INR 2.5 lakh crore (INR 2.5 trillion) from asset monetization target in India

As announced by the finance minister in the FY2022 budget speech, the Indian government is aiming to monetize 100 government-owned assets across sectors to mobilize about INR 2.5 trillion, which will be crucial to meet the overall revenue target. This is part of a National Asset Monetization pipeline. Excerpts from a news report in The Times of India. 

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Reiterating his strong backing for privatisation and asset monetisation, the PM said the reforms, which have been launched, were aimed at ensuring that public money is spent judiciously to benefit the poor, in what was seen as a response to critics of the new policy unveiled in the Budget.

“The money that belongs to the poor is used for such enterprises (PSUs). This puts a huge burden on the economy,” Modi told a webinar to draw up the roadmap for the implementation of Budget proposals on privatisation and asset monetisation.

He said the government does not have to keep running public sector enterprises just because they have been running for decades or they were “pet projects of somebody”.

[…]Since coming to power in 2014, the NDA government has talked about the sale of PSUs, especially loss-making ones, such as Air India, but it has a poor track record. It sought to pass off the sale of state-run entities, such as HPCL to ONGC, another PSU, as strategic sale, drawing criticism even from the CAG.

It is now trying to push it as a key reform initiative and has even added state-run banks and a general insurance company to the list, after specifying that only four strategic sectors — atomic energy, space and defence, transport and telecom, power and petroleum — will have PSUs. Even in the sectors, state-run firms can have a diminished presence.

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The finance minister committed, in her budget speech, that the government will bring down fiscal deficit to 4.5% of GDP by FY2026, largely by increasing buoyancy of tax revenue through improved compliance, and increased receipts from assets monetization (including public sector enterprises and land).

In FY2022 alone, divestment receipts (which are a part of capital receipts) of INR 1.8 trillion is planned. Divestment targets have been missed in the past. For instance, the government could not meet the divestment target in FY2020 (INR 0.5 trillion vs INR 1.05 trillion targeted) and FY2021 (INR 0.32 trillion vs INR 2.1 trillion targeted). Note that for FY2022, planned divestment receipts account for 5% of total revenue receipts and 10.3% of capital receipts.

Key highlights of Nepal's 15th five-year plan (FY2020-FY2024)

National Planning Commission recently published the 15th five-year plan (FY2020-FY2024) taking also into account the effect of COVID-19 pandemic on the government’s priorities and the economy. This plan is considered as a first phase of a 25-year long-term economic vision that aims to position Nepal as a high-income country with per capita income of USD 12,100 by FY2044.  Its theme is 'generating prosperity and happiness' and aims to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth. 

The government is expecting Nepal to graduate from LDC category to a developing country status within this plan (by 2022 with per capita income of USD 1,400). This plan is expected to contribute to efforts to ensure that Nepal reaches a middle-income country status by FY2030 (with per capita income of USD 2,900) and achieve the SDGs as well. By the end of FY2024, per capita income is estimated to reach USD 1,595.

The plan emphasizes boosting investment in the sectors or thematic issues that are considered as drivers of economic transformation. These include transport, ICT, energy, education and healthcare, tourism, commercialization of agriculture and forest products, urbanization, social protection, subnational economy, and good governance, among others.

 By FY2024, the government wants to achieve a double-digit growth rate, increase per capita income of USD 1,595, reduce population under absolute poverty line to 9.5%, and increase share of formal sector employment to 50%. 

Some of the major national targets for 15th five-year plan (FY2020-FY2024) are as follows:

