McKinsey warns that AI will further divide the world economy into winners and losers

Jerry Bowles Profile picture for user jbowles September 18, 2018
The world is moving quietly, but inexorably, toward a world that will not only change the way humans live and work but also divide the world economy according to McKinsey’s latest AI report.

AI absorption via McKinsey

We are beseiged by artificial intelligence (AI) predictions. They often fall into the binary camp of winners and losers. But there's no escaping that few serious policymakers or economists doubt that AI will profoundly alter the world economy over the next decade and not everyone will benefit equally. Some companies and countries are aggressively developing and applying rudimentary models of AI while many others either lack the resources or have been lulled into a false sense of “we’ve still got time” by the absence of earth-shattering results on the ground.

Failing to act now is a serious mistake that could leave early adopters with "an insurmountable advantage", according to a new report by McKinsey Global Institute called Notes from the Frontier: Modeling the Impact of AI on the World Economy.

A key challenge is that adoption of AI could widen gaps between countries, companies, and workers. AI may widen performance gaps between countries. Those that establish themselves as AI leaders (mostly developed economies) could capture an additional 20 to 25 percent in economic benefits compared with today, while emerging economies may capture only half their upside. There could also be a widening gap between companies, with frontrunners potentially doubling their returns by 2030 and companies that delay adoption falling behind. For individual workers, too, demand—and wages—may grow for those with digital and cognitive skills and with expertise in tasks that are hard to automate, but shrink for workers performing repetitive tasks.

The important point to note in the McKinsey approach is that it is not making predictions as such but simulating ranges of possible outcome based on early sourced data.

The report says that winners will be those who act aggressively over the next 5-7 years, said Jacques Bughin and Jeongmin Seong, two co-authors of the report.

By the time the fruits of AI investment become clear--after 2025---it will be extremely difficult to compete with the leading players. By the second half of the next decade, a few winners will be conspicuously ahead of rivals, and by 2035, there will be clear winners and losers among countries, companies and individuals. The dividing line will be defined by those who took the coming age seriously and prepared for it, and those who were passive.

Why it matters

The stakes are enormous. The latest McKinsey report looked at five broad categories of AI technologies: computer vision, natural language, virtual assistants, robotic process automation, and advanced machine learning. Based on early evidence, McKinsey’s average simulation showed around 70 percent of companies adopting at least one type of AI technology by 2030, and somewhat less than half of the large companies may be using the full range of AI technologies across their organizations by then. Other key findings:

  • AI could potentially deliver additional economic output of around $13 trillion by 2030, boosting global GDP by about 1.2 percent a year.
  • AI’s contribution to growth may be three or more times higher by 2030 than it is over the next five years.
  • Companies that embrace AI will double their cash flow by 2030. Those that don't could lose 20% of their revenue by then. Said Susan Lund, another author of the report:

Extensive AI adopters had better financial performance. They are looking at AI as a growth opportunity by improving quality and creating entirely new products. Limited adopters see it as only a way to save on costs.

  • Companies failing to quickly embrace AI to improve growth risk falling further and further behind, paring their ability to attract top talent and leading to more concentration of market power within a few "superstar" firms. From the report:

The pattern of significant growth and revenue gains going to firms at the forefront of adoption looks set to continue. Their ability to reinvest these gains and pull even further ahead of competitors may create an insurmountable advantage, and increases the importance of all companies to consider how automation and AI could affect their businesses.

Who’s winning?

The new report follows up on a May study by McKinsey that described an evolving pecking order of “superstar” companies, all in the U.S. and China, that were well ahead of everyone else. These include Google, Microsoft, Baidu, Alibaba, and Tencent.

The latest study expands by adding to the list of winning countries and individuals. In all, McKinsey analyzed 41 countries, grouping them into four buckets by how well they appeared to be poised for the new age of AI.

In country rankings, the U.S. and China are at the top by themselves. As might be expected most of the development and adoption in the U.S. is driven by private industry. In China, the AI effort is being led and directed by the government. McKinsey noted:

The government is prioritizing AI, including its promotion in, for instance, its 13th Five-Year Plan (which runs from 2016 to 2020), its Internet Plus and AI plans from 2016 to 2018, and a “new generation AI plan.” China has stated that it aims to create a domestic AI market of 1 trillion renminbi ($150 billion) by 2020 and become a world-leading AI center by 2030.1 The private sector is pushing actively for AI, too. Three of China’s internet giants— Alibaba, Baidu, and Tencent—as well as iFlytek, a voice recognition specialist, have joined a “national team” to develop AI in in areas such as autonomous vehicles, smart cities, and medical imaging.

My take

The McKinsey report doesn’t explicitly say so but the takeaway I get from the study is that the world’s biggest and most dominant internet organizations are about to get much, much bigger and much, much more dominant.

The coming battle between the U.S. and China for AI dominance offers a ringside seat between the forces of free-market capitalism and government-dominated central planning.

Both approaches have lots of unforeseen consequences. China is already using AI as a central pillar in building a surveillance state that would have Winston Smith yearning for the good old days. Productivity enhancing, labor-saving technology like AI is certain to keep wages and human employment low and widen the inequality gap between the very rich and the very poor. That will eventually be a drag on consumption

"This inequality is not given," McKinsey Fellow and report co-authorJeongmin Seong optimistically said in an interview. "The future is up to us to shape."

Which reminds me a lot of the end of Hemingway’s first novel The Sun Also Rises: “We could have been so happy,Jake,” said Lady Brett. “Yes,” Jake said. “Isn’t it pretty to think so?”

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