The Fourth Industrial Revolution: Economic Impact and Possible Disruptions

Author: Emmanuel Obijole, (emmanuel.obijole@gmail.com) 

Department of Economics, University of Ibadan, Ibadan, Nigeria

This is an essay of the writing workshop Nigeria’s Readiness for and the Effect of the Fourth Industrial Revolution, published July 2020

INTRODUCTION

Industrial revolutions often heralded disruptions in the operations of markets and economies. These disruptions are deviations from the status quo and are not always negative. From the first industrial revolution to the third, the productivity of the workforce in affected economies experienced a rapid boost. The fourth industrial revolution (4IR) is not expected to be any different. It is also argued that industrial revolutions result in technological unemployment and increased income inequality.

Whether these disruptions are overly beneficial to an economy or not hinges on the structure of the economy, as well as the roles policymakers play in managing the fallouts of the 4IR disruptions. Assessing Nigeria’s readiness for 4IR, this paper gives an overview of the fourth industrial revolution, presents the possible present and future disruptions in the Nigerian trade and transportation industry, labour market, and recommends realistic policies to manage possible scenarios which these disruptions could birth.

THE FOURTH INDUSTRIAL REVOLUTION AND POSSIBLE DISRUPTIONS

Episodes of technological revolutions have produced transformations transcending spheres of human existence. The first industrial revolution mechanised production using water and steam power. In the second, the discovery of electrical energy further boosted productivity. The third featured automation of the production process using electronics and information technology; and the fourth has been driven by technological breakthroughs in physical, digital, and biological spheres. Some drivers of 4IR include artificial intelligence, robotics, the Internet of Things (IoT), 3D printing, digital platforms, and blockchain technologies (Schwab 2016).

Nigeria, like every other nation, faces the realities of 4IR. With a population of over 200 million people, Nigeria is challenged with a slowdown in economic growth and high unemployment. GDP growth has been below 2% since the 2016 economic recession. The relative contribution of sectors to Nigeria’s economic performance has also changed over the years. While there has been growing investment in tech start-ups and telecommunications, agriculture and manufacturing have been growing below potential. In 2018, services accounted for 37% of GDP, agriculture 25%, trade 16%, manufacturing and construction 13%, and crude oil and solid minerals 9%. (NBS 2018a). Despite the expansion in some sectors, employment creation has lagged behind the fast-growing labour force. In 2018, the unemployment rate was about 23.1% while 20.2% of the labour force was underemployed. (NBS 2018b).

The level of utilization of 4IR technologies is not currently widespread in Nigeria. But there could be potential applications to various sectors of the economy, causing disruptions in industries across the country. (Lou et al. 2019). IoT and drone technologies are expected to be central to the future of agriculture. 3D printing is transforming manufacturing. Automation of jobs due to artificial intelligence and robotics will also cause tectonic transformations in the Nigerian labour market. Blockchains are increasingly finding applications in the financial markets and even international trade. Digital platforms are also transforming both trade and transportation industries as well as other markets.

While the technological revolution is poised to affect markets and segments of the Nigerian economy, it might not radically distort market mechanisms. Market mechanisms refer to the forces of demand and supply, the “invisible hands” regulating a free market economy. Contrary to the misconception that capitalism (accompanying the first industrial revolution) ushered market mechanisms, markets and market mechanisms existed long before (3rd century BC), did not arise with the first industrial revolution, and will not disappear in the evolving “post-industrial” economy (Lipsey 1994, 331). The impact of the fourth industrial revolution does not change the coordinating function of market mechanisms. However, like any other shock, technological changes introduce uncertainties and externalities, necessitating government intervention to correct these market excesses.

