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Challenges of the 21st century: how the fourth industrial revolution is changing the world

Challenges of the 21st century: how the fourth industrial revolution is changing the world

Text: Professor Anton Kobyakov, Advisor to the President of the Russian Federation, Doctor of Economics, Executive Secretary of the St. Petersburg International Economic Forum Organizing Committee

Technological developments and new production methods are breaking down the existing economic order. Is Russia ready to face the new challenges that await?

Familiar problems

Several major international economic forums have taken place in Russia and around the world recently, including the Gaidar Forum in Moscow, the World Economic Forum in Davos, the Asian Financial Forum in Hong Kong, and the Global Business Forum in India.
We are closely following the agendas of these major international events in the world of economics and finance, and considering the most topical and compelling issues and trends as we put together the programmes for the St. Petersburg International Economic Forum and the Eastern Economic Forum, which take place each year with the involvement of the President of Russia.
The global economy has long been faced with world debt, a problem which is becoming increasingly difficult to solve. The overall levels of debt held by the US and Europe have surpassed the critical figures of 110% and 90% of GDP respectively. In the last five years, China’s external debt has grown by a factor of five to USD 28 trillion, one of the main factors behind several collapses in the country’s major national stock exchanges over the past six months.
In turn, the tightening of US monetary policy in December 2015 and the decision of the Federal Reserve to implement several interest-rate rises in 2016 are leading to an increase in the price of the dollar against all other world currencies, further complicating the problems of servicing debts in emerging economies, especially considering the capital flight from these nations, which appears to have become a permanent feature. This is compounded by the fact that emerging economies are also suffering from slowing growth rates. The main cause of this is the collapse of world prices for their exports, mostly comprising trade in natural resources. Furthermore, as recent events have shown once again, low hydrocarbon prices are by no means a positive factor for development.
The problems faced by the global economy at the present time are mutually reinforcing, and not even the most powerful economies on the planet are capable of solving them in isolation.
World debt, fragile global demand, a slowdown in the Chinese growth rate and low growth rates across Europe pose a genuine threat to the stability of global economic development. Years of quantitative easing in the US and continuing economic stimulus through loose monetary policy in the European Union and Japan have led to a situation where the respective central banks have accumulated a large number of assets on their books, in turn creating a risk of imbalance in the economy of each individual region. This is why, assessing each of these negative factors, many experts are anticipating low global growth rates and a great number of risks in the coming years, while the International Monetary Fund has revised down its forecast for growth in global GDP in 2016 for the third time, from 3.6% to 3.4%.

Industrial revolution

The world is suffering the effects of long-term structural problems, while at the same time being forced to deal with completely new challenges.
The global economy is currently undergoing a period of irreversible transformation: we are now standing on the threshold of the next industrial revolution, which will abolish the usual technological boundaries, reshaping technological and production networks. The new industrial revolution will be characterized by the merging of technologies and the elimination of boundaries between the digital, industrial, and biological fields. More and more, the effects of digitalization will be felt in various spheres of everyday life, manifesting itself in the appearance of smart cities, a reduced role for economic middlemen, and growing competition between digital and traditional platforms in banking and other sectors. We will see the emergence of a completely new kind of industry, based on so-called big data and related analytical tools, fully automated production, augmented reality technologies, the Internet of Things, and many other innovations.
There are already many clear examples showing what the economy of the fourth industrial revolution might look like in practice. For example, the emergence of financial technology platforms such as the Bitcoin cryptocurrency and Blockchain technology, among others, is completely reshaping the world of finance, reducing transaction costs between lenders and borrowers. The business models of financial technology platform start-ups are often so attractive that their estimated market value is higher than the capitalization of traditional investment banking groups. For example, the market capitalization of PayPal, which trades on NASDAQ, is more than USD 44 billion, while the traditional leader of global investment banking, Deutsche Bank, is valued at around USD 21 billion.

