Disruption as opportunity in small economies

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Published in the Straits Times

The pace of technological change, from automation to artificial intelligence, is relentless.  And global technology companies from Amazon and Google to Alibaba and Tencent have been growing at tremendous rates, seemingly developing positions of unrivalled competitive advantage.

Does this mean that we are moving into an age of technology giants, in which super-sized firms – and the large economies that house and regulate them – will dominate the next wave of economic development?  Will this be similar to the Industrial Revolution, where the large country powerhouses of Britain and then the US with ready access to large markets as well as large capital markets were best placed to develop and deploy these new technologies?

This matters because a wide range of emerging technologies – from robotics, autonomous vehicles, 3D printing and the internet of things – are expected to be enormously disruptive to labour markets, to firms, and to entire economies.  Disruptive technological change is not new, but this is now happening at a scale and speed that is unprecedented.  The McKinsey Global Institute estimates that up to 30% of work activities globally could be displaced through automation by 2030, with a mid-point of 15%.  Several Asian countries, including Singapore, Japan and South Korea, are estimated to be particularly exposed to automation – which will bring both opportunities as well as challenges.

But although large country firms such as the FAANGS (Facebook, Amazon, Apple, Netflix and Google) and Tesla from the US, and China’s BATs (Baidu, Alibaba, and Tencent) attract a lot of attention, my assessment is that small economies are well positioned to take advantage of these technologies and to manage the associated risks. From Sweden’s Spotify to New Zealand’s Xero and the Start Up nation of Israel, small economies have created many successful technology firms.  But even more importantly, small economies will benefit from being a user of technology, making operations more productive and supporting new growth opportunities.

There are three reasons that I am positive about the impact of these technologies on small advanced economies.

First, many small economies have strong characteristics to support the rapid absorption and effective deployment of technology.  For these technologies to add economic value, workers need to adapt quickly and creatively and firms similarly need to respond. 

Many advanced economies have high levels of human capital and skills, and their workers will be better able to upgrade and adapt to new ways of working – in ways that are less likely to occur in broad-based ways in larger economies.  In many small European countries, for example, the combination of active labour market policy, vocational education, and ongoing learning (often supported by governments and unions) has created a workforce that is particularly well equipped to respond to the disruption.

Indeed, small economies respond well to labour market shocks. This was recently seen after the global financial crisis when small economy unemployment rates reduced relatively quickly. And small economies have well-functioning labour markets, with strong labour force participation and high levels of labour productivity.  

At a firm level, there are frequently high levels of firm capability.  And small economy firms have a strong record of business investment, high levels of R&D spending and innovation, and uptake of new technology. 
Small economies are unlikely to create many global platforms like Amazon.  But small economies can be leaders in using technologies like automation and the cloud. Indeed these technologies may enable small economies to effectively scale up, levelling the playing field with larger economies by raising the productive potential of small economies.  It is not obvious that disproportionate value will accrue to large firms in big countries.

There is also strong policy support in many small advanced economies to support the rapid adoption of new technologies.  Many small country governments are in the global vanguard of developing innovative policy and regulatory environments to position their economies for new opportunities such as fintech, autonomous vehicles, and Industry 4.0.  Singapore is a very good example of this, with the various Smart Nation initiatives and the policy innovation around fintech, as are Denmark and the Netherlands.  Indeed, the intensity of small economy policy activity around the world is striking.  The responsiveness and quality of small economy public sector institutions creates a real edge in capturing value.

Second, these technologies provide a valuable way of pursuing the productivity agenda in small economies.  Many small advanced economies have high cost structures, which is placing pressure on their competitive position.  Technologies such as automation and the internet of things provide ways for firms to strengthen their competitive positions.  Indeed, significant investments in technology are being made in several small European countries with a view to improving productivity.  

Disruptive technologies will also have a meaningful impact on the services sector, from e-commerce in retail to fintech.  Productivity in domestically-oriented services sectors is frequently low in small economies, constrained by the absence of domestic scale and a lack of competitive intensity.  This means that there are disproportionately large gains from deploying best practice technologies and business models in small economies.  This is true for Singapore as well: consider the opportunities provided in the construction, retail, and financial services sectors from new technologies such as 3D printing and modular construction, online shopping, and digital services.

Third, the labour market characteristics of many (not all) small advanced economies limits some of the employment downsides associated with the rapid deployment of new technologies. In many cases, these new technologies reduce the labour intensity of existing activities.  Unemployment rates are lower on average in small economies and growth in the working age population is reducing in many small countries - and in some, is expected to contract as the population ages.  

Indeed, a key challenge in many small economies is overcoming labour shortages. In this respect, technologies that can economise on labour in labour intensive occupations and that can enhance labour productivity are valuable.  This contrasts with many large advanced economies, and with some larger emerging markets, in which there is a need to create substantial new jobs to reduce unemployment and respond to a growing working age population. 

Over time, the net employment impact of these technologies may be positive as new jobs that currently don’t exist are created.  But in the short-term, the tight labour markets in small economies mean that the social and political pressures from disruptive technology will likely be easier to manage.  The value of a growing working age population may be less positive (or even negative) in an era of disruptive technology.  

Overall, the impact of technology will be disruptive on labour markets and the economy.  However, small economies have many attributes that position them well.  Small economies stand to capture significant opportunities from new technologies and business models, by strengthening existing sectors and growing new activities.  They are also relatively well-placed in managing some of the social and political challenges that will likely arise from disruptive technologies.

Of course, managing technological change will be demanding – and not all countries will manage this process well.  But my money is on responsive, agile small advanced economies to capture value from disruptive technologies.
 

David Skilling