Why the Fourth Industrial Revolution is all about politics

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Nicolas Zahn's picture

The Fourth Industrial Revolution (FIR) is the overarching theme of this year's World Economic Forum (WEF) but given its nature, debate on how to reap its benefits and master its challenges is set to continue well beyond the gathering in Davos. In an article originally published in Foreign Affairs, Klaus Schwab described the FIR as building on the digital revolution. “It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.” And while this revolution is only beginning, addressing the issues it raises is critical as “[t]he speed of current breakthroughs has no historical precedent (1).”

New technologies such as artificial intelligence, the Industrial Internet of Things or 3D-printing certainly pose challenges and present opportunities for entrepreneurs and CEOs, however, I argue that the key factor in mastering the FIR lies in adjusting politics to new realities. To sustainably reap the promised benefits three political challenges need to be mastered: i) adjusting welfare states and social policies; ii) re-inventing regulatory models; and iii) better global governance.

Welfare states and social policies

A hallmark institution of previous industrial revolutions some variation of welfare state has spread to most industrialized countries. While their level of assistance varies significantly, a common understanding unites them all: society agrees that if you participate in the labor market you should be rewarded after you retire or are no longer able to work. To support the welfare state a simple condition needs to be met: more money needs to flow in than flows out. However, this condition is already under pressure by changing demographics (14). The Fourth Industrial Revolution increases this pressure by directly targeting a macroeconomic ideal from the times of the creation of welfare states: the idea of full employment.

A recent BCG report finds that the Fourth Industrial Revolution could lead to efficiency gains of up to 25 percent (12). These gains in efficiency and productivity are good news from a growth perspective but also mean that jobs are coming under pressure. While technological advances in the past have led to more employment in the long-term (15), skeptical voices are getting louder and louder when discussing the labor market effects of the FIR. A report released by the WEF in time for this year’s meeting in Davos estimates that the “Future of Jobs” does not look too good: “current trends could lead to a net employment impact of more than 5.1 million jobs lost to disruptive labor market changes over the period 2015-2020” (11). With mounting pressure coming from various sides, policy makers need to come up with new ideas. The worst possible idea would be to keep up current promises in the face of mounting challenges to core assumptions of the welfare state system.

This discussion also needs to be embedded into a broader context of inequality, a theme that has gained attention on the political agenda and resonates well with voters for obvious reasons. A possible part for a solution lies in wisely using the dividends created by the more productive and efficient economy after the FIR. However, here too, policymakers have a lot of work to do. As a recent report by the World Bank Group showed “Digital Dividends – the broader development benefits from using [modern] technologies – have lagged behind. [T]heir aggregate impact has fallen short and is unevenly distributed.” (10). Hence, ideas are needed on how to ensure that inequality does not increase as a consequence of the FIR and that welfare states do not fall apart completely.

Regulatory models

The second great political challenge relates to new regulatory models policymakers, the economy and society have to agree upon. Basically, regulation should ensure a market framework based on competition also for companies implementing the FIR. What sounds simple proves already challenging today. To name but one example, technology companies – a sector that feels naturally close to the FIR – are operating in more and more monopolies (9).

In addition, the speed of technological change poses the biggest issue for regulators. Even “the best connected and most well informed” people have a hard time figuring out the impacts of the Fourth Industrial Revolution due to the “acceleration of innovation and the velocity of disruption” (1). Regulators have an obligation towards society, e.g. to ensure product safety, but they should also have an eye on not being too strict so as to allow for innovation. Finding the right balance is tough especially as products and services get more and more complex and internationalized, thereby increasing pressures for regulators that often lack technical and business know-how and are still pre-dominantly national. For companies this is an unsatisfactory situation as they are left with one of two bad choices: adhere to inadequate regulatory models, forego profits and anger investors or ignore regulatory uncertainties and rush ahead with the danger of being hit hard by regulators once they catch up. Examples for this problem can already be found today in the two ride-sharing companies Uber and Lyft. Not only is the expansion of these companies hindered by differences in national legislation, especially for Uber which chose to go with the second option of rushing ahead (2, 4). But additionally, regulators are struggling to put these companies into their existing frameworks. Only slowly are regulators adapting their understanding of how to classify certain new companies step by step (3). These developments have led inter alia Klaus Schwab to rightly criticize “top-down regulation” (1). Regulatory models need to become more flexible, “agile” and evolutionary (1). A key to achieving this transformation lies in better cooperation and exchange between regulators, industry and society (1). Cooperation between various stakeholders, the so-called multistakeholder approach, has already shown great potential in areas where regulation is complex, e.g. Internet governance (16).

Global governance

The third political challenge is better global governance. Globalization, as a driver of demand for global governance, has hugely benefitted from global rule-making and harmonization of regulatory models, something that would also help new industries in the FIR, as briefly discussed above.

