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Economic growth to gain from AI

The impact of AI on economies may emerge gradually and be visible only over time.

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ARTIFICIAL intelligence (AI) can bring additional economic output of around US$13 trillion by 2030, boosting global GDP by about 1.2 per cent a year, according to a recent McKinsey report.

This net growth comes after taking in the costs of automation on the labour force, even as the consultancy flagged that workers must be ready for jobs to be transformed by technology.

The potential behind AI comes as an estimated 70 per cent of global companies is due to adopt at least one form of such technology by 2030, said the McKinsey Global Institute report that was released in September.

As a rough guide, this compares against the introduction of steam engines during the 1800s that lifted labour productivity by an estimated 0.3 per cent a year; the productivity gains from the use of robots during the 1990s at about 0.4 per cent, and the impact from the use of IT during the 2000s that raised productivity by an annual 0.6 per cent.

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The economic impact from using AI may emerge gradually and be visible only over time, with McKinsey expecting a S-curve adoption of AI - a pattern that suggests a slow start given the investment associated with learning and deploying the technology, and then an acceleration driven in part by competition.

With this, AI's contribution to economic growth may be three or more times higher by 2030 than it is over the next five years, McKinsey said.

But amid this, McKinsey estimated that up to 14 per cent of workers globally might need to change occupations, and while some may change roles within the same company, others may need to move to new sectors and locations.

While most workers will face competition from AI for some tasks, less than 10 per cent of occupations are made up of activities that can be fully automated based on the current state of AI. But six in 10 jobs have at least one-third of activities that can be automated.

"The economic benefits of AI-based automation and innovation are secured at a cost, an element that existing research tends to overlook. The deployment of AI will very likely create a shock in labour markets and there will probably be costs associated with managing labour-market transitions, especially for workers whose skills are made obsolete or less relevant by AI technologies," said the consultancy.

"This implies significant changes for workers and workplaces. Further, it is hoped workers may have access to some social security and unemployment benefits to sustain them while they are unemployed and between jobs."

These changes to the workforce can incur costs of about US$7 trillion by 2030, even as the consultancy noted that its current modelling does not account for detailed value redistribution across the economy.

This trend will also affect Asean. A report by Oxford Economics and Cisco estimated that by 2028, 28 million fewer workers across these economies - more than 10 per cent of the current Asean-6 workforce - will be required to produce the same level of output as today. Asean-6 refers to Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

For some 6.6 million workers across the Asean-6 region, new technologies will render their jobs redundant. Agriculture will be the major source of these redundancies, as new development in areas such as global-positioning systems, telematics and smart sensors are deployed to greater effect.

But many sectors will experience a net increase in their demand for jobs by 2028 because the rise in spending power through increased productivity more than offsets the jobs directly displaced by technology, said the report.

"The sectors projected to see the greatest rise in demand for new workers are wholesale and retail, manufacturing, construction, and transport."

McKinsey pointed to another challenge related to the global economy, where AI adoption is concerned: The use of AI can widen gaps between workers, countries and companies.

"For individual workers, demand - and wages - may grow for those with digital and cognitive skills and with expertise in tasks that are hard to automate, but shrink for workers performing repetitive tasks," said McKinsey.

It also said countries that establish themselves as AI leaders - which are mostly developed economies - can capture an additional 20 to 25 per cent in economic benefits compared with today, while emerging economies may capture only half their upside.

"There might also be a widening gap between companies, with front-runners potentially doubling their returns by 2030 and companies that delay adoption falling behind."

McKinsey pointed out that many developed countries may have no choice but to push AI to capture higher productivity growth, given that their GDP growth momentum is slowing, in many cases partly reflecting the challenges related to ageing populations.

"Wage rates in these economies are high, which means there is more incentive than in low-wage, developing countries to substitute labour with machines.

"Developing countries tend to have other ways to improve their productivity, including catching up with best practices and restructuring their industries, and may therefore have less incentive to push for AI. In any case, AI may offer them a smaller economic benefit than advanced economies."

But McKinsey was clear that developing economies are not doomed to lose the AI race, pointing out that some developing countries are already being ambitious in pushing AI. China, for example, has a national strategy in place to become a global leader in the AI supply chain, and is investing heavily.

"Gaps may be widening among firms, workers and countries, but measures can be taken to manage the transition and steer economies towards higher productivity and job growth. The disruption that comes with AI may lead to some firms leaving the market and some workers losing jobs," it added.

"There will be major challenges for individuals transitioning to new jobs. But if given the support they need to develop and refresh their skills and return to the labour market, then resources can be redeployed to more productive parts of the economy."