Author: Jayant Menon, ISEAS-Yusof Ishak Institute
A silver lining amid the unfolding tragedy of the COVID-19 pandemic has been the acceleration of the digital economy. Lockdowns and social distancing measures have hastened the adoption of technologies of the Fourth Industrial Revolution (4IR) that enable work-from-home arrangements, remote learning, telemedicine and other novel forms of service delivery. While this acceleration is generally welcome, there is a concern that it may increase inequality within and between countries. The adoption rate of these technologies favours more developed countries, which threatens to widen the digital divide in Asia.
Digital infrastructure in developing countries is limited and access to what is available can vary by income class. The urban poor may not have the financial means to fully participate and technology may not reach rural or isolated regions. The threat to their jobs is more concerning as automation and robotics take hold initially in low and mid-skilled jobs.
This increases the risk of unemployment in the low- to mid-skilled job categories. Low wage growth rates in these sectors relative to rates in higher-skilled sectors will exacerbate wage and income inequality. Inequality between countries in Asia is likely to increase and a rise in income and wealth disparities within them appears unavoidable.
Though attention has focused on how the 4IR may exacerbate inequality, various countervailing effects are often overlooked, perhaps because they will take time to materialise. The 4IR may produce offsetting effects that enhance economic inclusion by increasing connectivity, improving agricultural incomes and supporting micro, small and medium enterprises.
Mobile phones enable the poor to access new sources of information including high-frequency news and market prices that can affect their incomes. In a famous study undertaken in South India, Robert Jensen showed how smartphone adoption by fishermen and wholesalers reduced price dispersion and eliminated waste, increasing consumer and producer welfare.
Smartphones also enable new forms of education, such as online courses and virtual classrooms, and new healthcare services, such as telemedicine linked to diagnostic pills. Platforms like Kenya’s Ushahidi are democratising access to new technology and innovation while aiding improvements in governance and accountability.
Mobile phones give farmers better access to prices, weather information and knowledge about soil, seeds and fertiliser. They may also enable a ‘sharing economy’ to develop, whereby farmers who cannot afford to buy expensive mechanical equipment can rent it by the hour from other farmers via online sharing sites, like Trringo in India.
Micro, small and medium enterprises are often constrained by a lack of access to business and financial services. Blockchain technology could potentially increase the security of cross-border financial transactions and logistics, even in the poorer countries of Southeast Asia where these services are underdeveloped.
These factors demonstrate that the 4IR can aid economic inclusion. Countries must still tackle rising unemployment among low to mid-skilled workers and widening wage disparities due to the skills premium to address inequality.
Enabling greater mobility of unskilled workers would curtail unemployment in labour-abundant countries and help sustain growth in labour-importing ones. Even in labour-abundant countries like Indonesia and the Philippines, importing skilled labour can bring in necessary competencies while capital can come with diffused technology, both of which can benefit the local economy.
Divergent demographic trends will add to the need for greater factor mobility. While South Asia (especially India, Nepal and Pakistan) and the newest members of ASEAN (especially Cambodia, Laos and Myanmar) have relatively young populations, much of East Asia is ageing rapidly. Countries in the region with young populations also tend to be capital importers, while ageing economies tend to be capital exporters. Policies that enable greater factor mobility can help reduce differences in capital-labour ratios and assist in increasing productivity to promote more inclusive growth.
Such policy changes must first overcome anti-globalisation forces that have been strengthened by the pandemic. But these forces can assume deceptive forms, such as ‘reshoring’ under the guise of supporting supply chain resilience.
Such moves would curtail rather than promote factor mobility. In this environment, regional initiatives that aim to liberalise trade can help, like the ASEAN Economic Community and the Regional Comprehensive Economic Partnership. Even if these agreements cannot promote factor mobility, they can help equalise factor prices by increasing commodity trade. Increased trade can produce similar results in reducing adjustment costs.
The pandemic’s push towards a digital economy may worsen inequality, but it will also increase inclusion in some areas which will serve as a partial offset. Implementing policies that increase trade, labour or capital mobility will ease short-run adjustment costs. Long-term challenges posed by the 4IR, including rising inequality, must be addressed by transforming systems of education and learning and strengthening local capital and financial markets.
Jayant Menon is a Visiting Senior Fellow at the ISEAS–Yusof Ishak Institute, Singapore.