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How can countries take advantage of the fourth industrial revolution?

Victor Mulas's picture

The economy is in a restructuring process. Technology-led transformations are no longer limited to technology-related sectors and are beginning to affect structural sectors, including manufacturing, retailing, transportation and construction. Disruptions of business models are surging from a fragmented network of entrepreneurs and innovators. Cognitive skills are increasingly being replaced by technology-led productivity, affecting labor supply in both developing and developed countries. In turn, creativity and social skills are becoming more important and more valuable than ever before. This process has been called the Fourth Industrial Revolution.

Countries that are less prepared to adapt to these structural changes will suffer in their competitiveness. As much as 80 percent of the productivity gap between developed and emerging economies can be explained by the lag in transitioning to technology-led changes from previous economic restructuring processes (for example, the 18th-  and 20th-century industrial revolutions). Automation is reducing the cost of traditional labor-intense industries (reducing costs relative to labor by 40 percent to 50 percent since 1990), shifting the cost structures that benefited emerging economies. Trade is shifting increasingly to digital goods and services. Knowledge-intensive flows of trade are already growing about 30 percent faster than capital-  and labor-intensive trade flows. Jobs are also being affected, with routine cognitive functions being affected the most, while providers of intellectual and physical capital benefitting disproportionately. 



There are also opportunities stemming from this widespread diffusion of technology and transformational changes. Entrepreneurship and innovation is becoming affordable and de-localized. The innovation model of large capital-intense laboratories (e.g., Bell Labs) is not the most effective one anymore. Instead, open innovation (the process whereby large firms co-create innovation with entrepreneurs and other actors, instead of having an internal process) and innovation emerging from startups are increasing. Tech startup ecosystems have emerged in cities worldwide, in both emerging and developed economies, disrupting traditional business and creating new industries. This results in local innovation and business models that can be appropriated by the domestic economies. These ecosystems also generate new sources of jobs emerging from the structural changes produced by technology.

How high-growth firms can reshape the economy

Denis Medvedev's picture

Productivity. Growth. Jobs. These are the outcomes that are at the top of many of our clients’ agendas, and they form a core part of most of our private sector development projects. But where do they come from? Who creates them?

Evidence from high-income countries suggests that the answer might be found in a group of small, young and fast-growing firms that contributes disproportionately to these outcomes at the national level. In the United States, about 50 percent of new firms will have gone out of business before the age of five (Haltiwanger et al, 2013). Among those that do survive, just 12 percent experience output growth in excess of 25 percent, but they account for 50 percent of overall increase in output. Similarly, only 17 percent of surviving firms (less than 10 percent of all that entered) experience employment growth above 25 percent – but they create close 60 percent of new jobs in the U.S. economy (Haltiwanger et al, 2016). There is undoubtedly something special about these few high-growth firms (HGFs).

One key reason that HGFs are able to perform so well is their high productivity. Firms in the 90th percentile of the U.S. productivity distribution create almost twice as much output with the same inputs as firms in the 10th percentile (Syverson, 2004). In developing countries, the gap between firms at the top and bottom ends of the productivity distribution is even larger – up to five times! (Hsieh and Klenow, 2009)



Beyond their own high productivity, HGFs raise national efficiency in several important ways. Their “pull factor” facilitates the convergence of less productive firms to the national frontier (Bartelsman et al, 2008). And when markets for production inputs are competitive, HGFs are able to lift overall efficiency by pulling resources from less productive firms. This is what accounts for their disproportionate contribution to productivity, jobs, and output growth (Haltiwanger et al, 2016).

Understand the differences, act on the commonalities in a globalized economy: How can Public-Private Dialogue be of help?

Steve Utterwulghe's picture



The Mongolian government’s economic advisors. Photo by Steve Utterwulghe


Misunderstanding, distrust, lack of genuine consultation. These are some of the words that I hear the most from various public and private stakeholders during my regular missions to developing countries.

From Bamako to Ulan Bator, where I am writing this post, the relentless echo of grievances points to the fact that the government doesn’t understand – or want to listen to – the private sector, and therefore doesn’t trust it. And likewise, the private sector sees public authorities as often incompetent, corrupt and an impediment to competitiveness and wealth creation.

While generalizing is a dubious exercise, the similarity and recurrence of complaints across the globe warrants deeper digging.

