Will the AI Revolution Cause a Great Divergence?
This paper considers the implications for developing countries of a new wave of technological change that substitutes pervasively for labour
Abstract
This paper considers the implications for developing countries of a new wave of technological change that substitutes pervasively for labour. It makes simple and plausible assumptions: the AI revolution can be modelled as an increase in productivity of a distinct type of capital that substitutes closely with labour; and the only fundamental difference between the advanced and developing country is the level of TFP. This set-up is minimalist, but the resulting conclusions are powerful: improvements in the productivity of “robots” drive divergence, as advanced countries differentially benefit from their initially higher robot intensity, driven by their endogenously higher wages and stock of complementary traditional capital. In addition, capital—if internationally mobile—is pulled “uphill”, resulting in a transitional GDP decline in the developing country. In an extended model where robots substitute only for unskilled labour, the terms of trade, and hence GDP, may decline permanently for the country relatively well-endowed in unskilled labour.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Cristian Alonso, Andrew Berg, Siddharth Kothari, Chris Papageorgiou and Sidra Rehman (2020) Will the AI Revolution Cause a Great Divergence? IMF Working Paper No. 2020/184