• Average GDP growth (at basic prices): 9.6%
• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15.7%
• Share of essential goods (agri, livestock, food items) in total imports: 5%
• Population under the absolute poverty line: 9.5%
• Population with multidimensional poverty: 11.5%
• Share of formal sector employment: 50%
• Unregistered (formal) establishment: 10% of total establishment
• Literacy rate (15+ years): 95%
• Road density: 0.74 km of road per sq km of land
• Households with access to electricity: 95%
• Population with access to internet: 80%
• Electricity generation (installed capacity): 5,820 MW
• Renewable energy: 12% of total energy consumption
• Per capita electricity consumption: 700 kwh
• Agricultural productivity (major crops): 4 MT per hectare
• Irrigable land with year-round access to irrigation: 50%
• Per capita tourist spending: USD 100 per day
• Human development index: 0.624
• Gender development index: 0.963
• Population covered by basic social security: 60%
• Social security expenditure: 13.7% of budget
• Global competitiveness index: 60
• Ease of doing business index: 68
• Travel and tourism competitiveness index: 3.8
• Corruption perception index: 98
• Nepali citizens with national ID card: 100%
• Population affected by disaster incidents: 9.8%

The NPC estimated average growth in agriculture, industry, and services sectors to be 5.4%, 14.6%, and 9.9%, respectively. By the end of the 15th plan, the government is targeting to increase the share of industry and services sectors to 18.8% and 58.9%, respectively, while the share of agriculture sector is to decrease to 22.3%. To achieve the stated average growth rate, the NPC estimated that NRs 9.229 trillion (at FY2019 constant prices and based on ICOR of 4.9:1; FYI, a lower ICOR indicates efficient production process) investment will be required over the plan period. Public, private and cooperative sectors are expected to contribute 39%, 55.6%, and 5.4%, respectively of this required investment.  

[The government is considering FY2019 as a base year for the long-term economic vision. So, the data is presented in FY2019 constant prices. However, this is not much helpful in doing comparative analysis including that of long-term plans and targets. National account estimates, public finance, and periodic surveys - based on which the numbers are estimated eventually- are either presented with different year as base year (FY2011 for NEA for now) or are in current prices (fiscal, monetary, external sectors, and household surveys.]

As a share of GDP by FY2024, the expected impact on macroeconomic indicators are as follows:

National accounts (focused on increasing investment through savings mobilization)

• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15%
• Gross domestic savings: 22%
• Gross national savings: 47.5%
• Gross fixed capital formation: 41.6%

Fiscal sector (focused on allocation and implementation efficiency, and fiscal discipline for expenditure management; maximize revenue mobilization and taxpayer-friendly tax administration)

• Total budget: 43.3%
• Recurrent expenditure: 17.9%
• Capital expenditure: 18.6%
• Financial management: 6.8%
• Revenue: 30%
• Income tax: 10%
• Foreign debt: 5.7%
• Domestic borrowing: 4.3%

Monetary and external sector (focused on controlling inflation, balance of payments stability, and financial stability)

• Average annual Inflation: 6%
• Export of goods and services: 15%
• Import of goods and services: 49%
• Remittances: 22.1%
• Foreign investment: 3%

Meanwhile, the average financing gap to achieve the SDGs is estimated to be NRs 585 billion per year for the entire period of 2016 to 2030 (SDG period). It is on average 8.8% of GDP for 2016-19, 12.3% of GDP for 2020-22, 13% of GDP for 2023-25, and 16.4% of GDP for 2026-30. The overall annual financing gap is estimated at 12.8% of GDP throughout the period of 2016 to 2030.

Key highlights of Nepal's long-term economic vision (FY2020-FY2044)

According to a press note by National Planning Commission, the government is aiming to graduate Nepal from LDC category (to a developing country status) by FY2022 with per capita income of USD 1,400 and a middle-income country by FY2030 (according to WB classification, Nepal is now in the lower middle-income country category). In FY2019, which is considered as base year for the long-term vision, per capita income was USD 1,047. 

Furthermore, by FY2044, the national goal is to achieve a high-income country category with per capital income of USD 12,100. To be fair, these are actually adapted from long-term development vision published by the government in 2018. They are also in the recently published the 15th Five Year Plan (FY2020-FY2024). 

Three phases of long-term economic development vision (Prosperous Nepal, Happy Nepali) are:

• Generating prosperity and happiness (15th five-year plan, FY2020-FY2024), which aim to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth.
• Accelerating prosperity and happiness, and achieving SDGs (16th and 17th five-year plan), which aim to rapidly achieve the indicators of prosperity and happiness. By the end of 17th five-year plan (FY2034) Nepal will have graduated to a middle-income country with a goal to high-income status.
• Sustaining prosperity and happiness (18th and 19th five-year plan), which aim to achieve sustainability by maintaining balance between prosperity and happiness. Social justice and double-digit economic growth on average are to be achieved during this period. By the end of this phase (FY2044), the economy will be self-reliant, independent, and prosperous. 