The issue of trust in policymaking is a complex field of study. The origin of mistrust of the private sector by the government in many developing countries is embedded in the socio-political culture and economic history of the state.
That being said, it is now rare to find a government that categorically denies the contribution of the private sector to the economic development of a nation. About 90 percent of the jobs are created by the private sector in the developing world, and about 50 percent of those are created by small and medium-sized enterprises (SMEs). Furthermore, as José Juan Ruiz from the Inter-American Development Bank (IDB) has written, “Policymakers realize that they need to access the deep knowledge held by the private sector in order to learn about market failure and formulate the right policies to address them.”

On the other hand, the private sector wants a stable and transparent regulatory environment in which to operate. It doesn’t want more regulations, but better regulations that will protect its investments. For that, it needs the government to listen and act in a way that will create an enabling business environment. Building trust is hard work.

Differences between public and private stakeholders certainly exist, but so do commonalities. It never takes long for parties to acknowledge that there is a clear common ground to strive for: sustainable economic development that should lead to inclusive growth. That, in turn, will spur job creation and revenue collection for the state. That’s an irrefutable win-win scenario.

Establishing payments interoperability: coordination is key

Thomas Lammer's picture



Efficient, accessible and safe retail payment systems and services are necessary to extend access to transaction accounts to the 2 billion people worldwide who are still unserved by regulated financial service providers.
 
Having interoperable payment services addresses several important challenges regarding financial access and broader financial inclusion. This is because interoperability enables people to make payments to anyone else in a convenient, affordable, fast, seamless and secure way via a single transaction account.
 
Establishing payments interoperability is a formidable task. Our experience shows it is important to find the right balance between cooperation and competition when reforming retail payment systems.  Despite the advantages that interoperability brings, not all market participants will necessarily embrace interoperability initiatives, e.g. if they fear to lose their dominant position and/or competitive advantage. In an earlier Blog the role authorities to facilitate interoperability has been discussed. Central banks are a key driving force in any payment system reform, but they cannot – and should not – act alone. Other regulators – such as financial and telecom regulators – are also important to achieving interoperability.

Pensions, power & development performance

Elias Masilela's picture
Woman who works in the daycare kitchen of a local farm in Milnerton, South Africa


The investment of pension fund assets has moved from an obscure topic for actuaries, to an issue which raises political attention at the highest level.

This is for the simple reason that it directly touches the social and economic livelihoods of people.

Since the 2008 global financial crisis, developed economies have been looking for additional sources of long-term capital to fill the gaps which bank and government balance sheets can’t fill. This is a search that has engulfed the developing world for much longer if not for as long as they exist. Younger developing economies are starting to see their pension funds grow, side by side with an increasing awareness of the impact which productively invested assets can have on economic growth both today and tomorrow. If invested for the aligned intensions of social impact and financial return, pension funds can improve people’s lives today and secure their income in future. However, this isn’t a general phenomenon – applying only to larger funds which have invested in the intellectual capacity of their Trustees, and in countries which have understood and embraced the strong relationship between the macroeconomic performance and asset performance.

Redirecting pension investments from short-term assets (government paper, bank deposits) to investments with a long-term impact is key to delivering, not only improved, but sustained returns. Private equity (PE) - equity capital not quoted on a public exchange – is one such asset class. PE investment is increasingly in vogue as such capital is the foundation of all economies, and indeed leads to the development of robust stock markets. If structured with pension investors’ risk-return consideration in mind, it can deliver the diversification benefits which these investors need.  If properly targeted, such investments will be vital in meeting the Sustainable Development Goals, considering that 15 of the 17 SDGs have a focus on growth, development and sustainability (the last two being on implementation and capital resource origination). Active participation in investee companies by shareholders such as pension funds will be vital for ensuring a future sustainable and shared economy. In turn, for this to work optimally, requires conscientious and capable Trustees.

3 hindrances to expanding pensions in Kenya

Rose Kwena's picture



Did you know that in Kenya less than 15% of the population is covered with old age security? This means that many Kenyans are facing a vulnerability of retiring into poverty. But this is not accidental since established factors identified in studies commissioned by Retirement Benefits Authority (RBA) necessitate this situation.  

