Information and development: Escaping the industrial maturity trap and moving forward to an information society
Phuah Eng Chye (14 September 2019)
Advanced economies appear to be bumping into limits to their growth. They display symptoms of “industrial maturity” such as hollowing out of their manufacturing sectors, demographic aging and anaemic capital formation. Some symptoms such as large budget and trade deficits may be common but the causes may vary. In countries like Japan, the symptoms reflect stagnation (low growth, low inflation and low interest rates). In others like the US, the symptoms reflect inequality arising from low wage growth and high living costs (e.g. rentals, transport, healthcare and education). These differences reflect different phases of industrial maturity, different circumstances and the outcomes of different policy remedies.
These symptoms are nonetheless an indication that countries should reconsider their development beyond export-led and industrialisation models as these are “losing strategies”. It has been true that as an economy advances, its manufacturing sector shrinks; this implies that it is incorrect to blame globalisation for the loss of manufacturing. It also implies that countries trying to hold onto their manufacturing facilities (and jobs) will find their competitiveness (and companies) hobbled by rising costs and that losses will mount as they lose ground to new global entrants. In the meantime, domestic economic and social conditions will inevitably deteriorate as the information disruption of traditional industries, employment, organisations and cultures deepens.
Economies therefore need to plan an escape out of the industrial maturity trap as this is a precondition for a successful transition to an information society. This requires freeing the policy mindset from industrial and physical paradigms and abandoning legacy policy goals. Simply put, a blueprint to manage the transition to an information society should therefore not resemble an industrial economy plan.
The plan should squarely confront information challenges – the problems and opportunities emerging from rising information intensity. But at the moment, there are no ready-made economic theories and models to guide policy-making as the economics of the future is very different from the economics of the past. The theories that apply to physical goods don’t apply to information goods. Thus, there is a need to be open-minded in exploring economic concepts and models that are more likely to be relevant to the information society.
- Macroeconomic models
The economic landscape is being rewired by information disruption. Many of these changes are not captured by the conventional macroeconomic models. Here are some possibilities to consider.
- Diminished role of real output. The industrial economy is based on scarcity. Information societies builds abundance on top of physical scarcity. The traditional economic rules still apply but to a lesser extent. This diminishes the significance of tangible output. It is in the abundant and intangible part of the economy where the economic frameworks, objectives and policies are not well developed. Here, the main constraints on growth and jobs are not physical. The constraints are (1) financial – namely the value and income generated from human capital, activities and assets and the financing of consumption and deficits and (2) legal – in relation to how people participate and benefit from exchange. If output should not be the target, the alternative is to use a nominal model. This presents a theoretical challenge to interpret what prices and profits represent. If economic growth is delinked from output growth, one interesting interpretation is that curtailing budget expenditures in response to shrinking output is an error due to its negative impact on intangible activities which would cause the economy to unnecessarily contract. Nonetheless, a non-output model would still be subject to financial constraints such as its ability to service budget, trade and financial debts and calls on its liquidity.
- . It is logical for matured economies to import physical goods from developing economies as (1) Developing countries can produce more cheaply; (2) Matured economies will not be better off bringing back manufacturing as with their high costs. Even if they could, they will not be able to export; and (3) From a global perspective, only matured economies have sufficient financial resilience to be a persistent importer. If matured economies do not import, this will have negative repercussions on global economic growth. In addition, the low costs of foreign goods and a strong currency provide the means to offset rising domestic costs. Hence, matured economy strategies should aim to generate foreign exchange inflows to finance imports of goods. One route is to earn foreign exchange from exporting services – education, health, tourism, patent and brand income and management fees. Another is to encourage home companies to repatriate overseas income. Lastly, countries can organise the sale of assets to foreigners – properties, financial assets, brands and technology. This makes sense because monetised assets fetch high values in matured economies.
- Robust service economy models. Despite the dominance of the service sectors, many economic models are still tied to manufacturing concepts. This should change. A service economy model provides the closest proxy to the information society or a non-physical economy. The behaviour of a services economy differs from an industrial economy. One possibility is to test a model built for an economy that is highly dependent on tourism income. Modelling exercises can be carried out to see how large tourism revenues affects the jobs and wages of locals, housing prices, income distribution, capital formation and fiscal revenues. It would be interesting to postulate and test different policy objectives and strategies. A tourism economy would provide a robust test of policies relating to wages, profit, ownership and income equality and the displacement effects from large tourist and foreign investment inflows.