TRADE, TRANSPORTATION INDUSTRY AND THE TECHNOLOGICAL REVOLUTION

Over the years, industrial revolutions have bolstered trade. The comparative advantage from specialisation and mechanisation has promoted global growth, engendering international trade. Global supply chains have also increased with the rise of the internet. The current episode of technological change will impact trade via blockchains, digital platforms, IoT among several other drivers of these transformations. International trade has been faster using blockchains since it provides enough flexibility in making payments than the traditional letter of credit. These technologies could reduce shipping and customs processing times by 16-28%, boosting global trade by 6-11%. (Lund et al. 2019).

In Nigeria, the trade sector accounted for about 14% of her GDP in 2018 (NBS 2018a). This trend is expected to increase with greater application of these technologies. Digital platforms like Jumia, Konga, Alibaba, Amazon, and freelancing sites like Upwork and Fiverr are becoming more popular since they lower transaction costs involved in the search process, and connect buyers and sellers directly. Lund et al. (2019) estimate that with increased automation, trade in goods may reduce while trade in services is expected to increase in the future. Since the services sector is outperforming the manufacturing sector, this growth in trade of services is expected to contribute largely to Nigeria’s economic growth.

On transportation, 4IR is revolutionising the industry with the application of artificial intelligence in producing self-driving and smart cars. On-demand ride platforms have also automated and made regular transportation services more convenient. Nigeria’s transportation industry has been a very important sub-sector in the services sector, contributing about 4% of the sector’s output in 2018 (NBS 2018a). Digital platforms like Taxify, Uber, and Bolt are thriving in the transportation sector. With Nigeria’s growing population, increased industrialisation and commercialisation (due to 4IR), the demand for transport is expected to be on the increase. As firms become more competitive and enjoy economies of scale in the industry, transport costs will also be driven down. The revolution in the transportation and trade industry is also creating job opportunities for delivery agents, and freelancers via these digital platforms. A closer look at the labour market disruptions is undertaken in the next section.

LABOUR MARKET DISRUPTIONS

Along with Nigeria’s ever-increasing population, her labour force increased by 6.35% between Q3 2017 and Q3 2018. Meanwhile, employment marginally increased by 0.39%, and the unemployment rate also increased from 18.8% to 23.1% over the same period. (NBS 2018b). While this does not automatically translate to more job losses, it reflects that job creation has been slower than the expansion in the labour force. 53%, 35% and 12% of total employment in 2019 were employed in services, agriculture, and industry respectively. (World Bank 2020). There is a need to add and not reduce jobs, and the fourth industrial revolution could exacerbate this inherent challenge.

4IR is expected to change the future of work in the country, but a pertinent question to be answered is “Are workers going to be better off, or worse-off”? In the previous industrial revolutions, the introduction of machines and new technologies created new jobs demanding new skill-sets. However, lower-skilled employees were often affected: either losing their jobs or having to take wage cuts. The impact of 4IR in the Nigerian labour market depends on whether these technologies complement or substitute labour, and this varies from sector to sector.

Modern economic growth theories support that technological advancement often enhances growth in aggregate output. An important indicator of the likely changes in the labour market is how the growth in output translates to jobs (employment elasticity). PwC (2018) estimated the employment elasticity of the agricultural, manufacturing, and services sectors to be -0.1%, 0.3%, and 0.5% respectively. With businesses becoming more intense in their use of digital technologies, it is projected that there will be job growth especially in information and communication technology (ICT). Thus, a 1% increase in services output will on average increase employment in that sector by 0.5%. Though its employment elasticity is less than proportionate, its impact could be large since services contribute most to employment in Nigeria.

On the flip-side, WEF (2017) reports that about 46% of work activities in Nigeria are susceptible to automation. It is also estimated that about 6% of employers are wary of an inadequately skilled workforce, and this percentage is expected to increase in the future with changing the core skills required across jobs. Nigeria is ranked as having an average capacity to adapt to these disruptions and also averagely exposed to these future trends (compared to advanced economies). However, this will most likely change as these technologies increasingly find applications. This necessitates the role of the government in addressing the possible disruptions to the labour market.