However, Kenya is starting to tackle some of these factors and to help increase pensions coverage to reach more Kenyans to help reverse the state of affairs.

1. A chief factor limiting pension growth is that the formal sector is creating fewer jobs. Despite the positive economic growth registered in the country, employment growth in the formal sector is slow. For example, only 128,000 out of the 841,600 new jobs created in 2015 were formal. This has a direct effect on the pension services since the structure of the industry is still highly biased towards the formal employment model.
Transactions that facilitate employers and employees to contribute are generally conducted from the pay slip, and formal employers adhere more to the regulations and legislation on the issue compared to those who operate informally. As a result, millions of citizens have been cut off from the pension system.   

Luckily, this gap is slowly being narrowed by Individual Pension schemes that are specifically targeting the informal sector workers. An example of this is the Mbao pension scheme. The Plan is an inventive idea that adapts a savings product to marginal population groups and contributes to their improved social and economic security.

Opening markets: Mexico uncovers and slashes local barriers to competition

Marialisa Motta's picture

In the state of Chiapas, Mexico — where nearly 1 million people live in moderate to extreme poverty — bus fares have been too high, and the availability of buses has been limited. Over four years, consumers on a single route have paid $2.5 million more than necessary. Tortillas in states across Mexico are more expensive than they need to be. In one state, firms overcharge for road construction by an estimated 15 percent, making it difficult to provide the high-quality transport services for cargo and construction materials that are necessary to build a logistics hub to diversify the state economy beyond petroleum. Another state has a very dynamic economy, hosting a greater density of industrial parks than comparable states. Given the positive spillover effects — industrial activity boosting local employment, demand, and purchasing power — the state expected growth in retail markets. Yet, stores have not been opening. Yet another state relies on tourism to generate business opportunities and jobs, including for poor people. However, until recently, tourists found that commercial establishments in the state’s primary municipality closed in the evenings and at night, often preventing them from going shopping.
 
What do these examples have in common? Local barriers to competition.

In the past few years, the Mexican Federal Competition Authority (COFECE) and Better Regulation Authority (COFEMER), internationally recognized institutions, as well as the World Bank Group, have pointed out that subnational regulations restrict competition in local markets. In many municipalities in Mexico, regulations and government interventions allow market incumbents to deny entry to new firms, to coordinate prices, to impose minimum distances between outlets, or to grant incumbents exclusive rights to artificially protect their dominant position. In total, a lack of vigorous marketplace competition costs the Mexican economy about one percentage point of GDP growth each year – a shortfall that affects the country’s poorest households by an estimated 20 percent more than its richest households. Most countries, however, have never systematically scrutinized local barriers to competition.


 
To address such issues effectively, competition policy experts from the World Bank Group’s Trade & Competitiveness Global Practice have developed an innovative tool – the Subnational Market Assessment of Competition (SMAC) – to systematically identify, prioritize and support the removal of local barriers to competition. (The SMAC is built from the World Bank Group Markets and Competition Policy Assessment Tool, or MCPAT.) The World Bank Group designed the SMAC to prioritize the reform of the rules and practices that most severely prevent healthy competition in the primary sectors for each state’s economic development.

From start-up to scale-up: What does it take?

Ellen Olafsen's picture

What do you think of when you hear the term “entrepreneur”? What about “growth entrepreneur”? Do Elon Musk and Tesla come to mind? Travis Kalanick and Garrett Camp of Uber? Jack Ma of Alibaba? 

Forget for a moment the immense scale that these few, highly successful tech giants have achieved. Such cases will always be outliers. Instead, imagine the potential collective impact of companies in developing countries growing from a $50,000 to a $1 million company, or from a $1 million to a $10 million company. Imagine how this could help generate dynamism in the local economy and ultimately increase competitiveness, incomes and jobs.

The reality, however, is that most start-ups fail — about two-thirds, according to most estimates. Furthermore, out of the one-third that do survive, nearly 90 percent won’t grow at all.  So when you picture 100 start-ups, you know that roughly 30 will survive: After two years, 20 or 25 will still exist, but only 5 or 10 will employ more people and generate higher revenues compared to when they started. Research from across the world is showing that this small number of growth-oriented firms accounts for nearly half of all net new job creation.

