Dialogue Chain. Episode 13. Alexey Zabotkin, director of the Monetary Policy Department of the Bank of Russia, and Ruben Enikolopov, rector of the New Economic School.
Zabotkin: Ruben, I’m really happy that you managed to join us today for a conversation about economics.
Enikolopov: I’m very glad too that you invited me, so thank you for that. Economics is my favorite topic.
Zabotkin: In the previous episode I met with Gabriel Di Bella, Resident Representative of the IMF in Russia at the time. We discussed monetary policy, so we talked a lot about the economic cycle. That’s why this time it would be logical to converse about long-term trends in economic growth. More specifically, I would like to hear your opinion on how technological advances affect growth and the structure of the economy in terms of both local and global economies. Before turning to the current situation, please comment briefly on the technological advance impact mechanism on the economic growth.
Enikolopov: Economists have a rather clear idea about what factors affect long-term economic growth, because there’s the absolutely classical Solow model, which, oddly enough, is [still] effective. This model shows that the key factors specific to long-term economic growth are connected with factors of production: labor, capital, and technology. Speaking about long-term economic growth and, in particular, about per-capita growth rates (i.e. increase in the well-being of individuals, rather than the economic growth of a country), it is defined primarily by capital growth, namely the savings ratio, which is rather difficult to change. And technologies, in fact, increase well-being. The trends of the last 150-200 years show that this is what makes us more prosperous than our great grandfathers, grandfathers, fathers, and mothers. That’s why technological advances play a crucial role in the long-term increase of well-being.
Zabotkin: Now, let’s turn to the current situation. In the last few decades, the general sentiment has probably been that technologies increasingly penetrate our lives. More actively maybe than in the 2000s, 1990s or 1980s. At the same time, the last decades have seen lower economic growth in Russia and generally in the world than in the previous decades. How can you comment on that?
Enikolopov: Actually, it’s not the first time. Last time, I mean previously in history, it happened in the 1980s when computers appeared. It was exactly the same: everyone saw computers appear and understood that they were more effective, but productivity didn’t increase. All right, economic growth can be attributed to other factors. We can estimate global productivity, which doesn’t change. Now, it’s the same: productivity isn’t increasing. In 1987, the famous economist and Nobel Prize winner Robert Solow said: “You can see the computer age everywhere but in the productivity statistics.” So, now we see the same thing happening with artificial intelligence (AI). AI is everywhere except for productivity growth. And the big puzzle is why.
There are many explanations; for example, some argue that the existing statistical methods do not calculate it. We use lots of services, which are technically free: users don’t pay for Google and Yandex or online maps, they are free of charge. From the point of view of statistics, they are useless, since their price is zero. This is the nature of statistics. But in reality, if we look into the data, we realize that this problem existed before: many things were not accounted for because they were not included in statistics. That’s why I’m not sure this is the reason. But what actually seems to be the reason is that all changes, like computers, which are called technologies of general use, of general purpose and so on, do not change any particular sector, they change everything. And it takes a long time. It was the same when computers appeared, when, for example, electricity was invented, when steam engines appeared long ago, and so on. And we can see how it went back then: there is a lag of 20-30 years, because everything needs to be overhauled. For instance, when electricity was invented after the age of steam engines, all factories and plants had to be reorganized because before that, everything had been different.
It’s the same now: all business processes need changing, because if your warehouse is managed by robots instead of humans, it must be built differently. So, now, while the old ones are still sound, people don’t want to change them. That’s why, in fact, these effects take longer but in the end, they are much bigger. This is always the case when we make massive changes. That’s what we see now happening with these new technologies. All business processes are being adjusted, but this adjustment is not over yet, and it will probably take 10-15 years until the full effects of new technologies (not computers, but artificial intelligence, robots and so on) come into force.
Zabotkin: Ruben, you have mentioned that the economic statistics do not include some of the services we use now because there are no market transactions behind them, there’s no exchange of money for services. Do you consider that an imperfection of the statistics, which needs improving, or will the added value generated by these transactions be captured in other segments of the economy?
Enikolopov: It depends on what we calculate. If we want to estimate people’s well-being, we, of course, should take this into account. What we see here is just like what we had when housework was not included in the statistics and women were considered next to useless in the economy. These services face the same problem. Of course, they are extremely important and people pay for them with their time. Now, people’s attention and time are the most precious goods in the new economy. When Google provides you with free maps, search engines, mail and so on, you pay for it with your data and your time, most of all with your time. That’s a very valuable thing, which is often underestimated.
Zabotkin: You think it’s more about time than data, don’t you?
Enikolopov: Yes, I believe that now, time is much more important. Imagine personal data without time: somebody knows something about me, but they still can’t sell advertising to me, because I don’t use it. It’s true that, knowing my personal data, they can sell it better but since I don’t use it, any number multiplied by zero is zero. So, personal data is no doubt very important, but the most precious thing is time. And, of course, in terms of well-being, it’s extremely important to measure it. It’s probably not that important to the Central Bank because it doesn’t involve any monetary transactions, meaning that it’s not crucial in terms of monetary policy. But if we want to evaluate improvements to well-being, of course we need to measure it one way or another.