It outlines 10 national goals and 76 indicators for long-term economic development vision. It also identifies 8 strategic national strategies, 9 drivers of economic transformation, and 8 enablers. 

The ten long-term national goals are:

1. Accessible and modern infrastructure and connectivity
2. Development and full utilization of human capital potential
3. High and sustainable production and productivity
4. High and equitable national income
5. Well-being and decent standard of living
6. Safe, civilized and just society
7. Healthy and balanced ecology
8. Good governance
9. Comprehensive democracy
10. National unity, security and dignity

The eight long-term national strategies are:

1. Achieve rapid, sustainable and employment-oriented economic growth
2. Ensure affordable and quality health care and education
3. Develop internal and international interconnectivity and sustainable cities/settlements
4. Increase production and productivity
5. Provide a comprehensive, sustainable and productive social security and protection
6. Build a just society characterized by poverty alleviation and socio-economic equality
7. Conserve and utilize natural resources and improve resilience
8. Strengthen public services, enhance balanced provincial development, and promote national unity

The nine drivers of economic transformation are:

1. High-quality and integrated transport system, information technology and communication infrastructure, and massive networking
2. Quality human capital and entrepreneurial work culture and full utilization of potential
3. Hydroelectricity production and promotion of green economy
4. Increase in production, productivity, and competitiveness
5. Development and expansion of quality tourism services
6. Modern, sustainable and systematic urbanization, housing and settlement development
7. Development and strengthening of the provincial and local economy and expansion of the formal sector
8. Guaranteed social protection and social security
9. Governance reform and good governance

The eight enablers that will provide support for the realization of drivers of economic transformation are:

1. Political commitment to the constitution, democracy, and development
2. Demographic dividends and civic awareness
3. Geographic location as well as natural diversity and abundance of natural resources
4. Socio-cultural diversity and unique identity
5. Social capital and Nepali diaspora spread around the world
6. Clean and renewable energy
7. Goodwill of friendly nations and the international community
8. Federal governance and fiscal federalism

The overall structural strategy over the next 25 years is to reduce share of agriculture sector in GDP to 9%, but increase share of  agriculture and services sectors to 30% and 61%, respectively. The annual average GDP growth target of 10.5% is set for the period. A summary of the targets (which may be reviewed in subsequent plans) to be achieved by FY2044 are as follows:

• Average annual GDP growth: 10.5%
• Per capita income: USD 12,100
• Population under absolute poverty line: 0 (or below 1%)
• Population in MPI: 3%
• Gini coefficient based on property: 0.25
• Ratio of richest 10% and poorest 10% population (Palma ratio): 1.1
• LFPR (15+ years): 72%
• Share of formal sector employment: 70%
• Electricity generation (installed capacity): 40,000 MW
• Households with access to electricity: 100%
• Per capita electricity consumption: 3,500 kilowatt-hours
• Households with access to motor transport within 30 minutes of travel: 99%
• National and provincial highways (black topped up to two lanes): 33,000 kms
• National highways (>two lanes and fast tracks): 3,000 kms
• Railroads: 2,200 kms
• Population with access to internet: 100%
• Life expectancy at birth: 80 years
• Maternal mortality (per 100,000 live births): 20
• Child mortality rate (per 1000  live births): 8
• Underweight children: 2%
• Literacy rate (15+ years): 99%
• Net enrolment rate at secondary level (9-12): 95%
• Gross enrolment rate at higher education: 40%
• Population with access to improved drinking water: 96%
• Population covered by basic social security: 100%
• Gender development index: 0.99
• Human development index: 0.760

Quick overview of India's FY2022 budget

Finance Minister Nirmala Sitharaman presented INR 34.8 trillion expenditure plan [USD 476.8 billion, USD 1 = INR 73.05 as on Feb 1) for FY2022 (starts 01 April 2021). It is 1.0% increase over the revised expenditure estimate for FY2021. Revenue growth is expected to be 23.4% (15% if we consider revenue plus recovery of loans & divestment receipts).

