Rodrik: Innovation Is Not Enough

Innovation is widely touted as a primary ingredient to growth for an organization and for an economy as a whole. The pace of technological breakthroughs and innovation seems to be advancing at breakneck speeds, but the economy in the US and abroad remains mired in weak growth. Techno-optimists believe we are in for a rapid acceleration in standards of living while techno-pessimists look at the sluggish productivity statistics and claim that the economy-wide benefits of today’s emerging technologies are limited.

Economist Dani Rodrik suggests a third group exists: the techno-worriers. Techno-worriers agree with the optimists about the scale and scope of innovation but are worried about the adverse implications for employment and equity. Rodrik begins with the premise that the benefits of any innovation on productivity, employment, and equity depend on how quickly it spreads through the economy via jobs and the marketplace. What differentiates the optimists, pessimists and worriers from each other is whether or not today’s innovation will remain bottled up in a few tech-intensive sectors that employ few people and are a small share of total GDP.

In his Project Syndicate article Innovation is Not Enough, Rodrik identifies the challenges of spreading the benefits of innovation to the bulk of the economy in both advanced and developing economies.

  • In rich countries, technological innovation has not had much impact so far in many of the sectors where consumers spend the bulk of their income (services such as health, education, transportation, housing, and retail goods). Since 2005, the two sectors with the highest productivity growth in the US – information and communication technology (ICT) and media – make up less than 10 percent of GDP while government services and health care make up a quarter of GDP but have had no productivity growth at all. Techno-optimists see this as an opportunity for the lagging sectors to catch up while techno-pessimists think that these gaps are here to stay under the belief that the digital revolution may not reach as far as past breakthroughs like electricity, indoor plumbing and the automobile.
  • On the supply-side, the challenge is on the “skill-bias” of jobs in innovative sectors, widening the gap between the earnings of low- and high-skill workers. For innovating sectors to expand rapidly and continuously, there must be access to the capital and skills it needs. When those skills are “high-skills”, the adoption and diffusion of the new technologies widen the wage gap.
  • In developing countries, the labor force is predominantly low skilled. If robots and automation take the place of workers in manufacturing – where labor-intensive assembly operations served as a rapid escalator to higher income levels – developing countries lose their comparative advantage and suffer from “premature deindustrialization”. A result is workers shifting out of these higher productivity sectors and into less productive parts of the economy. There is actually evidence that the phenomenon of labor shifting from higher to lower productivity sectors is happening in the U.S. as well. The slowdown in overall productivity then becomes more clear.

Innovation must be able to spread to large parts of the economy where more workers become more productive. We have been witnessing some workers and firms becoming more productive while the rest are moving to less productive parts of the economy. The result is a slowdown in growth and an increase in inequality. Innovation by itself is indeed not enough.

 

 

 

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