A recent IMF staff research finds that Artificial Intelligence (AI) risks widening the gap between rich and poor countries by shifting more investment to advanced economies where automation is already established.
This, according to the authors, could in turn have negative consequences for jobs in developing countries by threatening to replace rather than complement their growing labor force, which has traditionally provided an advantage to less developed economies.
The main implication of the study is that improvements in the productivity of robots drive divergence between advanced and developing countries if robots substitute easily for workers.
Also, those improvements will tend to increase incomes but also increase income inequality, at least during the transition and possibly in the long run for some groups of workers, in both advanced and developing economies.
The authors noted that to prevent this growing divergence, policymakers in developing economies will need to take actions to raise productivity and improve skills among workers.
The model employed looks at two countries (one advanced, the other developing) that both produce goods using three factors of production: labor, capital, and robots.
“Robots” were interpreted broadly, to encompass the whole range of new technologies with the main assumption that robots substitute for workers. Also, the “artificial intelligence revolution” in the framework is an increase in the productivity of robots.
The study found that divergence between developing and advanced economies can occur along three distinct channels: share-in production, investment flows, and terms-of-trade.
Share-in-production: Advanced economies have higher wages because total factor productivity is higher. These higher wages induce firms in advanced economies to use robots more intensively, to begin with, especially when robots easily substitute for workers. Then, when robot productivity rises, the advanced economy will benefit more in the long run. This divergence grows larger, the more robots substitute for workers.
“The landscape is likely going to be much more challenging for developing countries that have hoped for high dividends from a much-anticipated demographic transition”.
Investment flows: The increase in productivity of robots fuels strong demand to invest in robots and traditional capital (which is assumed to be complementary to robots and labor). This demand is larger in advanced economies due to robots being used more intensively there (the “share-in-production” channel discussed above).
As a result, investment gets diverted from developing countries to finance this capital and robot accumulation in advanced economies, thus resulting in a transitional decline in GDP in the developing country.
Terms-of-trade: A developing economy will likely specialize in sectors that rely more on unskilled labor, which it has more compared to an advanced economy. Assuming robots replace unskilled labor but complement skilled workers, a permanent decline in the terms of trade in the developing region may emerge after the robot revolution.
This is because robots will disproportionately displace unskilled workers, reducing their relative wages, and lowering the price of the good that uses unskilled labor more intensively. The drop in the relative price of its main output, in turn, acts as a further negative shock, reducing the incentive to invest and potentially leading to a fall not just in relative but in absolute GDP.
The findings also underscore the importance of human capital accumulation to prevent divergence and point to potentially different growth dynamics among developing economies with different skill levels.