FY2022 budget focuses on six pillars: 

1. Health and wellbeing (PM Aatmanirbhar Swastha Bharat Yojana to develop capacities of primary, secondary and tertiary healthcare system, strengthen existing institutions and rollout COVID-19 vaccine, among others)
2. Physical and financial capital, and infrastructure (ANB production linked incentive scheme to promote manufacturing activities, mega investment textiles parks, National Infrastructure Pipeline, recapitalization of PSBs, infrastructure financing through Development Financial Institution, national asset monetization pipeline of potential brownfield infrastructure assets; roads, highways and railway infrastructure with focus on corridors; development of world class Fin-tech hub at GIFT-IFSC; divestment of strategic assets such as BPLC, Air India, SCI, CCI, IDBI Bank, etc)
3. Inclusive development for aspirational India (focus on agriculture and allied sectors, farmers' welfare and rural India, migrant workers and labor, and financial inclusion incl MSME)
4. Reinvigorating human capital (proposed Higher Education Commission of India that will set standard, accredit, regulate and fund higher education; benchmark skill qualifications, assessment, and certification, accompanied by the deployment of certified workforce)
5. Innovation and R&D (national research foundation, language translation mission, a space PSU, etc)
6. Minimum government and maximum governance (bill to regulate healthcare professions, first digital Census, etc)

The thrust is on Aatmnirbhar Bharat (Self-reliant India) initiative, for which it has rolled out sectoral incentives (such a production linked incentives to spur industrial activities), increase in custom duties on certain items, and sectoral reforms. 

Expenditure: Revised total expenditure for FY2021 is estimated to be 113.4% of budgetary estimate for FY2021 as pandemic-related expenditure on providing relief increased. For FY2022, about 84.1% of total expenditure outlay of INR 34.8 trillion consists of revenue expenditure (recurrent expenditure) and the rest 15.9% is capital budget. About 23.2% of the revenue expenditure consists of interest payments, 10% for defense, 9.9% for transfer to states and UTs, and 9.6% for subsidy. Interest payment alone is expected to be 45.3% of total revenue (tax and non-tax revenue).

The budgeted expenditure for FY2022 is equivalent to about 15.6% of GDP (per government’s estimate of nominal GDP for FY2022). Revenue expenditure is estimated to be 13.1% of GDP and capital expenditure 2.5% of GDP. Food, fertilizer and petroleum subsidies (interest subsidy is excluded in expenditure reporting in the budget) together is equivalent to about 1.5% of GDP, of which 72% is food subsidy and 24% fertilizer subsidy. Interest payments is estimated to be 3.6% of GDP. The government is hoping that interest payments will come down in the medium-term with RBI’s accommodative monetary policy and adequate liquidity in the market. 

The expenditure outlay for health sector is down by 9.5% compared to FY2021 revised estimate. It grew by 30% in FY2021 compared to FY2020, reflecting the spike in healthcare expenditure to contain the pandemic. Similarly, allocations for rural development, which includes NREGA, is down 10% compared to 51.9% growth in FY2021.  

In addition to INR 34.8 trillion expenditure outlay, the government is also expecting capital investment of INR 5.8 trillion from various public enterprises, resulting in total expenditure outlay of about INR 40.7 trillion. In FY2021, the union government’s expenditure was INR 34.5 trillion and public enterprises spent INR 6.5 trillion in capex, making total expenditure of INR 41 trillion. So, total capital spending of the central government (incl PSUs capex) could be as high as 5.1% of GDP.

Revenue: As per the revised estimates for FY2021, the government expects to mobilize 77% of the tax and non-tax revenue outlined in the FY2021 budget. While tax revenue is expected to be 82.2% of target, non-tax revenue is expected to be just 54.7% of the target. Capital receipts are expected to be 185.6% of budget target, thanks to a massive borrowing after the lockdowns. 

