Four ways we can fix economics in 2019

By Matt Dallisson, 15/02/2019

A Brexiteer’s statement in the wake of the referendum in 2016 captures the frustrations felt by many under the twin forces of globalization and the Fourth Industrial Revolution. Never has the economy changed so quickly, nor with such glaring visibility of the gap between the winners and those left behind. The backlash is hardly surprising.

Although many advanced economies have reaped enormous benefits from globalization and technological advances in recent decades, they have also experienced a hollowing out of the middle class; growing market concentration within many sectors which means fewer employers and less power for workers; as well as a decoupling between productivity growth and wage increases.

In many emerging markets, the picture is different. People feel more positive about digital technology when it helps to level the playing field by providing access to information, markets, services and employment, allowing entrepreneurs to thrive. Yet, as the promise of the manufacturing-led development model of the past fades, it is unclear what will replace it. A newly prosperous middle class is starting to worry whether a path to success will be open to their children.

One of the pillars of trust in a society is the feeling that life is getting better, not worse. But in too many economies, there is a sense that opportunities for the next generation are dwindling rather than expanding. The Fourth Industrial Revolution has cut the tethers to our familiar reference points and left us with lingering insecurity – fuel to the populist fire.

A central priority for managing both globalization and the Fourth Industrial Revolution, in both advanced and emerging economies alike, should be fleshing out a new social contract that restores a sense of common purpose and basic economic security.

Put another way: how can we ensure new technologies help us to flourish as people and as economies, rather than sowing division and discontent? This question has no easy answers. It needs a common and objective understanding of the key challenges, the evidence base associated with them and the range of response options. This common framework for decision-making is often missing.

As the digital economy has taken shape it has introduced several new dimensions of “value creation” that are not fully integrated into traditional concepts and metrics. In particular, new types of assets and economic activity are not well understood and new sources of consumer welfare (and loss) are not adequately measured. What is the value of the open knowledge on Wikipedia, or the toll taken by the incursion of digital technology into our private lives? Additionally, there is an incomplete picture of how gains are being distributed and questions about who is truly creating value in the economy.

Five approaches have been put forward for rethinking economic value: 1) identify and account for a range of new intangible assets; 2) adapt or complement GDP to account for digitally-derived value; 3) adapt measures of consumer welfare, well-being and societal value; 4) focus new metrics on distribution and disaggregated data; and 5) rethink the fundamental definition of value, highlighting the distinction between the creation of value and rent-seeking, and rethinking markets as co-created by both public and private sector actors.

Digital platforms are the source of a range of consumer benefits thanks to the introduction of new services, greater choice, higher matching speed and lower costs. They can facilitate the entry of new businesses by giving access to marketing channels, credit, logistics and other basic services. And they can benefit workers and employers by enabling more efficient job matching as they increase the amount of information available on both sides of the market. Yet at the same time, scale and the resulting concentration of market power can offset some of these benefits, with potential repercussions on innovation, quality and distributional outcomes.

As technological advances rapidly shift the distribution of work tasks performed by humans and those performed by machines and algorithms, global labour markets are undergoing major transformations. If managed wisely, these transformations could lead to a new age of good work, good jobs and improved quality of life for all. If managed poorly, they pose the risk of greater inequality and broader polarization. While there is a wide-ranging debate on actions to manage job displacement in the 4IR, views around whether and how best to enhance job creation are more limited.

In developed economies, the efficacy of social insurance policies tied to formal work and stable employment contracts is depleting, as increasing numbers of people become displaced or experience insecure work, low pay and unequal access to good jobs. In developing economies, where work has largely been diverse and informal, technological advances look set to continue that trend and offer additional flexible work opportunities, leaving open the question what a future social protection model might look like. While there is broad consensus that workers will need support in the transition to the new world of work, there is significant debate as to the level of depth and breadth of such support as well as the key stakeholders responsible for its delivery.

2) Focus on new financing models and revenue collection for social protection; 3) harness the potential of commercial solutions, such as financial technology solutions to the income volatility often experienced by gig workers.

There is a unique window of opportunity today to shape the new economy to make life better for future generations. This window will not remain open for long before the trends of the new economy – and the societal forces they unleash – become locked in.

Next week, leaders at Davos will discuss the thorny issues behind the questions outlined above and more. Over the coming year, the Forum will provide a platform for those response options to be tested, for sharing best practices, and shaping consensus on the best course of action and for scaling solutions. We invite you to join us by sharing your ideas for emerging challenges in the new economy and how they should be addressed.