Blogs

Dismantling the Myths of Digital Technologies Blog Series

Ghassan Dibeh is contributing with a series of blogs aimed at initiating an informed discussion on the knowledge economy and the digital revolution. The blogs aim at deconstructing some of the generic narratives around these issues and to inform readers about various dimensions that need to be considered for Arab countries to benefit from the value-added and the competitive edge that digital technologies would create.

The world is currently in the midst of a new technological revolution: the 4th industrial revolution or the second machine age as described by Erik Brynjolfsson and Andrew McAfee in their seminal work The Second Machine Age (2014). The most vivid imagery of the impact of this new revolution, led by robotics and artificial intelligence, is the advent of robots and the replacement of human labor by machines, or more apocalyptically the occurrence of a technological singularity, when machine intelligence would surpass human intelligence as popularized by the technologist Ray Kurzweil. Despite such possibilities, the replacement of labor by machines is still a controversial subject with arguments on both sides. A recent report by the MIT Task force on the Work of the Future[1] casts doubt on the possibility, in the near future at least, of robots replacing millions of jobs in the US. However, the report warns of the impact of new technologies on income inequality.

In this respect, the new digital technologies will definitely have a salient impact on inequality of income and wealth, whether machines substitute for labor in all the economy creating huge unemployment (in the extreme case, one robot will control the whole economy), or whether those displaced by machines find jobs somewhere else in the economy (Say's law applying). Both cases raise very serious prospects of increased inequality, which in the current economic environment, will exacerbate such a trend brought to the forefront by Thomas Piketty’s Capital in the 21^st Century (2013). For example, according to the IMF, about half of the decline in the labor share can be traced to the impact of technology in advanced economies. However, in emerging markets the impact of technology on labor shares is lower affecting only one-fourth of the decline. Even though the importance of digital technologies in Arab economies is still to a large extent marginal, it is worthwhile to start discussing the potential impact it will eventually have on inequality in the region.

A Quick Look at Inequality in the Arab World

The Arab world, despite what has been called "The Arab Inequality Puzzle”[2], suffers from large inequalities. Wealth inequality is very high and extreme wealth inequality manifests itself in the stark magnitude of wealth control by few individuals and families. According to the Elena Ianchovichina, World Bank economist, wealth concentration in the hands of few individuals is much higher in many Arab countries than in other countries of similar levels of economic development. For example, few individuals and their families in Lebanon and Egypt control wealth equivalent to 30% and 24% of GDP, respectively.[3] Other studies show that, in contrast to the Gini-based low inequality measures in the region, the share of the top 10% of income earners in the Middle East ranges between 55% and 61% which are comparable with distributions in other developing regions and higher than the US and European inequality.[4] In addition the labor share is low (e.g. Egypt 29%)[5] and the Arab world experienced a decline in real wages by 2.7% between 2006 and 2011, the only region in which such a drop has been recorded.[6] Another grave example on the size of inequality is the Inequality-Adjusted Human Development Index (IHDI), which shows that the Human Development Index (HDI) loses 25% of its value when adjusting for inequality in health, education and income, which is the third-highest after the South Asia and Sub-Saharan Africa regions.[7]

Digital technologies and Inequality

According to The Second Machine Age, technological progress in the era of digitization affects inequality through three channels: first, through differential returns to owners of capital and labor; second, the existence of winner-takes-all markets; and finally, through skill-biased technological change. Digital technologies are partly capital and hence “who owns the robots?” becomes a crucial question. In the Arab world, the concentration of capital ownership, financial wealth and limited access to financial markets, will cause those who currently own capital to own the firms that win in the digital race. As an indication of such financial hurdles, in many countries the administrative costs of startups are prohibitive. Even in startup friendly UAE, it is estimated that such costs amount to around 25,000 USD in the first year.

Second, in winner-take-all markets, compensation is mainly determined by relative performance while in traditional markets, revenues are closely correlated with absolute performance. In a traditional market, a worker who is 90% as skilled, or as productive as another worker, will get 90% of his or her pay. However, a slight differential in software programming abilities may lead to the domination of the market by the slightly better. As Brynjolfsson and McAfee observed, there would be no demand, for example, for the tenth best accounting software. Moreover, new technologies will help “superstar firms” to pull away from the rest, concentrating income in the hands of the few. In 2014, WhatsApp had 55 employees serving 450 million customers. In addition, the 2011 counterparts of the four most valuable companies in 1964 whose average market capitalization was $180 billion (in 2011 dollars), employed less than quarter in employees. In this respect, the dynamic of new technologies is global. Hence, the ability of a superstar firm located outside the Arab world to dominate the market would prevent local developers and entrepreneurs from competing with these global giants (Careem acquired by Uber). The existence of network and agglomeration effects would further allow global monopolies to dominate Arab markets with few subsidiaries of highly networked local entrepreneurs. These local entrepreneurs would, at best, form islands of innovation connected to the global monopolies that share rents with them.

Third, skill-biased technological change would make those with higher skills gain in incomes with respect to those with lower skills. Hence, wage or labor-labor inequalities will increase. As an indication of such a phenomenon in the Arab world (not related to digital technologies), there has been an increase in manufacturing wage inequality since 1980 as measured by UTIP (University of Texas Inequality Project) indexes. In this respect, inequality in access to education can have a significant impact on such disparities. According to the UNICEF “there are still very large gaps in education attainment in MENA, with a difference of up to 10 years of schooling between the top 20 per cent of the most educated and the bottom 20 per cent of the least educated.” Moreover, wealth inequalities have a significant effect on the completion of different educational cycles in the region.[8]

In sum, in the Arab world robots may not be coming in masse to replace human labor, however, they will be coming to widen the existing inequalities in income and wealth as digital technologies will create a big rift between those who own capital, have high skills and are globally networked and connected and between those who are not.