- From production to consumption-based models. Matured economies operate under conditions of excess production capacity, surplus capital and demand deficiencies. Yet, the logic of production models drives policies to target further increases in output. Countries where the corporate sector are net savers are susceptible to economic stagnation and rely on consumer and government debt to offset demand deficiencies. Perhaps, new policy ideas can be obtained by shifting to consumption-based models. Consumption-based models would provide a more reflective picture of consumption needs, bottlenecks and leakages. Consumption-based models are also more amicable to the application of concepts such as abundance, demand-driven, participation and monetisation. These models would underpin the design of policies to optimise consumption subject to financial stability requirements.
- Financialisation as an information process.
Conventional theory tends to view financialisation within a bank credit paradigm. I argue financialisation should be viewed as an information process. This interpretation “delinks” money supply from physical output. At the micro level, value is linked to information on products, services, assets and counterparties. At the macro level, the bank credit model has become an anachronism in a global landscape dominated by central bank sterilisation, markets, liquidity, asset managers and traders. In a financialisation model, monetary policy and economic business cycles are highly connected to liquidity flows and asset returns. Within an information paradigm, monetary policy objectives should not focus on consumer price inflation because of abundance. Instead, policy should focus on managing the appropriate levels of liquidity in relation to asset prices and balance sheet soundness. Regulators should also review whether markets are doing a good job at managing, pricing and allocating capital and risks and whether the information and the process underpinning transactions are efficient and trustworthy.
- Roles of governments and private sector.
In the face of information disruption, governments have been content to take a backseat and allow the private sector to shape the course of events. But we are reaching a point where governments feel a need to reassert their authority. First, platforms and technology are becoming dominant and are upsetting the existing power structure. Second, social externalities – i.e. the erosion of traditional jobs and social protection and rising inequalities – are becoming pronounced and triggering a social backlash. Third, the public goods system covering administration, education, healthcare, utilities, judiciary, taxation and others under pressure. They need to be re-organised and the services delivered differently. In particular, there is a need to address the rising costs of and deteriorating access to public goods within the context of fiscal constraints. Fourth, the boundaries between government and business have been blurred by privatisation, outsourcing and private-public partnerships. The government’s role and strategies to be clarified in light of the shortfalls in meeting public needs. Fifth, many economies have become anorexic and have unsustainable fiscal strategies. There is a need to review the government strategies as well as the subsidies and incentives provided to businesses. Sixth, information disruption is eroding traditional institutions, laws and social norms and raising the level of disputes. It will be critical for governments to provide guidance on the new regulatory boundaries and legal interpretations in relation to work, social norms and information. There is a need to re-organise the dispute resolution process. Overall, governments need to clarify where they intend to expand their role and intervene, and areas where they intend to shrink their role.
- Human capital and societal risks.
New work forms have emerged to replace traditional jobs and they are largely unregulated. There is a need for strategies to create labour regulation (particularly for the new work forms) to enhance the quality of jobs in an information-driven landscape. This should be accompanied by a strategy to enhance the quality and use of human capital. In addition, societal risks have been heightened by the enlarged size and speed of movement of goods, services, people, capital and information across the globe. These movements generate significant economic benefits but also produce considerable externalities in the form of environmental, social and financial waste. In tandem with this, traditional protections have been eroded by large corporations shifting the burden for bearing societal risks to individuals and the government. The social protection framework should be reformed to mitigate the adversities of the information-driven landscape. One example is to shift from employer-based welfare and pensions to a national scheme to address transience. Policies related to consumption, housing, healthcare and education should be reviewed to ensure citizens are not unduly burdened by debt; particularly in ensuring that young adults do not begin their working life with large debt burdens.
Infrastructure choices are critical. The wrong choice of infrastructure is costly and will not support efficient deployment of the latest technologies. Jeremy Rifkin explains that “when your businesses are plugged into a second industrial revolution infrastructure of centralized telecommunication, fossil fuel, nuclear power, internal-combustion transportation for roads, rail, water and air transport, and we know that the productivity in that infrastructure peaked…it’s the productivity of the infrastructure that has now declined. This is really crucial because…you can have market reform and labor reform and fiscal reforms, and incentivize a million jobs or innovations, and it won’t make any difference as long as your businesses are plugged into that second industrial revolution infrastructure…That’s the key, new infrastructure.” Jeremy Rifkin explains that “a new smart infrastructure, made up of an interactive Communications Internet, Renewable Energy Internet and Transportation Internet is beginning to spread nodally, like Wi-Fi, from region to region, crossing continents and connecting society in a vast global neural network. The EU communication network will have to be upgraded…The electricity grid of the European Union will have to be transformed into a smart digital Energy Internet to accommodate the flow of energy produced by millions of green micro power plants. The transportation and logistics sector will have to be digitalized and transformed into an automated GPS-guided driverless network running on smart roads and rail systems. The introduction of electric and fuel cell transportation will require millions of charging stations. Smart roads, equipped with millions of sensors that feed real-time information on traffic flows and the movement of freight, will also have to be installed”. Governments will need to manage the shift to a distributed network because there will be substantial resistance from incumbents whose franchise and value of legacy assets will be affected.
