Which countries are the most prepared for the upcoming digital revolution?

Which countries are the most prepared for the upcoming digital revolution?

In an upmarket hotel in Seoul on 9 March 2016, a Korean man gently tapped two black stones against a bowl, and became immortalized as a symbol of a new industrial revolution. The man in question was Lee Sedol, one of the strongest players in the history of the ancient Chinese board game Go. He had just resigned against AlphaGo, Google’s artificial intelligence system, in a match that made waves around the world—particularly in the Artificial Intelligence (AI) community.

Go was supposed to be virtually impossible for computers to crack. Possible board iterations far exceed the numbers of atoms in the universe, meaning that using brute force to calculate future moves—much as IBM’s Deep Blue did to beat Garry Kasparov at chess nearly two decades earlier—was no use. To win, a computer would have to use something akin to creativity, flair, even intuition. Many experts had predicted that such a breakthrough was still decades away. And yet, AlphaGo went on to win three of the next four matches.

Smarter AI is one clear technological advancement of recent years. But there has also been unprecedented progress on many other fronts—including robotics, the Internet of Things, biotechnology and 3D printing, to name only a few.

This progress will lead to profound changes in countries’ economic structures. It will boost productivity growth—which in many developed nations has been decidedly sluggish since the financial crisis—aggregate supply, and economic growth rates.

At the macroeconomic level this is good news. But the overall picture will mask a maelstrom of changes beneath the surface that could create many losers. According to a recent report by consultancy firm PwC, over a third of U.S. jobs are at risk of automation by the 2030s. Figures are nearly as elevated for other major economies such as Germany and the UK. Workers in sectors such as retail, manufacturing and transport are at a particularly high risk of being replaced by machines.

While such skill-biased technological change will likely boost demand for educated workers in emerging sectors, it will also reduce firms’ appetite for a host of low and medium skilled employees. This could hollow out the middle class and entrench income inequality—which is already at a multi-decade high in many developed nations.

Benefits and training systems will need to be revamped to get the millions of newly unemployed people back to work in completely different sectors. Lifelong learning will be paramount, and adult training will have to become much more dynamic and better aligned with future market demand.

This is assuming there will be work available. The more pessimistic are already heralding a world where jobs will be few and far between, and some are calling for a universal basic income as a way of securing living standards.

Take another of the technological sea changes currently underway: cost-competitive 3D printing. This could lead to a no less radical restructuring of the economy. Global supply chains could be transformed beyond recognition, as developing countries with low labor costs see their comparative advantage in producing cheap manufactured goods gradually eroded. This could lead to onshoring and greater vertical integration, with many companies switching production back to developed nations to be closer to final markets; the automotive, industrial machinery and consumer products sectors are set to be the most affected. Another upshot is that the U.S. trade deficit—much maligned by certain American politicians—could shrink, while many emerging economies could see their external sectors wither. A recent report by ING estimated that in a conservative scenario, by 2060 3D printing could reduce global trade by nearly 25%.

Faced with such a monumental metamorphosis of the world economic order, which countries are most likely to prosper? The World Economic Forum asked this very question and compiled a list of the countries most prepared for the digital revolution—considering factors such as the political and regulatory environment, innovation, skills and the government’s participation. Singapore, Finland and Sweden came out on top. What caused them to rise above the rest of the pack, and can other countries learn from their success?

Singapore

The Asian powerhouse has taken a strong government-led approach, typified by the Smart Nation initiative launched in late 2014. Key pillars include a National Digital Identity system enabling firms and consumers to carry out transactions online more seamlessly, and the Internet of Things—including a project to equip each of the country’s 110,000 lampposts with smart sensors capable of recording and transmitting information. Turning the city-state into a testing ground for new technologies is also a key part of the plan, most notably in the field of autonomous driving, with fleets of driverless vehicles set to hit the road over the coming years. The government set aside SGD 2.4 billion (around USD 1.8 billion) last year for Smart Nation projects.

In addition, the state has created “launchpads”, hubs of innovation that bring together dozens of incubators and start-ups, many in sectors with strong future growth potential such as IT and biomedicine. Enterprise Singapore—a government agency—provides crucial logistical and financial support to companies entering the next stage of growth, seeking to scale up and break into overseas markets.

