4 FINANCE & DEVELOPMENT | June 2018The Digital RevolutionTHE LONG AND SHORT OF June 2018 | FINANCE & DEVELOPMENT 5Smart policies can alleviate the… [607035]

4 FINANCE & DEVELOPMENT | June 2018The Digital RevolutionTHE LONG AND SHORT OF

June 2018 | FINANCE & DEVELOPMENT 5Smart policies can
alleviate the short-term
pain of technological
disruption and pave the
way for long-term gain
Martin MühleisenThe Digital RevolutionTHE LONG AND SHORT OF

Digital platforms are recasting the
relationships between customers,
workers, and employers as the sili-
con chip’s reach permeates almost
everything we do—from buying
groceries online to finding a partner
on a dating website. As computing power improves
dramatically and more and more people around the
world participate in the digital economy, we should
think carefully about how to devise policies that
will allow us to fully exploit the digital revolution’s benefits while minimizing job dislocation.
This digital transformation results from what econ –
omists who study scientific progress and technical change call a general-purpose technology—that is,
one that has the power to continually transform
itself, progressively branching out and boosting
productivity across all sectors and industries. Such transformations are rare. Only three previous tech-
nologies earned this distinction: the steam engine,
the electricity generator, and the printing press.
These changes bring enormous long-term benefits.
The steam engine, originally designed to pump
water out of mines, gave rise to railroads and indus-
try through the application of mechanical power.
Benefits accrued as farmers and merchants delivered
their goods from the interior of a country to the
coasts, facilitating trade.
Adopt—but also adapt
By their very nature, general-purpose technological
revolutions are also highly disruptive. The Luddites
of the early 19th century resisted and tried to destroy
machines that rendered their weaving skills obsolete,
even though the machines ushered in new skills
and jobs. Such disruption occurs precisely because
the new technology is so flexible and pervasive.
Consequently, many benefits come not simply from
adopting the technology, but from adapting to the
technology. The advent of electricity generation
enabled power to be delivered precisely when and
where needed, vastly improving manufacturing effi –
ciency and paving the way for the modern produc-
tion line. In the same vein, Uber is a taxi company
using digital technology to deliver a better service.
An important component of a disruptive tech –
nology is that it must first be widely adopted before
society adapts to it. Electricity delivery depended
on generators. The current technological revolution
depends on computers, the technical backbone of
the Internet, search engines, and digital platforms. Because of the lags involved in adapting to new
processes, such as replacing traditional printing with
online publishing, it takes time before output growth
accelerates. In the early stages of such revolutions, more and more resources are devoted to innovation
and reorganization whose benefits are realized only
much later.
For example, while James Watt marketed a rela-
tively efficient engine in 1774, it took until 1812 for
the first commercially successful steam locomotive to appear. And it wasn’t until the 1830s that British
output per capita clearly accelerated. Perhaps it is no
wonder that the digital revolution doesn’t show up
in the productivity statistics quite yet—after all, the
personal computer emerged only about 40 years ago.
But make no mistake—the digital revolution is
well under way. In addition to transforming jobs and
skills, it is also overhauling industries such as retail-
ing and publishing and perhaps—in the not-too-
distant future—trucking and banking. In the United
Kingdom, Internet transactions already account for
almost one-fifth of retail sales, excluding gasoline, up
from just one-twentieth in 2008. And e-commerce
sites are applying their data skills to finance. The
Chinese e-commerce giant Alibaba already owns a
bank and is using knowledge about its customers
to provide small-scale loans to Chinese consumers.
Amazon.com, the American e-commerce site, is
moving in the same direction.
Meanwhile, anonymous cryptocurrencies such as
Bitcoin are posing challenges to efforts to combat
money laundering and other illicit activities. But
what makes these assets appealing also makes them
potentially dangerous. Cryptocurrencies can be used
to trade in illegal drugs, firearms, hacking tools, and
toxic chemicals. On the other hand, the underlying
technology behind these currencies (blockchain) will
likely revolutionize finance by making transactions
faster and more secure, while better information
on potential clients can improve the pricing of
loans through better assessment of the likelihood
of repayment. Regulatory frameworks need to ensure
financial integrity and protect consumers while still supporting efficiency and innovation.
Looking forward, we may see even more disruption
from breakthroughs in quantum computing, which
would facilitate calculations that are beyond the
capabilities of traditional computers. While enabling
exciting new products, these computers could undo
even some new technologies. For example, they could
render current standards in cryptology obsolete,
6 FINANCE & DEVELOPMENT | June 2018