In FY2022, the government is expecting to mobilize INR 17.9 trillion revenue, of which 86.4% is tax revenue and the rest 13.6% is non-tax revenue— similar to the revised estimate for FY2021. The government wants to mobilize INR 1.9 trillion in the form of non-debt creating capital receipts (recovery of loans and divestment receipts). A substantial part of it consists of divestment receipts (INR 1.8 trillion). Divestment targets have been missed in the past. For instance, the government could not meet the divestment target in FY2020 (INR 0.5 trillion vs INR 1.05 trillion targeted) and FY2021 (INR 0.32 trillion vs INR 2.1 trillion targeted). 

The projected revenue is estimated to be 8.9% of GDP (6.9% tax revenue, 1.1% non-tax revenue and 0.9% non-debt creating capital receipts), which is higher than 8.2% revised revenue estimate in FY2021. Note that non-debt creating receipt is estimated to be about 0.84% of GDP, much higher than 0.24% of GDP last year. This is primarily due to a large divestment target (about 0.79% of GDP, up from 0.16% of GDP in FY2021). 

Of the total gross revenue to be mobilized by the center (including transfer to NCCF/NDRF and state’s share), GST accounts for 21.8%, income tax 19.4% and corporation tax 18.9%.

Fiscal deficit: The projected expenditure and revenue including recovery of loans and divestment receipts leaves a budget gap of about INR15.1 trillion for FY2022 (6.8% of GDP). The government wants to finance this fiscal deficit by borrowing and using other resources (including drawdown of cash balance). Specifically, it is planning to borrow almost all of it from the internal market. Specifically, about 64.3% of it will be in the form of market borrowing (dated government securities and T-bills) and the rest from securities against small savings, state provident funds and other receipts including 364-day treasury bills and net impact of switching-off of securities. External borrowing is estimated to be about INR46.2 billion (0.01% of GDP).

For FY2022, projected revenue deficit is 5.1% of GDP, fiscal deficit 6.8% of GDP, and primary deficit 3.1% of GDP. In FY2021, the estimated revenue deficit is 7.1% of GDP, fiscal deficit 9.5% of GDP and primary deficit 5.9% of GDP. 

The reduction in deficit targets primary hinges on the ability of the government to accomplish its divestment target. Divestment of government-held assets is kind of one-off revenue bonanza. Relying on divestment alone to lower fiscal deficit is not going to be sustainable. The government is planning to divest assets in several PSUs (such as Air India, LIC, etc). It is expected to be around 0.79% of GDP, up from 0.16% of GDP in FY2021. The plan for big ticket divestment has been dragging on for a long time. 

However, if nominal GDP growth accelerates (more infrastructure investment funding by divesting government-owned assets), then revenue mobilization will also pick up and fiscal deficit could be narrowed. Fiscal Responsibility and Budget Management (FRBM) Act 2018 sets fiscal deficit target at 3% of GDP by FY2021 and central government debt at 40% of GDP by FY2025. The government will amend FRBM Act as it will not be able to bring fiscal deficit to the level stipulated in the existing version of FRBM Act. The finance minister committed, in her budget speech, that the government will bring down fiscal deficit to 4.5% of GDP by FY2026, largely by increasing buoyancy of tax revenue through improved compliance, and increased receipts from assets monetization (including public sector enterprises and land). States are allowed to borrow more next year but will have to lower net fiscal deficit to 3% of GSDP by FY2024. 

Starting this budget document, the government will discontinue NSSF Loan to FCI for food subsidy and that it will be provisioned directly in the budget. This applies to FY2021 revised estimate and FY2022 budget estimate. This move improves budget transparency as substantial subsidy related extra budgetary resources were complicating true extent of government borrowing and level of fiscal deficit. In fact, in FY2020 budget, the FM released data on extra budgetary resources, especially borrowings of government agencies that went towards funding GOI schemes and the repayment was the government's burden. In FY2021 budget, the FM extended its scope and coverage to include NSSF loans provided by the government to the FCI. This is now discontinued. 