The country places great emphasis on adult education. This is encapsulated by SkillsFuture, a government program to upgrade skills and foster a culture of lifelong learning. As part of the initiative, from January 2016 all Singaporeans over 25 were provided with a 500 SGD credit to pay for a training course. Since then, around 300,000 people—over 5% of the entire population—have taken advantage of the scheme. The administration has also established a professional conversion program designed to help “mid-career switchers”—experienced professionals looking to move into new sectors.

Many of these initiatives are made possible by the government’s remarkably long-sighted view of economic policy making. The country even has a Future Economy Council, charged with charting an economic course for the decades to come. In this sense, Singapore is aided greatly by its anomalous political system, where the People’s Action Party has been in power since 1959.

Finland

What really sets Finland apart is its highly developed IT ecosystem, with an extremely computer-savvy population. This is partly a legacy of mobile giant Nokia, which has led to Finland having the highest proportion of IT workers in the EU—just shy of 7% of the workforce in 2016. But it is also the fruit of many years of government initiatives and training policies. The European Commission ranked Finland as the second most digitalized economy in the EU last year, with strengths in human capital, the use of internet services and the integration of digital technology.

The education system more generally is still robust, despite some slippage in the most recent PISA rankings. The government is adept at anticipating future labor market needs and tweaking public policies accordingly, while the proportion of adults participating in training is far above the EU average.

The country is one of the forerunners in 5G technology—which will allow vast streams of information to be transferred at greatly enhanced speeds—and has established a 5G test network as part of a joint partnership between the public and private sectors.

And with more data comes the need to store it. Finland is positioning itself as a global data hub, aided by its cool climate, low electricity costs and stable business environment. Following the completion of a high-speed underwater data cable between Germany and Helsinki, the government has turned its attention to a possible route along the Northeast Passage, dubbed Arctic Connect. Were such a cable to be built, it would markedly improve communication speeds between Europe and East Asia and cement Finland’s position as a key node for data traffic.

Innovation is another key strength. Finland spends heavily on research and development—2.8% of GDP in 2016—and boasts a thriving start-up scene, particularly in gaming. Investment in Finnish start-ups reached a record high last year and is among the most elevated in Europe in relation to GDP. The country also benefits from organizations such as DIMECC, which aims to create linkages between researchers and companies and speed up digitalization.

Sweden

The parallels with Nordic neighbour Finland are clear. Sweden’s economy is highly digitalized, ranking well above the EU average for connectivity, the digitalization of business and e-commerce. Swedish firms have been particularly eager adopters of technology such as cloud computing and electronic invoicing, while 4G and broadband covers virtually the entire population. Spearheading the government’s digital strategy—the most recent iteration of which was set out last year—is the Digitalisation Council, comprised of politicians, business leaders, researchers and the head of the country’s largest private-sector union.

In terms of innovation, Sweden was ranked the best in the EU last year according to the European Commission. A collaborative culture and a strong social safety net arguably encourages risk taking. Furthermore, Sweden spends more on R&D as a percentage of GDP (3.3%) than any other EU country. And there is a wealth of support for those looking to start a business. In Stockholm, for instance, the STING incubator offers coaching from successful entrepreneurs, free office space, seed funding and access to a network of potential investors. According to the organization—which is partially financed through public funds—70% of firms that pass through the incubator are still active and growing.

Where Sweden stands head and shoulders above most other countries is adult training. In the EU, Sweden has among the highest proportion of adults taking part in education and training, and it boasts several different schemes designed to prepare its older citizens for the jobs market, including Komvux (municipal adult education).

Conclusion

All three countries share evident similarities. They all boast highly stable business and political environments and well-performing education and training systems. All are innovative—a key asset in order to grasp opportunities in emerging industries. And in all three—but particularly in Singapore—governments are pivotal. This is partly because they get the basics right, by providing funding for basic research, start-ups and key infrastructure. But they also go a step further, by offering guidance and support for companies looking to scale up production, fostering collaboration between researchers and firms, and establishing a clear blueprint for the future of the economy in conjunction with other economic agents.  

Lee Sedol may have been largely powerless when faced with the technological might of AlphaGo. But governments need not suffer a similar fate. With the right public policies in place, the state can take the lead in moulding the technological transformations currently underway, and see citizens’ welfare boosted as a result.  


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Photo by Tyler Daviaux on Unsplash

Author: Oliver Reynolds, Economist

Date: June 7, 2018


Twitter @FocusEconomics

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