in the discovery and development of antibiotics, sensors, and the internet. Without public intervention, these game-changing innovations would not have been possible.

The biggest challenge in harnessing technology is its potential impact on democracy.

With fake news and misinformation easily transmitted globally, AI-powered social media could also undermine democratic discourse.

Therefore, digitalization technology can only promote inclusiveness if it has public value. Of relevance here is the article on the need for public goods to support private innovation written by Bank for International Settlements (BIS) staff Jon Frost, Leonardo Gambacorta, and our friend Hyun Song Shin, economic adviser and head of research.

The BIS zeroed in on digital technology transforming the financial industry in payments, savings, borrowing and investment on digital platforms. Fintech and Bigtech companies, according to the BIS, now compete with banks and other financial market players in a wide spectrum of financial services.

While progress in this area has been impressive, as 1.2 billion adults gained access to financial accounts between 2011 and 2017, BIS argued that for digital technology to further bolster financial inclusion, public goods are critical. “Public goods provide the underpinnings of financial inclusion.”

The pandemic imposed social distancing and economic lockdowns and since then, digital payments have become the lifeline of many people — selling and buying goods, depositing and transferring money without contact.

Related to this, the BIS raised a most fundamental point that has been sadly missed by many proponents of financial inclusion. Digital technologies cannot succeed on their own. They need enablers: mobile phones, internet, storage and processing of large volumes of digital data, and other infrastructure like cloud computing, machine learning, distributed ledger technology, and biometric technologies.

Because digital technology is scalable and can improve risk assessment based on the same by-product of data, numerous services and functionalities have been opened by digital technology. Lending without collateral may now be possible. Bigtech companies hold a great amount of credit information about the potential borrower. But Bigtech companies have become too big to fail.

BIS proposed five policies to leverage on the benefits of digital technology while safeguarding financial stability and consumer rights. One, open, inclusive digital infrastructures should be built. Two, common standards should be introduced to encourage competition. Three, competition policies should be updated. Four, data privacy should be strengthened. And finally, policymakers like central banks, regulatory, competition and privacy authorities should get and work together.

This is the other side of the pandemic. It has spawned innovation that unless tamed, could in fact exacerbate poverty and inequality.

 

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.