- Information and choice.
Societal advancement should always mean more information and choice, never less. Policies that choke off information flows and increase the elements of physicality (including output and violence) and scarcity (protectionism) are regressive. They will end up hurting growth because they reduce monetisation, exchange and innovation. This, in turn, reduces the range of possibilities and choice. Hence, economic blueprints should prioritise the evolution of an information architecture, policies and regulations that promotes information flow and usage and expands choice for its citizens. In tandem with this, emphasis should be placed on generating economic activities by increasing transparency, broadening access and participation, and facilitating self-organisation. As more aspects of economic activities are driven by information, a cohesive framework is necessary to ensure consistent policies and regulations across a broad range of areas including on networks, data, content, platforms and AI.
Overall, economies will not be able to escape the industrial maturity trap if they cling to a physical development path. An agriculture society is built around crops. An industrial society around manufactured output. The information society should be built around information. Therefore, the answers for the future do not lie in building more factories, producing more widgets and creating more manufacturing jobs. It will not come from a discussion about how robots will replace humans at work. “Smart” technologies and cities should not be centred around devices.
In the information society, value is not derived from crops or devices but from humans. Plans and policies should be therefore be guided by a discussion on shaping our vision for human capital in the information society. A vision on how we could use information to maximise the value of human capital, improve the quality of lives and minimise the use of physical resources. A vision on how society can be organised for the greater good if we have all the information we need.
Elena Holodny (June 2017) “A key player in China and the EU’s third industrial revolution describes the economy of tomorrow”. Businessinsider.com. http://www.businessinsider.com/jeremy-rifkin-interview-2017-6
Jeremy Rifkin (updated 6 December 2017) “How an integrated Eurasian market can promote biosphere consciousness and digital entrepreneurialism”. Huffington Post.com. https://www.huffingtonpost.com/jeremy-rifkin/eurasian-market-digital_b_8481444.html
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
Phuah Eng Chye (2 September 2017) “The services economy: Comparing the manufacturing and service paradigms”.
Phuah Eng Chye (16 September 2017) “The services economy: Service sector growth and the information society”. http://economicsofinformationsociety.com/the-services-economy-service-sector-growth-and-the-information-society/
Phuah Eng Chye (10 February 2018) “The sharing economy: Sharing infrastructure and beyond”.
Phuah Eng Chye (2 March 2019) “Future of work: Transition to the information society”. http://economicsofinformationsociety.com/future-of-work-transition-to-the-information-society/
Phuah Eng Chye (16 March 2019) “Future of work: Strategy roadmap for labour”.
Phuah Eng Chye (25 May 2019) “How information alters economic concepts”.
Phuah Eng Chye (8 June 2019) “The information society landscape”. http://economicsofinformationsociety.com/the-information-society-landscape/
Phuah Eng Chye (22 June 2019) “Policy conversations and the language of information”. http://economicsofinformationsociety.com/policy-conversations-and-the-language-of-information/
Phuah Eng Chye (20 July 2019) “Information and development: Development models and landscape change”. http://economicsofinformationsociety.com/information-and-development-development-models-and-landscape-change/
Phuah Eng Chye (3 August 2019) “Information and development: Globalisation in transition”. http://economicsofinformationsociety.com/information-and-development-globalisation-in-transition/
Phuah Eng Chye (17 August 2019) “Information and development: Globalisation interrupted and deglobalisation risks”.
Phuah Eng Chye (31 August 2019) “Information and development: The information path to development”. http://economicsofinformationsociety.com/information-and-development-the-information-path-to-development/
Steven Fazzari, Piero Ferri, AnnaMaria Variato (2018) “Demand-led growth and accommodating supply”. FMM Working Paper No. 15, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FFM), Düsseldorf. https://www.econstor.eu/bitstream/10419/181473/1/fmm-imk-wp-15-2018.pdf
 “How information alters economic concepts”.
 “The information society landscape”.
 For example, Łukasz Rachel explains how “leisure-enhancing technologies can help account for both the rise in leisure hours and the decline in productivity observed across the industrialised world. Their nature carries important implications for the long-run viability of the platforms’ business models, for measurement of economic activity, and for welfare”.
 “The services economy: Comparing the manufacturing and service paradigms”; “The services economy: Service sector growth and the information society”.
 Steven Fazzari, Piero Ferri and AnnaMaria Variato presents a supermultiplier model in which the growth of autonomous demand determines the steady state growth rate of output. The results explain how economies can become trapped with low growth due to weak demand or fiscal austerity.
 Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
 Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
 “Future of work: Strategy roadmap for labour”.
 “Future of work: Strategy roadmap for labour”.