Alternative energy

An inevitable consequence of the fourth industrial revolution will be the rapid development of alternative energy sources. The years of high oil prices marked a time of profitable investment in green energy, and in new technologies for storing and distributing energy. As a result, alternative energy has seen a huge boost to its development and is now slotting neatly into the new landscape.
Looked at from another perspective, the development of alternative energy is taking place against the background of a full-scale global crisis for oil-producing companies. As a result of the sharp fall in oil prices, oil and gas companies have been forced to cut staff and reduce spending on the development of new fields. This, in turn, is often leading to structural changes to the economies of a range of countries, with Saudi Arabia, for example, discussing the part privatization of oil giant Saudi Aramco.
The fourth industrial revolution is opening up huge growth prospects for the world economy, while at the same time throwing up completely unprecedented challenges. Technological developments and new production methods are breaking down the existing economic order, with companies forced to adjust to changing consumer demands. However, a paradox is also emerging, where the economy is able to grow while unemployment also increases, the result of new intelligent systems replacing the workforce. Analysts forecast that automated production in Germany alone could lead to a reduction of 610,000 jobs in the medium term. An economy based on these new realities will rely more and more on highly qualified specialists creating new technologies, and fewer and fewer low-skilled workers. This trend is set to increase over time, its influence going beyond particular sectors in a given country to reach entire macroregions.

Competition will be tough and global

Among the consequences of ‘Industry 4.0’ and structural problems in the world economy will be an escalation in competition at the geo-economic level. This implicitly confirms the theory that, in the modern world, “where business leads, politics follows”.
Global competition will drive the creation of new, diverse integration and infrastructure projects, with each one marked by great ambition and scale. Examples include the Trans-Pacific Partnership; One Belt, One Road; and the proposed Transatlantic Trade and Investment Partnership. If China is successful in its plan to create a new Silk Road Economic Belt, the countries participating in the project alongside China will be able to take advantage of additional economic opportunities in terms of attracting financing for their infrastructure projects, which will have a positive impact on their balance of payments. The question here concerns whether these projects will be able to integrate with each other successfully, and the extent to which they will interact with the EAEU.
Geopolitical pressure points, both old and new, will lead to increased migration, already visible in the European Union. This will, in turn, impose additional responsibilities on the European economy, which is already in a difficult position. Furthermore, the aftermath of this unprecedented wave of migration may be taking on very negative connotations, as evidenced, for example, in the statements of the Austrian leadership, which described the country as facing its deepest crisis since the end of the Second World War. Britain’s proposed referendum on leaving the EU, discussions on suspending the Schengen Agreement, and the return of border controls in some countries are just some of the many consequences of the migrant crisis currently gripping Europe.
Emerging economies must make tremendous efforts to ensure that they are not left on the sidelines of a dynamic new world, and must integrate into global value chains. Countries with economies heavily focused on natural resources must make steps towards transitioning to knowledge-based and innovation economies, otherwise it is highly likely that there will be a regression towards fundamentalism, a problem which will become a worldwide sticking point for a new global economic system that is still in its infancy.

Seeking Russia’s place

In these difficult conditions, which are having an undeniable impact every country in the world, Russia finds itself forced to deal with the additional burden of economic sanctions imposed by a range of countries. In spite of all the complications affecting the Russian economy, it is clear that Russia has everything it needs to take its rightful place in the new global configuration: a well-developed human capital, abundant natural resources, an enviable geographic location, transit potential, and much more besides. We are confident that these assets will, in the long term, allow Russia to become a key driver of global economic growth.
The country’s economy is gradually transforming and beginning to adapt to the new global realities. Russia is increasing its non-oil and gas exports and the range of services is offers. This is evident in a growing portfolio of international projects led by Russian companies such as Rosatom, Inter RAO, and others. New companies are appearing all the time, with estimated market values growing rapidly thanks to attractive business models – examples include Ulmart and QIWI, among many others. Further to this, Russia still has the opportunity to acquire shares in many tech companies thanks to funds held in US Treasury bonds.
Russia is also making efforts to develop partnerships in a number of areas. The country is seeking to establish a multifaceted system of cooperative relationships, working alongside Asian nations, as well as European, Latin American, and North American partners. In view of this, business leaders and officials from various countries are raising with increasing frequency the question of lifting the sanctions against Russia, even making preparations for their removal, knowing that this promises great gains for both sides.
The global challenges are becoming ever clearer, and the search for solutions requires the joint efforts of the international community. Many of these questions will be raised and discussed further at the St. Petersburg International Economic Forum. The time has come for new objectives and challenges to be met with entirely new, forward-thinking solutions.

Source: http://www.rbc.ru/ (Russian)

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