Category: Money

The International Monetary Fund (IMF) has listed some of the extraordinary ways Generative Artificial Intelligence could benefit our societies, including helping people to live healthier lives and accelerating scientific breakthroughs.

In a report entitled:  “Crisis Amplifier? How to Prevent AI from Worsening the Next Economic Downturn” IMF First Deputy Managing Director, Gita Gopinath said many experts also believe the technology could provide significant economic benefits, for example by providing a serious boost to productivity.

 This could help lift the global economy at a time when the growth outlook for the medium term is the weakest in decades.

This said, she added that many also agree that AI’s promise comes with considerable uncertainty and significant risks. To date, most warnings have focused on security, privacy, misinformation, and ethical concerns.

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“Taking an economic perspective, I would like to highlight a different sort of AI-related risk, one that has received much less attention. That is the risk that AI could exacerbate economic crises. The world economy will see another downturn—that much is certain. Today I will describe how the widespread use of AI could turn an ordinary downturn into a deep and prolonged economic crisis by causing large-scale disruptions in labor markets, in financial markets, and in supply chains.

I will also discuss what policy actions—taken now—can help mitigate some of these downside risks,” she said.

Gopinath described how AI could worsen the next downturn, starting with labor markets. The experience with previous waves of automation offers a warning here.

“ During good times, firms are often flush with profits. They can afford to invest in automation and hold on to workers, even if the value-added of those workers declines. However, in a downturn, these firms simply let go of workers to cut costs. Therefore, the extent to which automation could replace humans only becomes fully visible during or immediately after a downturn,” she said.

Also,  research showed that since the mid-1980s nearly 90 per cent of automation related job losses in the U.S. have occurred in the first year of recessions.

“Take the aftermath of the Global Financial Crisis. Rather than rehiring workers after the slump, many firms automated their operations—leading to the most severe “jobless recovery” ever seen in the US and Western Europe, driven almost entirely by the loss of routine jobs. This led to many disillusioned former workers leaving the labor market altogether,” she said.

 “In the next downturn, AI is likely to threaten a wider range of jobs than in past cycles, including higher-skilled cognitive jobs. About 30 per of jobs in advanced economies are at risk of being replaced by AI. That figure is 20 per cent for emerging markets and 18 per cent for low-income countries.

In other words, the pool of potentially replaceable workers in future downturns will be bigger than anything we’ve seen before. The result could be unprecedented job losses.

That could also lead to unprecedented numbers of long-term unemployed, because many of the displaced workers will lack the requisite skills in an economy where AI is increasingly prevalent.

Such a sharp spike in unemployment would be a major shock to the financial system, as record numbers of unemployed workers could struggle to repay their debts. However, in this new AI-adapted reality, that would be only part of the disruption to the financial system.

“The financial services industry has relied heavily on algorithmic trading since before the recent AI boom. The industry is now rapidly replacing older models with vastly more complex ones that can learn on their own. The inner workings of such models can be difficult even for experts to understand. AI is also growing briskly in client-facing investment businesses, as assets managed by automated robo-advisers, for example, are projected to grow to $2.3 trillion in 2028,” he said.

 “Generative AI could also make a downturn much worse through its impact on global supply chains. The user-friendly features of newer AI models could encourage widespread adoption by companies who would then come to rely on AI predictions for their production decisions. Here again, as in financial markets, in normal times this could bestow numerous benefits, including helping to raise productivity. But in a future downturn, AI algorithms trained on stale information could trigger a series of forecasting errors, creating more rapid swings in production and inventories. This could cause crippling delays and shortages of critical supplies across the global economy,” she said.