Digital Economy: The Fourth Industrial Revolution

The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production.

Now, the Fourth Industrial Revolution is a way of describing the blurring of boundaries between the physical, digital, and biological worlds. It’s a fusion of advances in artificial intelligence (AI), robotics, the Internet of Things (IoT), 3D printing, nanotechnology, energy storage, materials science, autonomous vehicles, genetic engineering, quantum computing, and other technologies. It’s the collective force behind many products and services that are fast becoming indispensable to modern life. Think GPS systems that suggest the fastest route to a destination, voice-activated virtual assistants such as Apple’s Siri, personalized Netflix recommendations, and Facebook’s ability to recognize your face and tag you in a friend’s photo.

When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. The Fourth Industrial Revolution is rapidly driving transformational disruption across every sector. By 2022, over 60% of global GDP will be digitized. An estimated 70% of new value created in the economy over the next decade will be based on digitally enabled platforms.

Challenges and Opportunities

Like the revolutions that preceded it, the Fourth Industrial Revolution has has moved the economy from ‘low volume, high transaction cost’ to ‘high volume, low transaction cost’. Ordering a cab, booking a flight, buying a product, making a payment, listening to music, watching a film, or playing a game—any of these can now be done remotely.

It has potential to raise global income levels and improve the quality of life for populations around the world. In the future, technological innovation will also lead to a supply-side miracle, with long-term gains in efficiency and productivity. Transportation and communication costs will drop, logistics and global supply chains will become more effective, and the cost of trade will diminish, all of which will open new markets and drive economic growth.

At the same time, as the economists Erik Brynjolfsson and Andrew McAfee have pointed out, the revolution could yield greater inequality, particularly in its potential to disrupt labor markets. As automation substitutes for labor across the entire economy, the net displacement of workers by machines might exacerbate the gap between returns to capital and returns to labor. On the other hand, it is also possible that the displacement of workers by technology will, in aggregate, result in a net increase in safe and rewarding jobs.

However, in the future, talent will represent the critical factor of production, more than capital. This will give rise to a job market increasingly segregated into “low-skill/low-pay” and “high-skill/high-pay” segments, which in turn will lead to an increase in social tensions. Technology is therefore one of the main reasons why incomes have stagnated, or even decreased, for a majority of the population in high-income countries: the demand for highly skilled workers has increased while the demand for workers with less education and lower skills has decreased.

The impact on business

On the supply side, many industries are seeing the introduction of new technologies that create entirely new ways of serving existing needs and significantly disrupt existing industry value chains.

Major shifts on the demand side are also occurring, as growing transparency, consumer engagement, and new patterns of consumer behavior (increasingly built upon access to mobile networks and data) force companies to adapt the way they design, market, and deliver products and services.

Whether consumers or businesses, customers are increasingly at the epicenter of the economy, which is all about improving how customers are served. Physical products and services, moreover, can now be enhanced with digital capabilities that increase their value. New technologies make assets more durable and resilient, while data and analytics are transforming how they are maintained.

Industry structures and business models are being disrupted by innovation in new products and services, changing cost structures, lower barriers to entry and shifting value pools. Companies need to re-imagine how to create, distribute and capture value in this new environment. Navigation requires holistic and sustained insight & intelligence. Overall, the unstoppable shift from simple digitization (the Third Industrial Revolution) to innovation based on combinations of technologies (the Fourth Industrial Revolution) is forcing companies to reexamine the way they do business.

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The impact on government

Technology is not deterministic. It creates both opportunities and challenges. It is up to governments, in close dialogue with other stakeholders, to shape the digital economy by defining the rules of the game. This in turn requires a reasonable sense of the kind of digital future that is desirable.

Policymakers need to make choices that can help reverse current trends towards widening inequalities and power imbalances wrought by the digital economy. There will be huge challenge that will involve the adaptation of existing policies, laws and regulations, and/or the adoption of new ones in many areas. For most countries, the digital economy and its long-term repercussions remain unchartered territory, and policies and regulations have not kept up with the rapid digital transformations taking place in economies and societies. Even in developed countries, few approaches have been tried and tested.

The evolution of the digital economy calls for unconventional economic thinking and policy analysis. Policy responses need to take into account the blurring of the boundaries between sectors due to the increased difficulties of enforcing national laws and regulations with respect to cross-border trade in digital services and products. They should also explore new pathways for local value creation and capture, and further structural transformation through digitalization.

While some issues can be addressed through national policies and strategies, the global nature of the digital economy will require more dialogue, consensus-building and policy-making at the international level.

The Fourth Industrial Revolution will also profoundly impact the nature of national and international security, affecting both the probability and the nature of conflict. The history of warfare and international security is the history of technological innovation, and today is no exception. Modern conflicts involving states are increasingly “hybrid” in nature, combining traditional battlefield techniques with elements previously associated with non-state actors.

As this process takes place and new technologies such as autonomous or biological weapons become easier to use, individuals and small groups will increasingly join states in being capable of causing mass harm. This new vulnerability will lead to new fears. But at the same time, advances in technology will create the potential to reduce the scale or impact of violence, through the development of new modes of protection, for example, or greater precision in targeting.

The impact on people

The Fourth Industrial Revolution, finally, will change not only what we do but also who we are. It will affect our identity and all the issues associated with it, our sense of privacy, our notions of ownership, our consumption patterns, the time we devote to work and leisure, and how we develop our careers, cultivate our skills, meet people, and nurture relationships.

It is already changing our health and leading to a “quantified” self, and sooner than we think it may lead to human augmentation. The list is endless because it is bound only by our imagination.

One of the greatest individual challenges posed by new information technologies is privacy. We instinctively understand why it is so essential, yet the tracking and sharing of information about us is a crucial part of the new connectivity. Debates about fundamental issues such as the impact on our inner lives of the loss of control over our data will only intensify in the years ahead. Similarly, the revolutions occurring in biotechnology and AI, which are redefining what it means to be human by pushing back the current thresholds of life span, health, cognition, and capabilities, will compel us to redefine our moral and ethical boundaries.

Shaping the future

Neither technology nor the disruption that comes with it is an exogenous force over which humans have no control.

All of us are responsible for guiding its evolution, in the decisions we make on a daily basis as citizens, consumers, and investors. We should thus grasp the opportunity and power we have to shape the Fourth Industrial Revolution and direct it toward a future that reflects our common objectives and values.

In the end, it all comes down to people and values. The Fourth Industrial Revolution may indeed have the potential to “robotize” humanity and thus to deprive us of our heart and soul. But as a complement to the best parts of human nature—creativity, empathy, stewardship—it can also lift humanity into a new collective and moral consciousness based on a shared sense of destiny. It is incumbent on us all to make sure the latter prevails.