The stimulus measures (Self-reliant India initiatives such as production-linked incentives for 13 key sectors, increase in customs duty to encourage Make in India, increase net borrowing limit for states by 4.0% of GSDP for FY2022 and it could be conditionally increased by 0.5% of GSDP, capex increase, and RBI accommodative measures) and rapid vaccination program are expected to support economic recovery. Some of the rating agencies are okay with the high fiscal deficit along with a realistic (or even conservative) revenue projection. 

Concerns over fiscal/debt sustainability and sovereign ratings have been sidelined in favor of higher expenditure to support economic activities. The fiscal situation will be okay as long as GDP growth rate is higher than interest rates on government bonds. Already interest payment by central government is about a quarter of total spending and 45% of total revenue. Higher the borrowing by the government, the higher will be interest payments. It is important that higher borrowing goes into creating productive assets so that the return is more than enough to pay off debt.

Vietnam as a rising star in global supply chains

Cheap labor costs, big investment incentives, political and policy stability, and strong trade relations appeal Vietnam as an alternative investment destination to China, according to a special report published by The Economist Intelligence Unit. The country is now rated more highly than competitors such as China, Indonesia, India, Bangladesh and Pakistan. [Interestingly, Sri Lanka is rated the most favorable in South Asia in terms of business environment.]

The report focuses on labor, investment incentives, and trade relations, which are central to Vietnam’s competitiveness as a manufacturing hub.

First, the report argues that the ample supply of low-skilled labor will remain a core strength of Vietnam. Working age population is estimated at 68 million, which is about 70% of total population. It appears to be enjoying a “demographic dividend”, which refers to a share of working-age population being larger than those under 15 and over 64 years of age. Agricultural sector accounts for over one-third of the employed workforce, and workers from rural areas have been a key source of labor in manufacturing sector. There is still a stock of surplus labor in the agricultural sector, which means wages growth among low-skilled and unskilled workers in manufacturing sector will remain restrained. However, the availability of skilled labor force will still be an issue.

Second, the report states that Vietnam is offering generous concessions for high-tech manufacturers thinking to relocate labor-intensive processes. Incentives for lower-value added industries will be continue to be rolled back. Vietnam offers various incentives for FDI in industrial zones (industrial parks and export-processing zones), special economic zones, and technology parks. Most are export-oriented industries. It offers corporate and personal income tax exemption and rate reduction. High-tech sectors such as automotive, machinery, and production of advanced capital goods are offered below-market land rents, which is a major incentive amidst rising rent costs. Eligibility criteria are made flexible, especially for large firms. EPZs are not that popular these days because of reduction of import tariffs, which have made duty-free intermediate imports under EPZs largely redundant. The report notes that going forward the eligibility criteria for investment incentives will focus on higher value-added industries. 

Industrial clusters in Vietnam are concentrated in four geographical areas that were designated as priority regions for industrial development: Northern, Central, Southern and Mekong Delta Key Economic Zones. Footwear, textile and garment industries are well developed with advanced labor specialization and scaled-up manufacturing operations. Electronics exports have limited domestic value added, which the government is trying to change through vertical integration in the production of smartphones (Samsung is opening a R&D facility and a phone screen manufacturing plant).

Third, the report notes that Vietnam participates in more trade agreements and has better trading relations with major trading partners than its regional neighbors. This helps in promoting competitive export. It is a member of ASEAN Economic Community, Regional Comprehensive Partnership Framework, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the EU-Vietnam Free Trade Agreement. For instance, CPTTP opens up more access to Canada and Mexico (with whom it did not have agreements before) for Vietnamese sports footwear, telephone sets, electrical machinery, and clothing and apparel.

COVID-19 pandemic pushed 1.2 million people below the poverty line in Nepal

According to a news report, which cites a recent study done by National Planning Commission, supply, demand and income shocks due to the COVID-19 pandemic likely have pushed 1.2 million Nepali people below the poverty line (or an additional 4% of the population). This, according to the NPC, increases the number of poor people to 6.8 million (or about 22.7% of the population). The news report was published in Nayapatrika daily on 20 January 2021.