Zabotkin: Given the on-going technological advances and those of the last couple of decades, how do you think the economic structure will evolve? How will it affect the distribution of added value between labor and capital and cross-country specialization?
Enikolopov: Changes are already happening. They are vast and happening on all fronts. First of all, these changes are taking place in the labor market: robots and computers are already replacing people doing a certain range of tasks that are routine, can be reduced to algorithms and involve repetitive activities (in fact, the most boring ones). Again, in terms of well-being, it’s a great thing. If you want to predict which task, currently performed by people, is next to be outsourced to robots, find the most repulsive, unpleasant, or revolting, and that will most probably be the one. From this point of view, everything is great, except for one little thing: the people that now perform these tedious tasks lose their jobs and it isn’t always easy for them to switch to new ones. Such transformations, involving the robotization of entire sectors and massive lay-offs of workers that end up relying on the state for jobs, become a serious social problem.
Again, it’s not the first occurrence: in developed countries, miners have already gone through this process, just like the Luddites in the 19th century. This transition is very painful: our life will be better after it, but some people may suffer during the transition, so the issue is how to compensate them for it and how to help them adapt to the new life. And of course, the role the state plays in this matter will change. That is from the point of view of the labor market. In terms of, say, added value distribution in international trade, here, too, everything is changing dramatically: the cheap labor that has been a success factor for the last 20-30 years and that has made China’s success possible is losing its prominence. Cheap labor is being replaced by machines and robots. China’s competitive edge is not its cheap labor any more: firstly, it’s simply no longer cheap; secondly, they have changed the way they work. This might be one of the problems China faces (and a reason for its slower growth). Now, trade in services is on the rise, and it is very difficult to measure. Here we are back to imperfections of statistics! Looking at the value of international trade, one may conclude that globalization is in retreat since trade is falling. However, other estimates – for instance, by the McKinsey Institute – show that if we calculate services and the value of trade in services correctly, we will see that, in fact, there’s no decline. International trade growth has slowed down, but growth is still there, supported by expanding trade in services.
I mean, it’s true that trade in goods is falling, but its decline is compensated by trade in services. For instance, how is an iPhone produced? What is an iPhone? It was invented in the US, that is, its invention and development is a technological or R&D service. Its marketing strategy and the brand itself was also created in the US. Then, this service is actually exported to the country where iPhones are produced (now, it’s Vietnam, and before that it used to be China), after that the product is sold to other countries. There’s no doubt that tangible costs account for less than 50% of an iPhone’s price. The main price components are the costs of marketing and technological services. And this trend is here to stay. Developed countries are likely to specialize in design and everything related to R&D and the marketing of technologies, while assembly and production (customized for a particular market) will be performed locally by people or robots as the case may be. Anyway, the shift towards services over goods is absolutely clear, especially if we calculate services correctly, and especially those which are free.
Zabotkin: This trend manifests itself not only in trade: the share of services in GDP is expanding. And recalling the issues that have made the headlines in the last two years (namely, trade disputes, particularly between the USA and China), transfer of technologies and intellectual property rights play an important role in these disputes. Where is this trend going from your point of view? How big is the risk that we end up in a world with two or three economic blocs developing their own technologies? This, I guess, is not the best-case scenario for global technological development.
Enikolopov: I don’t think that such technological Balkanization is probable, because it’s extremely difficult to realize. Until recently, China’s principal way of acquiring new technologies was to grant privileges in return: you can work here subject to transferring new technologies to us; another method was to steal some technologies. In fact, stopping the theft of technology is next to impossible: again, history shows that, sooner or later, technologies get stolen. This process can be mitigated but not stopped. It is useless to fight the elements. Technologies will be transferred, but the issue is doing it in a civilized way rather than in the way it has been done recently.
Most of all, this concerns US and EU relations with China. Before, the division of labor was very simple: we invent everything, and you produce. Now, China has reached the point where it has become a competitor rather than a contractor. And the competition itself should be reorganized, because China is totally different from other players. But I think that the active phase we are seeing now is temporary. Relations will be built. They will be less nice and cordial since they will be competitive in nature. But we have many cases when in the end, huge major countries learn to make deals, and the most important deals will be the ones [on the transfer of] intellectual property rights and on the way rules of the game are set. I think that China is already becoming quite interested in that, because in some technological sectors it has already caught up with or surpassed developed countries. Americans never dreamed that the face recognition technology China has was possible. And in this case, it’s China who is interested in protecting its intellectual property. Before, they never bothered about it and just ’borrowed’ technologies. Now that they have reached the point of offering something new, protection of intellectual property will be in their best interests.
