According to Dr Jacques de Jongh, Inflation has been a significant talking point ever since the onset of the COVID-19 pandemic. For the last three years, countries have experienced significant increases in general price levels, arguably contributing to one of the most concerning cost-of-living crises since the Great Depression.
The drivers of this process have been manifold, owing to various post-pandemic shocks, including rising geopolitical tensions, weakened trade ties and fragile supply chains. Considering that these are all secular events, one would expect the impact to reside for the foreseeable future.
In this sense, controlling inflation has become a big problem for monetary policymakers worldwide. For the last 18 months, conventional responses have followed. Most central banks have ensued with increasing interest rates. Though price pressures have started to subside, inflation has remained stubbornly persistent and is still outside the target ranges for most countries.
Despite these concerns, various optimists are increasingly arguing that the solution to curbing inflation might be less monetary and more technological, specifically linked to the emergence of artificial intelligence (AI). AI's potential impact on price dynamics stems from its ability to offer notable productivity gains.
The argument here is motivated by two main avenues:
Firstly, increasingly adopting generative AI in the production process will allow more efficient use of other factors of production in the sense that it can allow better decision-making.
The second avenue lies in the ability of generative AI to spur innovation and the creation of new ways to produce and combine factors of production. For both these arguments, total factor productivity would greatly benefit.
Although inflation has been driven by post-pandemic shocks, AI-induced productivity gains would address one of the underlying causes of contemporary price dynamics. Ever since the end of the global financial crisis, countries have experienced sustained increases in nominal wages, which have coincided with stagnating productivity levels. As a result, we have consistently paid more for the same output over the last 15 years. If the impact of generative AI is as significant as most expect, it could dramatically enhance productivity levels, consequently reducing general unit costs.
Proponents quickly synonymise this effect with the productivity revolution experienced during the computer-powered boom in the late 1990s. Though the latter took several years to bear fruit, expectations are that AI adoption would drive this at a more accelerated pace as it allows physical and cognitive automation.
Whilst all of this seems plausible, AI must also be acknowledged for its disruptive nature. This pertains to the impact on labour markets and the underlying potential inequalities it can induce. When considering these dynamics within an interconnected world and differing development levels, the reality lends itself to various limitations and concerns. Developed countries and big companies are set to be the biggest winners of an AI-driven world, whilst developing countries, especially those in Africa, are expected to lag.
Keeping this in mind, there is much to ponder for the South African case. The latest CPI report released by Stats SA in February showed a slight increase in inflation (up from 5.1% to 5.3%) after two months of consecutive declines, as concerns over stubborn price pressures remain. This comes even after an aggressive policy normalisation schedule undertaken by the SARB over the last two years. AI adoption thus has much to offer.
Unfortunately, progress in this respect seems to have been somewhat slow. A recent report released by Deloitte suggests that SA firms are 35% less likely to adopt 4IR tools than their international counterparts.
Dr de Jongh also says that this risk of not keeping pace with the rest of the world is simply too large, especially given our unique economic malaise.
Failing to adequately incorporate this form of innovation could have profound effects, which hold considerable implications. These could potentially include widening growth performances, difficulty attracting foreign investment, and additional exchange rate volatility, all of which could ironically add to the inflationary mix.
Therefore, the question of whether South Africa can harness AI in the fight against inflation is complex. It will depend on several factors. Specifically, it will boil down to whether or not we can create a suitable climate for adoption. Having the requisite infrastructure in place, increasing the focus on STEM-centred education, establishing conducive public-private partnerships, and instituting a regulatory framework to ensure a socially just transition will all serve as deciding components.
Dr Jacques de Jongh