So how do you get from start-up to scale-up? What’s the “secret” behind the few companies that succeed? How do we increase the proportion of firms that survive and grow, particularly in places where job creation and growth are needed most?

We can start to answer this question by asking whether there is anything unique about the individuals who launch or run companies that grow. For one, growth-oriented entrepreneurs must have the aspiration to grow. You cannot expect that entrepreneurs will take the risk of expanding a company if they have no aspiration to do so. Expanding a company requires significant sacrifice, time and resources that many entrepreneurs cannot — or are not prepared to — invest. Indeed, “personal circumstances” is one of the most cited reasons for discontinuing a start-up project.

If having the right mindset is so critical to entrepreneurial success, are there any factors or traits that make some individuals more likely than others to succeed at starting and scaling a business? The literature is divided on this.

The challenge of affordable housing for low-income city-dwellers

Zaigham M. Rizvi's picture



Housing is a numbers game: The more people there are in any city or town, the greater the need is for housing. The number of people living on the planet is rising every second, as the
World Population Clock shows, while the amount of habitable land (what housing specialists call “serviced land”) remains limited.

It is critical that additional affordable, decent dwellings be developed, as today’s world population of about 7.38 billion (increasing by more than 80 million per year, at the current population growth rate of about 1.13 percent per annum) approaches about 9 billion by 2030 and a projected 11 billion by 2050.

Urbanization intensifies the need for city-focused housing: By 2030, nearly two-thirds of the world’s population will be urban – and, even more daunting, nearly half of that urban population will be living in poverty, in substandard housing or in slums. The challenge of providing affordable housing for low-income city-dwellers is universal, with intensifying urban congestion making it an urgent priority in Asia and Africa.

Toward a more durable form of globalization, beyond 'neoliberal' negligence

Christopher Colford's picture

“Globalization and technological change create huge challenges for modern economies, but they are not uncontrollable forces of nature. The economy we have is the economy we choose to build. It is time to make different choices, and show that capitalism can be remade.” — Prof. Mariana Mazzucato of the University of Sussex and Prof. Michael Jacobs of University College London, the editors of “Rethinking Capitalism.”

The shadows lengthen and the daylight shortens amid these elegiac end-of-summer evenings — but there’s a palpable feeling nowadays, in Washington and other capitals, that we’re approaching not just the sunset of a season, but the twilight of an era.

The sudden change in the policy discourse over the past year has shattered the familiar old contours of the globalization debate, with a “populist explosion” in the world’s developed economies forcing policymakers everywhere to reconsider the boundaries of “the art of the possible.” In many of the world's developed economies, a recalibration of globalization is under way.

In this insolite interim, the fraught phrase of Antonio Gramsci comes to mind: “The crisis consists precisely in the fact that the old is dying and the new cannot [yet] be born. In this interregnum, a great variety of morbid symptoms appear.”

Three incisive recent analyses illustrate the impassioned arguments that underscore this end-of-an-era feeling. Together, the analyses set the stage for the imminent publication of a new book of essays by a group of eminent economists, whose ideas may chart the way toward a more durable, more inclusive approach to globalization.

 
  • Second: Diagnosing how a phase of economic history may have run its course, Nobel Prize-winner Joseph Stiglitz (a former Chief Economist of the World Bank) in Project Syndicate asserts that the laissez-faire approach to globalization has reached its (il)logical conclusion: “The failure of globalization to deliver on the promises of mainstream politicians has surely undermined trust and confidence in the ‘establishment.’ . . . Neoliberals have opposed welfare measures that would have protected the losers [of globalization]. But they can’t have it both ways: If globalization is to benefit most members of society, strong social-protection measures must be in place. The Scandinavians figured this out long ago; it was part of [their] social contract. . . . Neoliberals elsewhere have not – and now, in elections in the US and Europe, they are having their comeuppance.”  
 
  • Third: A series of insightful columns by Martin Sandbu in The Financial Times – tracing an “insurrection [that] has been a long time coming” – explores the links among economic stress and social-class anxiety that provoked this year’s social eruption: “Over the past generation, the trajectory of the white working class has no doubt changed the most for the worse, compared with the previous generation.”


The history-minded reflections of Jacques, Stiglitz and Sandbu underscore the fact that many economists are still pondering how so many of their policy prescriptions went so badly wrong, opening the way for the global financial crisis.

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