POLICY RESPONSE TO RESOLVE LABOUR MARKET DISRUPTIONS

The burden to take advantage of the fourth industrial revolution is greater on overpopulated developing economies like Nigeria. 4IR ought to be harnessed to confront the nation’s development challenges. However, Nigeria had not developed a national strategy specifically addressing 4IR technologies. (Lou et al. 2019). The effects of the labour market disruptions are illustrated in two scenarios, with policy recommendations to address them. The first case is a situation with not-so-high unemployment but a labour market segregated into low-skill/low-pay and high-skill/high-pay jobs (slight case); and the second is a scenario where unemployment worsens as jobs losses significantly outstrips the new jobs created (extreme case).

To address the skills gap in the slight case, efforts should be made to prioritise education and to have a workforce skilled enough to be complimented and not substituted by 4IR technologies. To further enhance growth potentials, policies should be directed at promoting innovations, creating an enabling environment for businesses to leverage on the opportunities of 4IR, supporting research and development, adopting tax systems and regulations to ensure a smooth industry transformation. Schwab (2016) advocated this in what he termed “agile” governance, i.e. policymakers must be able to adapt regulations to the fast-changing environment, and collaborate closely with business and civil societies to harness the gains from 4IR.

Passive policy responses could put the labour market in the extreme case. As more workers lose their jobs or become underemployed, the returns on labour further lag behind that of capital. And as a result, unemployment and income inequality worsen. To address this in the short-run, social safety nets must be provided to those adversely affected. Over the long-run, policymakers must design frameworks to increase occupational mobility of labour as this will enable workers to easily transit to where their skills are required. Policymakers must ensure that the skills gap is closed and labour can work successfully with 4IR technologies.

CONCLUSION

The fourth industrial revolution will inevitably affect industries across economies. Given Nigeria’s developing services sector, 4IR could greatly engender economic growth in the future. Trade, transportation, and other market segments could benefit, and new rewarding jobs could also be created. There are however possible challenges of workers being displaced due to automation and widened income inequality. Nigeria must realistically anticipate, be positioned to harness the opportunities embedded in 4IR and adopt policies to cushion the negative effects of these technologies, towards maximising the net gains from the fourth industrial revolution. In the words of William Arthur Ward, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

REFERENCES

Lipsey, Richard. 1994. “Markets, Technological Change and Economic Growth.” The Pakistan Development Review, 33(4): 327-356

Lou, Karine, Stephan Kreutzer, Francie Sadeski, Matthieu Lecave, and Fiona Merki. 2019. “Country Case Study: Nigeria.” Unlocking the Potential of the Fourth Industrial Revolution in Africa. Côte d’Ivoire: African Development Bank Group. Study Report.

Lund, Susan and Jacques Bughin. 2019. “Next-Generation Technologies and the Future of Trade.” VOX CEPR Policy Portal. Accessed June 6, 2020. https://voxeu.org/article/next-generation-technologies-and-future-trade

National Bureau of Statistics (NBS). 2018. “2018 Statistical Bulletin – Real Sector.”

National Bureau of Statistics (NBS). 2018. “Labour Force Statistics – Volume 1: Unemployment and Underemployment Report.”

PricewaterhouseCoopers Limited (PwC). 2018. Structural Transformation and Jobless Growth in Nigeria. Accessed June 5, 2020. https://www.pwc.com/ng/en/publications/stuctural-transformation-and-jobless-growth-in-nigeria.html

Schwab, Klaus. 2016. The Fourth Industrial Revolution: What It Means, How to Respond. Switzerland: World Economic Forum

World Bank. 2020. “World Development Indicators.” Last Updated April 9, 2020. Accessed May 17, 2020. https://databank.worldbank.org

World Economic Forum (WEF). 2017. The Future of Jobs and Skills in Africa: Preparing the Region for the Fourth Industrial Revolution. Switzerland: World Economic Forum.

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