The NPC has also estimated that it would take NRs 668 billion for relief and recovery efforts. Specifically, NRs 69.84 billion for pandemic containment and relief, NRs 92.62 billion for employment, NRs114 billion for project continuity, NRs 111 billion for technology and its implementation, and NRs 73.44 billion for self-reliant initiatives. These are based on immediate term, medium term and long term needs projection. It states that NRs 242 billion is required for the immediate term, NRs 287 billion for medium term, and NRs 135 billion for the long term. 

Tradeoff between AI and jobs

Excerpts from an interesting piece on the jobs displacement effect of AI from The Economist (16 January 2021 edition):

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The robots are indeed coming, they reckon—just a bit more slowly and stealthily than you might have expected. If new technologies largely assist current workers or boost productivity by enough to spark expansion, then more AI might well go hand-in-hand with more employment. This does not appear to be happening.

[...]Take work by Daron Acemoglu and David Autor of the Massachusetts Institute of Technology, Jonathon Hazell of Princeton University and Pascual Restrepo of Boston University, which was presented at the recent meeting of the American Economic Association (AEA). The authors use rich data provided by Burning Glass Technologies, a software company that maintains and analyses fine-grained job information gleaned from 40,000 firms. They identify tasks and jobs in the dataset that could be done by AI today (and are therefore vulnerable to displacement). Unsurprisingly, the researchers find that businesses that are well-suited to the adoption of AI are indeed hiring people with AI expertise. Since 2010 there has been substantial growth in the number of AI-related job vacancies advertised by firms with lots of AI-vulnerable jobs. At the same time, there has been a sharp decline in these firms’ demand for capabilities that compete with those of existing AI.

An AI-induced change in the mix of jobs need not translate into less hiring overall. If new technologies largely assist current workers or boost productivity by enough to spark expansion, then more AI might well go hand-in-hand with more employment. This does not appear to be happening. Instead the authors find that firms with more AI-vulnerable jobs have done much less hiring on net; that was especially the case in 2014-18, when AI-related vacancies in the database surged. But the relationship between greater use of AI and reduced hiring that is present at the firm level does not show up in aggregate data, the authors note. Machines are not yet depressing labour demand across the economy as a whole. As machines become cleverer, however, that could change.

Evidence that AI affects labour markets primarily by taking over human tasks is at odds with some earlier studies of how firms use the technology. A paper from 2019 by Timothy Bresnahan of Stanford University argues that the most valuable applications of AI have nothing to do with displacing humans. Rather, they are examples of “capital deepening”, or the accumulation of more and better capital per worker, in very specific contexts, such as the matching algorithms used by Amazon and Google to offer better product recommendations and ads to users. To the extent that AI leads to disruption, it is at a “system level”, says Mr Bresnahan—as Amazon’s sales displace those of other firms, say.

[...] Does more automation mean a surge in productivity is just over the horizon? Not necessarily. Speaking at the (virtual) aea meeting, Mr Acemoglu mused that automation comes in different sorts, with different economic consequences. “Good” automation generates large productivity increases, and its transformative nature leads to the creation of many new tasks (and therefore jobs) for humans. Advanced robotics, for example, eliminates production jobs while creating work for robot technicians and programmers. “So-so” automation, by contrast, displaces workers but generates only meagre benefits. Mr Acemoglu cites automated check-out kiosks as an example; though they save some time and money, their deployment is hardly revolutionary. From 1947 to 1987, the displacement effect of new technologies was generally offset by a “reinstatement” effect, he reckons, through which new tasks occupied displaced workers. The rate of reinstatement has since fallen, though, while displacement has not, suggesting an increase in so-so automation relative to the good kind.

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Noha Smith has a techno-optimism roundup here, arguing that the COVID vaccine was a turning point. Meanwhile, Eli Douardo argues that it is not easy to unleash total factor productivity growth as easily as tech adoption.

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TFP only budges when new technologies are adopted at scale, and generally this means products, not just science. Science lays critical groundwork for new technology, but after all the science is done, much work remains. Someone must shepherd the breakthrough to the product stage, where it can actually affect TFP. This means building businesses, surmounting regulatory obstacles, and scaling production.

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