MONEY , TRANSFORMED
Digital technology will spread
further, and efforts to ignore it or
legislate against it will likely fail.potentially affecting communication and privacy on
a global level. And this is just one aspect of threats to
cyber security, an issue that is becoming increasingly
important, given that almost all essential public
services and private information are now online.
Accelerated pace
Digitalization will also transform people’s jobs.
The jobs of up to one-third of the US workforce,
or about 50 million people, could be transformed
by 2020, according to a report published last year
by the McKinsey Global Institute. The study also estimates that about half of all paid activities could be automated using existing robotics and artificial
and machine learning technologies. For example,
computers are learning not just to drive taxis but
also to check for signs of cancer, a task currently
performed by relatively well-paid radiologists. While
views vary, it is clear that there will be major potential
job losses and transformations across all sectors and
salary levels, including groups previously considered
safe from automation.
As the McKinsey study underscores, after a slow
start, the pace of transformation continues to acceler –
ate. The ubiquitous smartphone was inconceivable to
the average person at the turn of the 21st century. Now,
more than 4 billion people have access to handheld devices that possess more computing power than the
US National Aeronautics and Space Administration
used to send two people to the moon. And yet these tiny supercomputers are often used only as humble telephones, leaving vast computing resources idle.
One thing is certain: there’s no turning back
now. Digital technology will spread further, and
efforts to ignore it or legislate against it will likely fail. The question is “not whether you are ‘for’ or
‘against’ artificial intelligence—that’s like asking our
ancestors if they were for or against fire,” said Max
Tegmark, a professor at the Massachusetts Institute of
Technology in a recent Washington Post interview. But
economic disruption and uncertainty can fuel social
anxiety about the future, with political consequences.
Current fears about job automation parallel John
Maynard Keynes’s worries in 1930 about increasing
technological unemployment. We know, of course,
that humanity eventually adapted to using steam
power and electricity, and chances are we will do so again with the digital revolution.
The answer lies not in denial but in devising smart
policies that maximize the benefits of the new tech-nology while minimizing the inevitable short-term disruptions. The key is to focus on policies that
respond to the organizational changes driven by the
digital revolution. Electrification of US industry in
the early 20th century benefited from a flexible edu –
cational system that gave people entering the labor force the skills needed to switch from farm work as
well as training opportunities for existing workers to
develop new skills. In the same way, education and
training should give today’s workers the wherewithal
to thrive in a new economy in which repetitive
cognitive tasks—from driving a truck to analyzing a medical scan—are replaced by new skills such as
web engineering and protecting cyber security. More
generally, future jobs will probably emphasize human
empathy and originality: the professionals deemed
least likely to become obsolete include nursery school
teachers, clergy, and artists.
One clear difference between the digital revo-
lution and the steam and electricity revolutions is the speed at which the technology is being diffused
across countries. While Germany and the United
Kingdom followed the US take-up of electricity
relatively quickly, the pace of diffusion across the
globe was relatively slow. In 1920, the United States
was still producing half of the world’s electricity. By
contrast, the workhorses of the digital revolution—
computers, the Internet, and artificial intelligence
backed by electrical power and big data—are widely
available. Indeed, it is striking that less-developed
countries are leading technology in many areas, such
as mobile payments (Kenya), digital land registration
(India), and e-commerce (China). These countries facilitated the quick adoption of new technologies
because, unlike many advanced economies, they
weren’t bogged down in preexisting or antiquated
infrastructure. This means tremendous opportunities
for trial and error to find better policies, but also
the risk of a competitive race to the bottom across countries.
While the digital revolution is global, the pace
of adaptation and policy reactions will—rightly or wrongly—be largely national or regional, reflecting
different economic structures and social preferences.
June 2018 | FINANCE & DEVELOPMENT 7

