Economies and people worldwide are starting to feel the first effects of the dawning fourth industrial revolution, a convergence of technologies that is blurring the lines between the physical, digital, and biological in ways that promise to disrupt almost every industry in every country.
Breakthroughs are happening and proliferating at an unprecedented pace—from sensors to blockchain to human-brain interfaces. Technology-enabled platforms in the ‘sharing’ or ‘on-demand’ economies are upending business models and forcing countries to rethink how they formulate economic policies.
The number of industrial robots in the world is roughly doubling every five years (from 69,000 in 2002 to 229,000 in 2014 – see the World Economic Forum paper – and is projected to reach 400,000 by 2018), driven especially by demand from automotive parts suppliers and the electrical/electronics industry. As the internet of things (IoT) becomes mainstream, the number of connected devices will almost triple by 2020, from 13.4 billion to 38.5 billion, and the proportion of products sold via e-commerce will more than double, from 6 percent in 2014 to 12.8 percent by 2019.
The combination of automation and digitalization is revolutionizing manufacturing and services alike, as well as blurring the lines between them. This process is increasing efficiency, optimizing logistics, and making prices more transparent and competition starker. At the same time, it is reinforcing the need of firms to remain ahead of the innovation curve.
More and more, technological forces are pushing companies to either innovate or disappear: 88 percent of firms in the 1955 Fortune 500 were not on the 2014 list, and the rate of turnover is accelerating, while the duration of product lifecycles declined, across all industries, by 24 percent between 1997 and 2012.5
Such dramatic changes in the dynamics of the economy need to be reflected in how we measure economic progress and its drivers. These changes make it necessary to better understand how the fourth industrial revolution is altering how we understand competitiveness, growth, and—fundamentally—the prosperity of countries.
This significantly impacts the drivers of competitiveness captured by the Global Competitiveness Index (see article).
The increased complexity of today’s economy is arguably making current statistical tools outdated, both conceptually and methodologically. Calculation methods built for tracking physical sales of goods and services are incapable of accurately measuring transactions that take place on virtual platforms or through non-monetary exchanges of services. Increased measurement challenges in calculating GDP have lessened its value as an indicator of economic progress, and also calls into question the accuracy of productivity estimates, which require precise evaluation of output, capital, and labor.
Measuring the drivers of prosperity likewise requires a conceptual and methodological rethink. When the Global Competitiveness Index (GCI) was introduced in 2006 by the World Economic Forum, the effects of the fourth industrial revolution had not yet started to arise. Today, although the main drivers of competitiveness identified at that time remain generally valid, they may affect the development process in a different way than they did a decade ago.
So how will the concept of competitiveness and the GCI be measured in light of the new forces that are starting to be unleashed by the fourth industrial revolution and other trends?
The World Economic Forum as part of its Global Competitiveness report 2016-17 has introduced a discussion paper to consider these new forces. It considers how to produce measurements that better capture this emerging new economic reality that translate into an evolved measurement of competitiveness and its drivers to give more relevant guidance to policymakers and public-private dialogues.
Here are its main thoughts.
First, productivity remains a key driver of prosperity. Although measuring productivity has become more complex, economists have little doubt of its central role in economic progress. Prosperity can increase only if inputs of production are used in smarter and more efficient ways to fulfill constantly evolving human demands. Therefore we still define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn determines the level of prosperity a country can achieve.
Second, future orientation is central. Because technology disrupts the business landscape in unexpected ways and does this more quickly than it used to, the primary feature of successful economies will be their capacity to be agile, adapt to changes, and respond to shocks relatively smoothly and speedily. These aspects are meant to be captured by the education and skills, labor market, and goods market pillars that measure the extent to which a country’s regulations and human capital support structural change and industrial revamp.
Third, the meaning of innovation is being updated. The capacity of a country to be innovative has to be thought of as an ecosystem that not only produces scientific knowledge but also enables all industries—including in the service sector—and society at large to be more flexible, interconnected, and open to new ideas and business models. This way of understanding innovation focuses on a country’s ability to bring new products and services to market, and it attributes equal importance to non-technical and technical inventions.
To be truly innovative, a country should not only file patents and support research and development in science and technology, but should also provide a networked, connected environment that promotes creativity and entrepreneurship, fosters collaboration, and rewards individuals who are open-minded and embrace new ways to perform tasks.
In such an ecosystem the modernization of the educational framework also plays a pivotal role: it must offer life-long learning opportunities and teach students to think critically, collaborate with individuals of different backgrounds, and expose them to different points of view and ideas. Similarly, the financial sector needs to offer venture capital and new financing solutions suitable for smaller or riskier projects, as well as leverage information and communication technologies (ICT) platforms, such as what today is known as fintech.
Fourth, ICT infrastructure is an imperative. As ICT-based business models become more prevalent, countries that fail to transition to a digital economy will be at a substantial competitive disadvantage, not only commercially but also in terms of innovation. Hence the technology adoption, business agility, and innovation capacity pillars have been reformed, considering them to be all part of the innovation ecosystem. ICT infrastructure measures have also been added to the infrastructure pillar as they now play a prerequisite role for development as much as transport infrastructure.
Fifth, the world is leveled more than it used to be. The current GCI model assumes that a country’s priorities evolve as it develops, with infrastructure, institutions, macroeconomic stability, and basic health and education more important for lower-income countries and innovation and business sophistication more important for higher-income countries. The fourth industrial revolution makes it reasonable to take a more agnostic approach and recognize that all competitiveness factors matter for countries at all income levels and the exercise of policy prioritization is more complex than we have so far believed.
For example, robotics is making light manufacturing less labor-intensive, which reduces the feasibility of lower-income countries developing by leveraging unskilled labor. However, because ICTs enable the rapid transfer of ideas and technologies, they also make innovation less capital-intensive, offering those countries new ways to develop.
In addition to these new conceptual underpinnings, the methodology needs to keep up with new indicators that have become available, notably for health and financial development. On health, the disability-adjusted life year summarizes all available information on the extent of mortality and disability due to communicable and non-communicable diseases and is, therefore, a more accurate measure of the health component of human capital than life expectancy or the prevalence of malaria, tuberculosis, and HIV. On finance, new metrics on depth, liquidity, soundness, and access to the banking sector have started to become more available for a larger set of countries since the global financial crisis.
These changes in the GCI methodology are a natural evolution of the current framework rather than a completely new approach. The overall structure of 12 pillars remains relevant because it captures general concepts that are important for any type of market-based society: good governance, infrastructure, education, and functioning markets will continue to determine how successfully economic systems can cope with technological and societal revolutions, but they will do so in different ways.
For example, institutions will not only have to protect property rights, security, and rule of law, but they also have to become more forward looking, updating regulations to prevent potential misuse of new technologies while nurturing a dynamic business environment; countries will need to build ‘data highways’ as well as roads and ports; and financial sectors will need to support industrial restructuring and innovation.
The analysis of the preliminary results suggests that the competitiveness of advanced and emerging economies alike will rest on a country’s future orientation and its ability to update skills, and on the regulations and social norms that promote entrepreneurship and welcome change, collaboration, and creativity.
For the full discussion paper on the changing metrics for measuring global competitiveness to take into account the fourth industrial revolution, click here.
[Photo: World Economic Forum]