Zabotkin: What is your opinion of Russia at the present stage of global technological development and its prospects in the next 5-10 years? Should we expect Russia to benefit from the opportunity it now has to catch up technologically, or are there any limits that will undermine our relative advantages in other sectors in a more technologically advanced world?
Enikolopov: I believe that now, Russia has more advantages than potential threats, thanks to its human capital, which is becoming increasingly important. We still have one of the leading markets of educated professionals able to promote those sectors, which are increasing in prominence. One of the reasons we haven’t seen explosive growth in Russia yet is that, like everywhere in the world, it takes time. Another reason is Russia’s structural problems hindering the development not only of technologies, but of the entire country, for example, lack of capital flow between sectors, property rights issues, etc. These problems prevent us from making the leap we could, a leap Russia has enormous potential for.
Zabotkin: Answering one of the previous questions, you mentioned the role of the state. I’d like to dwell on that a bit more. From the economic point of view, the role of the state is limited to three dimensions: provision of public goods, more equitable distribution of added value, and, finally, enforcement of uniform rules of the game and regulation in a broader sense. What is your opinion on each of these dimensions? More specifically, to what extent will technological development increase or decrease the role the state should play in each of them?
Enikolopov: I believe that the role of the state will increase in all three dimensions. Industries alone cannot provide social security to people who lose their jobs and need significant retraining. When entire sectors are robotized, social security becomes the state’s duty in terms of both paying welfare benefits to these people and retraining them because before that, we had entire families that…
Zabotkin: Guilds!
Enikolopov: Exactly, guilds: my dad made horseshoes, I make horseshoes, and my son will make horseshoes. Then it changed: I’ve been trained at the factory…
Zabotkin: From childhood to retirement…
Enikolopov: Right. I completed my education and I go on to work in this field. Now, we are shifting towards a system in which an average person will change their occupation several times in their life. This flexibility (especially when it comes to education) will become crucial. And the state should coordinate this process. Speaking of regulation, the third dimension, it will become extremely important because the key feature of new technologies is significant and increasing returns on scale, particularly in everything related to data. That’s why we have technological giants: the more data you have, the bigger is your competitive advantage. And in the end, it’s very difficult for new players to enter the market. Naturally, this results in monopolization, if nothing is done…
Zabotkin: It is, in fact, a natural monopoly.
Enikolopov: True. And the role of the state here will be enormous. Actually, nobody yet knows how to do it. Because antitrust laws were originally aimed against railways and oil monopolies, not data monopolies. Antitrust agencies lack new approaches, because they don’t yet have a notion that consumer rights can be violated by free-of-charge services. For them, violation means overcharging, which is not the case here.
Zabotkin: But it has been discussed in the last 10 years, judging by the sessions of the European Commission.
Enikolopov: Work is in progress, but there’s no solution yet. The diagnosis has been made but the treatment has not yet been found. But they are actively searching for it, and a part of the treatment is likely to be data standardization. For instance, one solution is to make it impossible for a single company to own all of my personal data and prevent me from transferring it to another company. Say, if I get bored of Facebook, I can retrieve my entire profile and transfer it to a different, new platform with no losses. For this, it is important that there be some standard mechanisms. It’s just like what we had with electricity: there were different approaches to the type of electricity, sockets, and voltage, which resulted in the rise of local monopolies. After the state intervened and helped unify the standards, these monopolies disappeared. All sockets are now the same, and I can take my device and plug it into another socket. This is what’s likely to happen with data, because the traditional approach of “breaking monopolies” is likely to prove too costly a way of fighting natural monopolies, in terms of efficiency. On the other hand, the state will have a bigger part in making the transition gradual, as well as in creating standards and rules that open markets to new players.
Moreover, turning back to public goods, security, I mean national security, is, of course, extremely important and is the state’s duty. Again, we live in a new world [where] we need security of a totally different nature. The dreadful word “cybersecurity” terrifies everyone, and we want to do something about it, but we don’t yet know how, because simple and primitive methods (disconnecting everything, cutting the wires and considering it done) take a grave toll on economic development. In finance, you always have to make a choice between risk and return. It’s exactly the same here: economic growth and national security often collide, and the state needs to strike a balance between them. Given its size, China can afford to cut some services. Thanks to its population of 1.5 billion, its market can create its own services, while most countries, almost all countries, cannot even dream of that, and Russia is no exception. Russia stands no chance of developing such huge services on its own. That’s why it will have to strike a balance between openness and national security. This is a big problem, to which we don’t yet see any solution. And here, the state will also play a very important role.
Zabotkin: Now, last question. Ruben, whom are you going to converse with next time?
Enikolopov: I do hope that I’ll manage to talk with the person that taught me macroeconomics at Harvard – with Kenneth Rogoff who is going to visit Moscow. And I do hope that now that I’ve become wiser, we will be able to have a discussion on a new level and talk about his opinion on economic development.