A key component of globalization are global value chains, that follow the logic of allocating resources where they can be used most effectively (17). Some aspects of the FIR, e.g. 3D-printing, have the potential to challenge this logic because they could make the need for outsourcing of industrial production obsolete. After all, if a robot is building a product or the customer is directly printing it at home, labor and production costs might become less of a decisive factor in deciding where to build a plant. However, it would be a mistake to assume that the FIR will lead to a de-globalization and to less demand for global governance. First, the new technologies lower the barriers of entry for players that have not yet participated in globalization but are very willing to do so (5). And second, complexity and interconnectedness will not decrease in the future. In fact, they will rather increase as we enter a world where more and more appliances are connected (6). With the growing importance of networks such as the Internet in the FIR, national borders will become even less relevant and the risks e.g. through cyberattacks, will increase (7, 8). Also, underlying our global networks is a physical infrastructure that spans the globe and requires coordination between states (13).

Hence, global governance, defined as the existence of a global set of rules (1) and the corresponding institutions, is hugely important to mastering the FIR. The rules in place today, need to be adapted to the new trade realities that will shift away from discussions on tariffs to discussions on trade in immaterial goods. Also, governments and industry would be ill-advised to advocate for re-nationalisation as this would deprive them of fully benefiting of the FIR and participating in the world. Doing so will require applying the lessons learned from the discourse on globalization. Governments need to better explain global governance and its importance to their citizens and become more transparent about whose interests they are representing.

 

The Fourth Industrial Revolution brings great potential but also great disruption. I have argued that the key to mastering it lies in addressing three political challenges: i) adjusting welfare states and social policies; ii) re-inventing regulatory models; and iii) better global governance.

If these challenges are not addressed, political risk for social tensions and economic imbalances will increase significantly. This in turn means a more challenging environment for businesses and might even make potential markets inaccessible. The increased uncertainty makes sustainable long-term profits harder to achieve. Hence, it would be in the interest of businesses not to lose sight of the strong political component that needs to be addressed to master the Fourth Industrial Revolution. There is little use in trying to block the coming changes, so companies are better advised to work with policymakers early on.

References: 

Sources:

  1. The Fourth Industrial Revolution: what it means and how to respond (http://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond)

  2. Lyft forgoes global expansion in favor of US market domination (http://phys.org/news/2015-08-lyft-forgoes-global-expansion-favor.html)

  3. New regulations for Uber and Lyft open the door for expansion
    (https://www.washingtonpost.com/local/trafficandcommuting/new-regulations-for-uber-and-lyft-open-the-door-for-expansion/2015/02/21/8445149a-b83e-11e4-a200-c008a01a6692_story.html)

  4. Lawsuits against Uber threaten global expansion (http://www.businessinsider.com/r-legal-troubles-market-realities-threaten-ubers-global-push-2015-10?IR=T)

  5. Globalization for the little guy
    (http://www.mckinsey.com/insights/globalization/globalization_for_the_little_guy)

  6. Menschheit steht vor dem grössten Umbruch seit der industriellen Revolution (http://www.sonntagszeitung.ch/read/sz_04_01_2015/gesellschaft/Menschheit-steht-vor-dem-groessten-Umbruch-seit-der-industriellen-Revolution-23180)

  7. Tech trends 2016: Cybersecurity in the connected world (http://www.bbc.com/news/business-35220442)

  8. Flashpoint: Cyber risk in an Internet of Things world (http://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/flashpoints-cyber-risk-in-an-internet-of-things-world-emerging-trends.html?linkId=18530497)

  9. In Silicon Valley Now, It's Almost Always Winner Takes All (http://www.newyorker.com/tech/elements/in-silicon-valley-now-its-almost-always-winner-takes-all?mbid=social_facebook)

  10. Digital Dividends (http://www.worldbank.org/en/publication/wdr2016)

  11. The Future of Jobs (http://www3.weforum.org/docs/WEF_Future_of_Jobs.pdf)

  12. Industry 4.0: The Future of Productivity and Growth in Manufacturing Industries (https://www.bcgperspectives.com/content/articles/engineered_products_project_business_industry_40_future_productivity_growth_manufacturing_industries/?utm_source=201601Davos&utm_medium=Email&utm_campaign=otr)

  13. How does the Internet cross the ocean? (http://www.weforum.org/agenda/2016/01/how-does-the-internet-cross-the-ocean?)

  14. European Commission – Economic and Financial Affairs - Ageing and welfare state policies
    (http://ec.europa.eu/economy_finance/structural_reforms/ageing/index_en.htm)

  15. Technology has created more jobs than it has destroyed, says 140 years of data (http://www.theguardian.com/business/2015/aug/17/technology-created-more-jobs-than-destroyed-140-years-data-census)

  16. Supporting Multi-stakeholderism in Internet Governance (http://www.itu.int/en/wtpf-13/Documents/backgrounder-wtpf-13-internet-governance-en.pdf)

  17. Global Value Chains (http://www.worldbank.org/en/topic/trade/brief/global-value-chains)