The advent of Artificial Intelligence (AI) applied to many sectors of national economies and thus driving Industrial Revolution 4.0. will likely bring a large increase in output and labor productivity in economies of Central and Eastern Europe. This is because the nature of work will change due to robotization and the application of AI to new technologies will likely bring revolutionary breakthroughs. Also, our lives, professional and otherwise, will be transformed in fundamental ways. According to the estimate of McKinsey Global Institute, a yearly contribution of AI to global produced value could be as high as 7 % of the world’s GDP, unfolding gradually in the coming years. This is an enormous boost to the world economic product and if harnessed properly can enhance prosperity in many places, including in CEE.

However, the application of AI to many sectors will bring also many challenges and risk of disruption to which national economies and their leaders will have to react. Transformation of the nature of work in many sectors and robotization will mean that many workers will be displaced from their current jobs. While predictions vary as to how precisely the AI will transform the economies and to what extent the labor market will be affected, it is presumed that the impact will be nothing short of fundamental. It might be worth pondering the potential adverse effects of the AI to the labor market now since the unfolding of AI revolution with both enormously positive gains but also concomitant negative economic side effects can come relatively quickly.

There are at least three areas where one could think a progress made would help prepare for the coming challenges :

First, it is clear that supporting the sector of lifelong learning should bring dividends on many fronts. Many displaced workers will likely not be able to find a new job in the same sector where they worked previously. Here the retraining – possibly subsidized one way or another by the governments – could help. Furthermore, a more complex response to boosting the whole sector of lifelong learning – such as through various tax-related schemes that would encourage private sector provision of retraining and encourage the flow of resources to the sector – could also help.

Second, large infrastructure projects which are still needed in many CEE countries would help absorb released workers – however, financing of such projects will be circumscribed by the usual fiscal constraint. Hence even more cautious than usual fiscal policy stance in the coming years would help prepare the fiscal position of individual countries for extraordinary expenditures should AI-related labor displacements prove significant and a launch of infrastructure projects be chosen as one of the solutions.

Third, but perhaps most importantly, promoting entrepreneurship and supporting various schemes to help start-ups would go a long way towards creating ground from which many new enterprises can spring ready to absorb displaced workers. Since the industry is particularly vulnerable to labor displacements due to likely future robotization and while start-ups in that sector are particularly demanding undertaking, innovative ways to help such start-ups would be called for. An increased flow of resources to the R&D sector could help CEE countries further reduce the gap from the technological frontier; the effective collaboration between business and universities would mean that advances in research would translate into commercialized products. Additionally, small business and self-employed workers should be particularly encouraged through various schemes. Also, more philosophically, support of Small business could be an effective recipe for many ills which the current integrated economic system brings, along with prosperity.

AI-related revolution is right at the corner. In order to fully realize its potential, which is enormous both for economic prosperity as well as quality of life, it is time to ponder the best medium-term solutions to some of the downsides that it is likely to bring along with the great benefits.

Vladimir Zlacky
26.october 2019

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