IMF: Technology ‘shock’ may hurt more than trade

An increase in automation may deliver a “technology shock” to nations’ less prosperous regions unprepared for job displacement, according to excerpts from the International Monetary Fund’s annual World Economic Outlook released on Wednesday.

The report said that technology shocks — proxied by declines in the costs of machinery and equipment capital goods — would raise unemployment in regions most vulnerable to automation.

The IMF said that the technology shocks can be more harmful than “trade shocks”.

“Although much discussed, trade shocks — in particular greater import competition in external markets — do not appear to drive the differences in labor market performance between lagging and other regions, on average,” the report said.

The issue is at the core of the debate over globalization, how it has affected politically influential groups of voters in some countries, and whether the protectionism sought by politicians will pose risks to global growth.

The fund report suggested that “national policies that reduce distortions and encourage more flexible and open markets, while providing a robust social safety net, can facilitate regional adjustment to adverse shocks, dampening rises in unemployment”.

IMF also addressed subnational regional disparities in real output, employment, and productivity in advanced economies, which have attracted greater interest in recent years against a backdrop of growing social and political tensions.

“Regional disparities in the average advanced economy have risen since the late 1980s, reflecting gains from economic concentration in some regions and relative stagnation in others,” the report said.

“On average, lagging regions have worse health outcomes, lower labor productivity, and greater employment shares in agriculture and industry sectors than other within-country regions. Moreover, adjustment in lagging regions is slower, with adverse shocks having longer-lived negative effects on economic performance.”

While the concentration of jobs and wealth in parts of a country may be a “normal feature of growth” that would eventually bring “catchup” benefits to other areas, the IMF said that the process of “convergence” in the developed world has slowed or stopped.

Areas suffering from “persistent inefficiencies” may be at risk of being left behind for good, the IMF said, a situation that “can fuel discontent and political polarization, erode social trust, and threaten national cohesion”.

However, Peet van Biljon, former manager of McKinsey’s Global Innovation Practice, told China Daily that moving from less vibrant regions of a country may not be the answer.

“Interregional mobility is an important option for people in lagging regions, yet it is currently being discouraged by large differentials in the cost of living, particularly property values between the major growth hubs like the large metropolitan areas, compared to property values in the lagging regions,” he said.

The new IMF managing director, Kristalina Georgieva, in her inaugural speech on Tuesday, urged countries to act quickly to implement structural reforms, which, as IMF research has found, could raise productivity and generate enormous economic gains.

“Potential job losses from automation and shifting demographics require countries to reform the structure of their economies,” she said. “If we do not act, many countries will be stuck in mediocre growth.”

The IMF report said that a reform push in areas such as governance, domestic and external finance, trade, and labor and product markets could deliver sizable output gains in the medium term.

A comprehensive reform package might double the speed of convergence of the average emerging market and developing economy to the living standards of advanced economies, raising annual GDP growth by about 1 percentage point for some time.

The report said that reforms have been “generally more farreaching in emerging markets than in low-income developing countries over the past few decades”.

It cited China and Egypt for positive reforms in their labor markets.