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THE LONG AND SHORT OF The Digital 4 FINANCE & DEVELOPMENT | June 2018
Revolution Smart policies can
alleviate the short-term
pain of technological
disruption and pave the
way for long-term gain
Martin Mühleisen
June 2018 | FINANCE & DEVELOPMENT 5D
igital platforms are recasting the Because of the lags involved in adapting to new
relationships between customers, processes, such as replacing traditional printing with
workers, and employers as the sili- online publishing, it takes time before output growth
con chip’s reach permeates almost accelerates. In the early stages of such revolutions,
everything we do—from buying more and more resources are devoted to innovation
groceries online to finding a partner and reorganization whose benefits are realized only
on a dating website. As computing power improves much later.
dramatically and more and more people around the For example, while James Watt marketed a rela-
world participate in the digital economy, we should tively efficient engine in 1774, it took until 1812 for
think carefully about how to devise policies that the first commercially successful steam locomotive
will allow us to fully exploit the digital revolution’s to appear. And it wasn’t until the 1830s that British
benefits while minimizing job dislocation. output per capita clearly accelerated. Perhaps it is no
This digital transformation results from what econ- wonder that the digital revolution doesn’t show up
omists who study scientific progress and technical in the productivity statistics quite yet—after all, the
change call a general-purpose technology—that is, personal computer emerged only about 40 years ago.
one that has the power to continually transform But make no mistake—the digital revolution is
itself, progressively branching out and boosting well under way. In addition to transforming jobs and
productivity across all sectors and industries. Such skills, it is also overhauling industries such as retail-
transformations are rare. Only three previous tech- ing and publishing and perhaps—in the not-too-
nologies earned this distinction: the steam engine, distant future—trucking and banking. In the United
the electricity generator, and the printing press. Kingdom, Internet transactions already account for
These changes bring enormous long-term benefits. almost one-fifth of retail sales, excluding gasoline, up
The steam engine, originally designed to pump from just one-twentieth in 2008. And e-commerce
water out of mines, gave rise to railroads and indus- sites are applying their data skills to finance. The
try through the application of mechanical power. Chinese e-commerce giant Alibaba already owns a
Benefits accrued as farmers and merchants delivered bank and is using knowledge about its customers
their goods from the interior of a country to the to provide small-scale loans to Chinese consumers.
coasts, facilitating trade. Amazon.com, the American e-commerce site, is
moving in the same direction.
Adopt—but also adapt Meanwhile, anonymous cryptocurrencies such as
By their very nature, general-purpose technological Bitcoin are posing challenges to efforts to combat
revolutions are also highly disruptive. The Luddites money laundering and other illicit activities. But
of the early 19th century resisted and tried to destroy what makes these assets appealing also makes them
machines that rendered their weaving skills obsolete, potentially dangerous. Cryptocurrencies can be used
even though the machines ushered in new skills to trade in illegal drugs, firearms, hacking tools, and
and jobs. Such disruption occurs precisely because toxic chemicals. On the other hand, the underlying
the new technology is so flexible and pervasive. technology behind these currencies (blockchain) will
Consequently, many benefits come not simply from likely revolutionize finance by making transactions
adopting the technology, but from adapting to the faster and more secure, while better information
technology. The advent of electricity generation on potential clients can improve the pricing of
enabled power to be delivered precisely when and loans through better assessment of the likelihood
where needed, vastly improving manufacturing effi- of repayment. Regulatory frameworks need to ensure
ciency and paving the way for the modern produc- financial integrity and protect consumers while still
tion line. In the same vein, Uber is a taxi company supporting efficiency and innovation.
using digital technology to deliver a better service. Looking forward, we may see even more disruption
An important component of a disruptive tech- from breakthroughs in quantum computing, which
nology is that it must first be widely adopted before would facilitate calculations that are beyond the
society adapts to it. Electricity delivery depended capabilities of traditional computers. While enabling
on generators. The current technological revolution exciting new products, these computers could undo
depends on computers, the technical backbone of even some new technologies. For example, they could
the Internet, search engines, and digital platforms. render current standards in cryptology obsolete,
6 FINANCE & DEVELOPMENT | June 2018MONEY, TRANSFORMED
potentially affecting communication and privacy on disruptions. The key is to focus on policies that
a global level. And this is just one aspect of threats to respond to the organizational changes driven by the
cyber security, an issue that is becoming increasingly digital revolution. Electrification of US industry in
important, given that almost all essential public the early 20th century benefited from a flexible edu-
services and private information are now online. cational system that gave people entering the labor
force the skills needed to switch from farm work as
Accelerated pace well as training opportunities for existing workers to
Digitalization will also transform people’s jobs. develop new skills. In the same way, education and
The jobs of up to one-third of the US workforce, training should give today’s workers the wherewithal
or about 50 million people, could be transformed to thrive in a new economy in which repetitive
by 2020, according to a report published last year cognitive tasks—from driving a truck to analyzing
by the McKinsey Global Institute. The study also a medical scan—are replaced by new skills such as
estimates that about half of all paid activities could web engineering and protecting cyber security. More
be automated using existing robotics and artificial generally, future jobs will probably emphasize human
and machine learning technologies. For example, empathy and originality: the professionals deemed
computers are learning not just to drive taxis but least likely to become obsolete include nursery school
also to check for signs of cancer, a task currently teachers, clergy, and artists.
performed by relatively well-paid radiologists. While One clear difference between the digital revo-
views vary, it is clear that there will be major potential lution and the steam and electricity revolutions is
job losses and transformations across all sectors and the speed at which the technology is being diffused
salary levels, including groups previously considered
safe from automation.
