Small businesses and AI: Accelerating innovation and inclusion

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“The challenge is to create new models of economic development that reduce inequalities while promoting growth and transformation,” says Arturo Franco, development economist and the Center’s vice president of research and insights. “Each region is facing different challenges, but they all need to make the digital economy work for everyone.”As we close out this momentous year, we look to our fellows, advisors and research partners who have been studying these trends that will continue to shape the future of inclusive growth around the globe in the coming years.&nbsp;&nbsp;<h3>The global middle class is evolving</h3>The middle class is expanding around the globe, fueled in large part by Asia, which leads the world&nbsp;<a href="https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">in GDP growth</a>. Nearly nine in 10 of the next billion middle-class consumers will be Asian.Helping to fuel this growth is the digital transformation of China and India’s economies. Bhaskar Chakravorti, our senior advisor for digital inclusion, argues that the&nbsp;<a href="https://hbr.org/2017/07/60-countries-digital-competitiveness-indexed" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">1.1 billion</a>&nbsp;(and counting) internet users in China and India hold the potential to reshape the digital revolution and&nbsp;<a href="https://hbr.org/2018/11/competing-in-the-huge-digital-economies-of-china-and-india" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">open new markets</a>. While China’s digital economy is more advanced, Chakravorti lays out several scenarios where India could narrow the gap.&nbsp;“If India could achieve 3 percent growth annually across several drivers, it could achieve China’s current level of digital momentum by 2022,” he says. Those key drivers include digital inclusion (particularly of women), physical infrastructure, digital access, greater use of digital money and payments and national investment in R&amp;D.&nbsp;

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Our senior fellow Rama Bijapurkar has&nbsp;<a href="https://www.weforum.org/agenda/2017/10/how-commerce-in-india-is-changing-forever-and-for-everyone/" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">argued</a>&nbsp;that India’s modest-income masses are primed for the digital revolution. The hard work now lies in enrolling India’s legions of small merchants and ensuring consumers have access to support and legal protections.&nbsp;&nbsp;While prospects in Asia look strong, rising inequality and trade wars could stifle growth. If trade is diminished, economic growth will increasingly rely on robust domestic demand for products and services, which in turn will require a broader middle class. Policies and practices that increase social mobility will therefore be critical. “In a period of economic uncertainty, more inclusive patterns of growth could help to underpin healthy domestic demand,”&nbsp;<a href="https://www.mastercardcenter.org/content/dam/public/mc-cig/uploads/asia-in-the-world-economy-roundtable-2018-report.pdf" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">our report with the National University of Singapore</a>&nbsp;notes.&nbsp;&nbsp;

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Arturo Franco

VICE PRESIDENT, RESEARCH AND INSIGHTS, CENTER FOR INCLUSIVE GROWTH

<h3>﻿Economic insecurity grows in the U.S.</h3>While Asia’s middle class is on the ascent, more and more American workers are struggling to find the path toward upward mobility.&nbsp;&nbsp;Today, roughly 106 million Americans – one in every three – are economically insecure, with household incomes at or below 200 percent of the federal poverty line. Between 2000 and 2015, the number of economically insecure Americans&nbsp;<a href="https://www.mastercardcenter.org/insights/100-million-and-counting-a-portrait-of-economic-insecurity-in-the-united-states" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">grew by 25 million,</a>&nbsp;more than twice as fast as the nation’s population, according to a recent report by PolicyLink, conducted with the support of the Center.&nbsp;

Economic insecurity has grave consequences. Laura Tyson, economist and senior advisor to the Center, sees a direct link between America’s growing homelessness crisis, wage stagnation and income inequality. As she notes in an&nbsp;<a href="https://www.project-syndicate.org/commentary/homelessness-crisis-in-america-by-laura-tyson-and-lenny-mendonca-2018-10" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">op-ed</a>&nbsp;with New America’s Lenny Mendonca, preventing homelessness “requires that people have adequate incomes to cover basic needs, including housing. Of 3,007 counties in the U.S., a worker earning the federal minimum wage of $7.25 per hour can afford a one-bedroom rental in only 12 (of those counties).”&nbsp;<h3>Job markets hollow out in the West</h3>U.S. and European economies are also struggling with job polarization. Technological change has ushered in higher-paying, high-skilled jobs, but it has also ushered out others. Low-wage jobs in the U.S. have grown&nbsp;<a href="https://www.mastercardcenter.org/content/dam/public/mc-cig/uploads/100_million_and_counting_FINAL.pdf" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">twice as fast</a>&nbsp;as middle-wage jobs since the 1990s, leaving many in precarious jobs with low pay and volatile incomes.As a result, thousands of workers are turning to the gig economy to make ends meet, often without the safety nets of insurance, benefits, retirement savings and regular schedules that traditional jobs provide, a&nbsp;<a href="https://www.mastercardcenter.org/insights/understanding-new-world-work-financially-vulnerable-americans" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">comprehensive survey</a>&nbsp;by Commonwealth revealed. The same survey also exposed the precariousness of those in low-wage jobs in general, not just in the gig economy.