The revolution will clearly affect economies that are
financial hubs, such as Singapore and Hong Kong
SAR, differently than, for example, specialized oil
producers such as Kuwait, Qatar, and Saudi Arabia.
Equally, the response to automated production tech –
nologies will reflect possibly different societal views
on employment protection. Where preferences
diverge, international cooperation will likely involve
swapping experiences of which policies work best. Similar considerations apply to the policy response
to rising inequality, which will probably continue
to accompany the gradual discovery of the best
way to organize firms around the new technology.
Inequality rises with the widening of the gap in
efficiency and market value between firms with new
business models and those that have not reorganized.
These gaps close only once old processes have been
largely replaced.
Education and competition policy will also need to
be adapted. Schools and universities should provide
coming generations with the skills they need to work
in the emerging economy. But societies also will need
to put a premium on retraining workers whose skills
have been degraded. Similarly, the reorganization of
production puts new strains on competition policy to ensure that new techniques do not become the
province of a few firms that come first in a winner-
take-all lottery. In a sign that this is what is already happening, Oxfam International recently reported
that eight individuals held more assets than the
poorest 3.6 billion combined.
The railroad monopolies of the 19th century
required trust busting. But competition policy is
more difficult when future competitors are less likely
to emerge from large existing firms than from small
companies with innovative approaches that have the
capacity for rapid growth. How can we ensure that the next Google or Facebook is not gobbled up by
established firms?
Avoiding a race to the bottom
Given the global reach of digital technology, and
the risk of a race to the bottom, there is a need for
policy cooperation similar to that of global finan-
cial markets and sea and air traffic. In the digital
arena, such cooperation could include regulating the treatment of personal data, which is hard to oversee
in a country-specific way, given the international
nature of the Internet, as well as intangible assets,
whose somewhat amorphous nature and location
can complicate the taxation of digital companies.
And financial supervisory systems geared toward
monitoring transactions between financial institu-tions will have trouble dealing with the growth of peer-to-peer payments, including when it comes to
preventing the funding of crime.
The importance of cooperation also implies a role
for global international organizations such as the
World Bank and the International Monetary Fund.
These institutions, with their broad membership,
can provide a forum for addressing the challenges
posed by the digital revolution, suggest effective
policy solutions, and outline policy guidelines. To
be successful, policymakers will need to respond
nimbly to changing circumstances, integrate expe-
riences across countries and issues, and tailor advice
effectively to countries’ needs.
The digital revolution should be accepted and
improved rather than ignored and repressed. The
history of earlier general-purpose technologies demon –
strates that even with short-term dislocations, reorga –
nizing the economy around revolutionary technologies
generates huge long-term benefits. This does not
negate a role for public policies. On the contrary, it
is precisely at times of great technological change that
sensible policies are needed. The factories created by
the age of steam also ushered in regulations on hours
of work, juvenile labor, and factory conditions.
Similarly, the gig economy is causing a reconsid-
eration of rules: for example, what does it mean to
be self-employed in the age of Uber? To minimize
disruptions and maximize benefits, we should adapt
policies on digital data and international taxation,
labor policies and inequality, and education and
competition to emerging realities. With good policies
and a willingness to cooperate across borders, we can
and should harness these exciting technologies to
improve well-being without diminishing the energy
and enthusiasm of the digital age.
MARTIN MÜHLEISEN is director of the IMF’s Strategy, Policy,
and Review Department.Even with short-term dislocations, reorganizing
the economy around revolutionary technologies
generates huge long-term benefits.
8 FINANCE & DEVELOPMENT | June 2018