As the McKinsey study underscores, after a slow Digital technology will spread
start, the pace of transformation continues to acceler-
ate. The ubiquitous smartphone was inconceivable to further, and efforts to ignore it or
the average person at the turn of the 21st century. Now,
more than 4 billion people have access to handheld
legislate against it will likely fail.
devices that possess more computing power than the
US National Aeronautics and Space Administration across countries. While Germany and the United
used to send two people to the moon. And yet these Kingdom followed the US take-up of electricity
tiny supercomputers are often used only as humble relatively quickly, the pace of diffusion across the
telephones, leaving vast computing resources idle. globe was relatively slow. In 1920, the United States
One thing is certain: there’s no turning back was still producing half of the world’s electricity. By
now. Digital technology will spread further, and contrast, the workhorses of the digital revolution—
efforts to ignore it or legislate against it will likely computers, the Internet, and artificial intelligence
fail. The question is “not whether you are ‘for’ or backed by electrical power and big data—are widely
‘against’ artificial intelligence—that’s like asking our available. Indeed, it is striking that less-developed
ancestors if they were for or against fire,” said Max countries are leading technology in many areas, such
Tegmark, a professor at the Massachusetts Institute of as mobile payments (Kenya), digital land registration
Technology in a recent Washington Post interview. But (India), and e-commerce (China). These countries
economic disruption and uncertainty can fuel social facilitated the quick adoption of new technologies
anxiety about the future, with political consequences. because, unlike many advanced economies, they
Current fears about job automation parallel John weren’t bogged down in preexisting or antiquated
Maynard Keynes’s worries in 1930 about increasing infrastructure. This means tremendous opportunities
technological unemployment. We know, of course, for trial and error to find better policies, but also
that humanity eventually adapted to using steam the risk of a competitive race to the bottom across
power and electricity, and chances are we will do so countries.
again with the digital revolution. While the digital revolution is global, the pace
The answer lies not in denial but in devising smart of adaptation and policy reactions will—rightly or
policies that maximize the benefits of the new tech- wrongly—be largely national or regional, reflecting
nology while minimizing the inevitable short-term different economic structures and social preferences.
June 2018 | FINANCE & DEVELOPMENT 7Even with short-term dislocations, reorganizing
the economy around revolutionary technologies
generates huge long-term benefits.
The revolution will clearly affect economies that are treatment of personal data, which is hard to oversee
financial hubs, such as Singapore and Hong Kong in a country-specific way, given the international
SAR, differently than, for example, specialized oil nature of the Internet, as well as intangible assets,
producers such as Kuwait, Qatar, and Saudi Arabia. whose somewhat amorphous nature and location
Equally, the response to automated production tech- can complicate the taxation of digital companies.
nologies will reflect possibly different societal views And financial supervisory systems geared toward
on employment protection. Where preferences monitoring transactions between financial institu-
diverge, international cooperation will likely involve tions will have trouble dealing with the growth of
swapping experiences of which policies work best. peer-to-peer payments, including when it comes to
Similar considerations apply to the policy response preventing the funding of crime.
to rising inequality, which will probably continue The importance of cooperation also implies a role
to accompany the gradual discovery of the best for global international organizations such as the
way to organize firms around the new technology. World Bank and the International Monetary Fund.
Inequality rises with the widening of the gap in These institutions, with their broad membership,
efficiency and market value between firms with new can provide a forum for addressing the challenges
business models and those that have not reorganized. posed by the digital revolution, suggest effective
These gaps close only once old processes have been policy solutions, and outline policy guidelines. To
largely replaced. be successful, policymakers will need to respond
Education and competition policy will also need to nimbly to changing circumstances, integrate expe-
be adapted. Schools and universities should provide riences across countries and issues, and tailor advice
coming generations with the skills they need to work effectively to countries’ needs.
in the emerging economy. But societies also will need The digital revolution should be accepted and
to put a premium on retraining workers whose skills improved rather than ignored and repressed. The
have been degraded. Similarly, the reorganization of history of earlier general-purpose technologies demon-
production puts new strains on competition policy strates that even with short-term dislocations, reorga-
to ensure that new techniques do not become the nizing the economy around revolutionary technologies
province of a few firms that come first in a winner- generates huge long-term benefits. This does not
take-all lottery. In a sign that this is what is already negate a role for public policies. On the contrary, it
happening, Oxfam International recently reported is precisely at times of great technological change that
that eight individuals held more assets than the sensible policies are needed. The factories created by
poorest 3.6 billion combined. the age of steam also ushered in regulations on hours
The railroad monopolies of the 19th century of work, juvenile labor, and factory conditions.
required trust busting. But competition policy is Similarly, the gig economy is causing a reconsid-
more difficult when future competitors are less likely eration of rules: for example, what does it mean to
to emerge from large existing firms than from small be self-employed in the age of Uber? To minimize
companies with innovative approaches that have the disruptions and maximize benefits, we should adapt
capacity for rapid growth. How can we ensure that policies on digital data and international taxation,
the next Google or Facebook is not gobbled up by labor policies and inequality, and education and
established firms? competition to emerging realities. With good policies
and a willingness to cooperate across borders, we can
Avoiding a race to the bottom and should harness these exciting technologies to
Given the global reach of digital technology, and improve well-being without diminishing the energy
the risk of a race to the bottom, there is a need for and enthusiasm of the digital age.
policy cooperation similar to that of global finan-
cial markets and sea and air traffic. In the digital MARTIN MÜHLEISEN is director of the IMF’s Strategy, Policy,
arena, such cooperation could include regulating the and Review Department.
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