Jun 24, 2021

Fourth industrial revolution and India's demographic challenge

Klaus Schwas coined the term 'fourth industrial revolution' to describe the confluence of emerging technology breakthroughs, covering wide ranging fields such as artificial intelligence, robotics, telecommunication revolution such as 5G, the internet of things, driverless vehicles, 3D printing and additive manufacturing, nanotech, biotech, materials science, energy storage and quantum technology. On the surface, it appears to be the next logical step from the third industrial revolution where electronics and IT were leveraged for production and service delivery. However, as Schwas argues, the growth of these in future would lead to exponential impact on various spheres. The velocity, scope and impact of these changes may take directions that may not be wholly predictable, affecting all fields from agriculture, education, trade, warfare, manufacturing and everything in between. There is a good (and urgent!) reason why policymakers should be abreast of developments in more than a cursory way. It would not only preempt the adverse affect on the country, but it might also help to prepare policies to take advantage of the developments. 

The traditional economics still looks at manufacturing and trade from last century's perspective. This needs an urgent revision, especially when it comes to a developing economy context. The macroeconomists still dabble in general grand equilibrium models that went nowhere when financial crisis hit. The microeconomics still begin with economies of scale and theories of firm that could barely explain the growth of IT and services firms such as Amazons and Facebooks which operated without profits for long time. Theories based on Ricardo's comparative advantage are still being taught in graduate schools with wine and cloth being traded between England and Portugal. The sad truth is that trade practitioners still use indices such as Balassa's "Revealed Comparative Advantage" to arm themselves during negotiations, advised by advisors trained during last century. The theories are not to be blamed as they played vital role in understanding the factors that contribute to development. The models had their use. The blame must lie with people who have turned these theories into religion despite piling evidence that points to the staleness. 

There is an acknowledgement, lately, in the various circles about gaming of globalization by countries such as China and the backlash may be seen in terms of waning political appetite for further globalization. However, the firms in a capitalistic economy such as US would nevertheless push for optimization through supply chain relocation into countries where cost of production is cheap. However, the cost advantage gained through cheap labor price would erode through advancement in technology mentioned in fourth industrial revolution. The threat of automation displacing labor is being discussed at various places in the last five years. However, the exact mechanism is not well known and the suggested panacea of skilling the labor might at best produce mediocre results, or at worst might not work at all. This would have serious repercussions for young countries such as India unless we take remedial steps. 

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