The shifting nature of jobs is not confined to the United States. Our partners Zsolt Darvas and Guntram Wolff at the Bruegel Institute have been&nbsp;<a href="https://www.mastercardcenter.org/insights/inequality-social-mobility-europe-today-2" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">tracking similar trends in Europe</a>.&nbsp;"Technological change has always changed the nature of work,” says Wolff, director of Bruegel and a senior fellow with the Center. “But this time around, a combination of robots, new [gig] work and emerging artificial intelligence technologies leave the workforce worried that the change may become much more disruptive than previously. The question is how labor institutions, education policy and the welfare state shall evolve."<h3>“Inclusive growth&nbsp;is&nbsp;diversified economies”</h3>One answer to these struggles is to diversify local and national economies. Diverse economies are more adaptive and create more and different jobs for all levels of workers. The Center has partnered with Marcela Escobari, senior fellow at the Brooking Institution, to develop new insights to help U.S. cities attract decent jobs and develop their workforce. Escobari’s initiative uses an approach&nbsp;<a href="http://atlas.cid.harvard.edu/about" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">pioneered by Harvard’s Center for International Development</a>&nbsp;to measure industrial diversity.“We know that each city has a unique fingerprint of industry and workforce structure,” says Escobari. “We want to give policymakers direction on how to confront trends specific to their city and how to help their workers, including their most vulnerable, find pathways to upward mobility.”The research will help cities understand how to use their limited resources and existing strengths to attract the most strategic industries. “That will help them grow and also bring good jobs to their localities,” she said.Diversified economies are not only important to the West, they are critical to helping Sub-Saharan African countries escape deeply entrenched poverty. A&nbsp;<a href="https://www.mastercardcenter.org/insights/advancing-inclusive-growth-to-end-extreme-poverty" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">World Bank report</a>&nbsp;notes that the lack of connections to important networks and a lack of economic diversification are leaving far too many Africans behind. Income growth among the bottom 40 percent in several sub-Saharan countries has lagged behind global averages since 2010.Martyn Davies, our senior fellow and managing director of Emerging Markets and Africa at Deloitte, says that African countries must move away from economies based solely in commodities like gold or oil if they are to enjoy shared prosperity.&nbsp;“Inclusive growth&nbsp;is&nbsp;diversified economies,” says&nbsp;<a href="https://www.enca.com/money/african-economy-needs-new-growth-stimulants-say-experts" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">Davies</a>. “Ultimately African economies have to do like Asia has…diversify, industrialize, create salaried classes, middle classes or at the very least, aspirational middle-class societies.”It is this very diversity – in ideas, people and cultures –&nbsp;<a href="https://srilanka.growthlab.cid.harvard.edu/publications/accessing-know-how-development" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">where progress lies</a>, says Harvard economist and senior fellow Ricardo Hausmann. Diversity in ideas and know-how creates a virtuous cycle of outward-looking creativity that feeds new industries and new jobs.“Societies become more knowledgeable,”&nbsp;<a href="http://www.jordantimes.com/opinion/ricardo-hausmann/does-west-want-what-technology-wants" rel="noopener noreferrer" target="_blank" style="font-size: 16px;">he says</a>, “not because individuals know more, but because they know different things.”&nbsp;

Marcela Escobari

SENIOR FELLOW, BROOKINGS INSTITUTION

<h3>Looking ahead to 2019</h3>In light of the forces shaping inclusive growth, the Center will deepen its efforts to advance insights and impact along four key areas in 2019:<ul><li>Promoting financial security&nbsp;to ensure all people have access to the tools they need to be productive and resilient in the digital economy.</li><li>Improving quality of life for all people,&nbsp;everywhere&nbsp;by leveraging technology and policies that will make urbanization more inclusive.</li><li>Supporting the economic mobility of workers&nbsp;so they can navigate the digital economy without being tethered to a particular place or job.</li><li>Leveraging the power of data for good&nbsp;by increasing the capacity to solve systemic problems using real evidence.</li></ul>“The world we live in is changing rapidly. We see an enormous opportunity to bring together private, public and non-profit sectors to move the needle toward shared prosperity,” says Center President Shamina Singh. “In the coming year, we’ll continue to build on progress with new partnerships and programs that help ensure everyone can take part in and benefit from a growing economy.”

The inclusive growth trends that will continue to shape the globe in the coming year.

This last year marked a global tipping point – the moment when the poor and vulnerable <a href="https://www.brookings.edu/blog/future-development/2018/09/27/a-global-tipping-point-half-the-world-is-now-middle-class-or-wealthier/" target="_blank">were no longer a majority in the world</a>. Just over half of the world’s population, or some 3.8 billion people, live in middle-class or wealthy households today, according to the Brookings Institution. Driven largely by Asia, this burgeoning middle class holds great promise for the globe if inclusive growth remains a top priority.
Ironically, the same forces that are fueling the growth of the global middle class in developing countries – technological change, digitization and globalization – are the same forces disrupting jobs and livelihoods in advanced economies.

Outlook for shared prosperity in 2019