Category: Economics for Business: Ch 24

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Brexit 10 years on: the economic impacts

It is 10 years since the Brexit referendum. From an electorate of 46,501,251 people, 17,410,742 (37.4%) voted to leave, 16,141,241 (34.7%) voted to remain and 12,949,258 (27.8%) did not vote. The UK left the EU on 31 January 2020 at 11:00 pm, but remained in the single market and customs union during a transition period lasting for a further 11 months until December 31 2020.

To mark the 10th anniversary of the vote a number of articles have been written assessing the effects of Brexit. Here we look at the economic effects, as do the articles linked below. This blog updates the analysis of an earlier one, The costs of Brexit: a clearer picture.

Trade

After the referendum, extensive negotiations took place on the trading arrangements between the UK and EU that would exist once Brexit was finalised.

One possibility was ‘The Norwegian model’, which would have seen the UK join the European Economic Area (EEA), giving it access to the single market, but removing regulation in some key areas, such as fisheries and home affairs. This was ruled out in favour of a bilateral trade agreement. Three main types were available:

  • Swiss model, where the UK would negotiate a series of bilateral agreements with the EU, including selective or general access to the single market.
  • Canadian model, where the UK would form a comprehensive trade agreement with the EU to lower customs tariffs and other barriers to trade.
  • Turkish model, where the UK would form a customs union with the EU. In Turkey’s case the agreement relates principally to manufactured goods.

The agreement reached, the Trade and Cooperation Agreement (TCA) was a version of the Canadian model. The UK would leave the single market and customs union, but there would be tariff-free and quota-free trade in goods between the UK and the EU. However, to ensure that it was EU and UK business that would benefit from these ‘trade preferences’, businesses must show that their products fulfil ‘rules of origin’ requirements.

Rules of origin. Under rules of origin requirements, when a good is imported into the UK from outside the EU and then has value added to it by processing, packaging, cleaning, remixing, preserving, refashioning, etc., it can only count as a UK good if sufficient value or weight is added. The proportions vary by product, but generally goods must have approximately 50% UK content (or 80% of the weight of foodstuffs) to qualify for tariff-free access to the EU. For example, in the case of a petrol car, 55% of its value must have been created in either the EU or UK.

Meeting rules of origin has created a large amount of paperwork for businesses and this has created a significant barrier to trade. What is more, exporters are required to complete import/export declarations. Also, agri-food goods are subject to strict physical border controls. These barriers have increased the costs of trade and reduced its volume.

Services. Free trade in services is not provided by the TCA. Instead, services exporters face various barriers, such as certain professional qualifications no longer being recognised in EU countries and a loss of ‘passporting’ rights that previously allowed cross-border financial operations with minimal extra permissions.

Brexit impact. Despite new barriers to trade in services, they are generally less significant than the barriers for trade in goods, particularly in a digital age. Indeed, UK services exports have held up well. Although they fell in 2020, they have grown significantly since. According to House of Commons Library Statistics on UK-EU trade (see link below):

In 2025, UK exports of services to the EU were 28% above their 2019 level in real terms. Exports to non-EU countries were 26% above their 2019 level.

UK exports of goods to the EU, however, have fared less well. In 2025 they were 14% below their 2019 level in real terms. This is partly the effect of COVID and the Ukraine war, but exports to non-EU countries were only 8% lower than 2019. According to research by economists John Springford and Anton Spisak for the Centre for European Reform (see link below), Brexit has depressed UK goods exports to the EU by 16%. According to the Office for Budget Responsibility, (see link below) both exports and imports in the long run will be around 15% lower than they would have been if the UK had remained in the EU. What is more, the growth of goods trade (exports plus imports) has fallen well behind the average of the rest of the G7. And according to British Chambers of Commerce research (see link below), 54% of UK exporters think the TCA is making it harder to export and the need for change is urgent.

The new barriers reduce market access, while lower export volumes reduce competition and economies of scale. There is less competition too from imports, with many EU firms no longer exporting to the UK because of the costs. The barriers lead to a misallocation of resources, with highly productive UK firms exporting less, with less productive firms in the UK and EU focusing purely on their domestic markets. The barriers thus impose an impediment to the exploitation of comparative advantage

Investment

Both domestic and foreign direct investment (FDI) in the UK have been adversely affected by Brexit. Bloom et al., in their paper for the NBER (see link below), estimate that by 2025, investment was 12–18% lower than it would have been without Brexit.

In the early years after the referendum, lower capital investment was mainly the result of uncertainty and devoting significant resources to administrative Brexit preparations. Later it was largely the result of the trade barriers themselves. Not surprisingly, firms in the UK with high exposure to EU markets experienced a sharper decline in investment than less-exposed ones.

The end of the single market and customs union reduced the attractiveness of the UK as a hub for FDI relative to competitor countries. And UK firms were encouraged to invest in the EU to create hubs for selling within the EU, thereby allowing them to avoid the trade barriers.

According to the Bloom et al. analysis, the effect of lower investment and less competition has been a fall in UK productivity of around 3% to 4% compared to remaining in the EU. The Office For Budget Responsibility argues that the post-Brexit trading relationship will reduce long-run productivity by 4% relative to remaining in the EU.

Growth in GDP

Lower investment, lower productivity and trade barriers have had a negative impact on economic growth. According to analysis by the National Institute of Economic and Social Research (NIESR) (see link below), by the end of 2023, UK real GDP was some 2–3% lower solely as a result of Brexit – in other words, after having taken into account the effects of COVID-19 and the Russia-Ukraine war. This corresponds to a per capita income loss of approximately £850. The NIESR analysis predicts that this will rise to some 5–6% of GDP, or about £2,300 per capita, by 2035.

Bank of England data, based on surveys of chief financial officers of over 2000 firms (small, medium and large), suggest that the UK economy is some 6% smaller than it would have been without Brexit. The Office for Budget Responsibility estimates that Brexit has caused a long-run reduction in GDP of 4% as a result of a similar percentage reduction in productivity.

The growth of small and medium-sized enterprises (SMEs) has been disproportionately dampened by the compliance costs of trade with the EU. Some SMEs, especially in the food and drink sector, have ceased exporting to the EU altogether.

Labour supply and migration

Halting the right of EU workers to move freely to the UK for work created acute labour shortages in specific sectors such as hospitality, health and social care, logistics, construction and agriculture. However, while immigration from the EU fell dramatically, this was more than offset by increased immigration from non-EU countries. But this was unable to fill shortfalls in some sectors.

The loss of free movement of labour means that UK workers now face restrictions on working in the EU. These include obtaining a work visa, which requires a formal job offer, sponsorship and meeting strict salary thresholds. While business trips for meetings, conferences, trade fairs, etc. are generally exempt, if the work involves remuneration, then normally a work visa will be required. The terms of work visas vary between member states. This has created a considerable barrier for touring bands and other artists. Short-term self-employed or freelance work is highly restricted, with virtually no work permit options available for visiting UK nationals.

Because employing UK nationals now imposes extra administrative and time-consuming burdens on local EU employers, many now prioritize applicants from EU nations who can start immediately.

Articles

Videos

Reports, Research, Analysis and Data

Questions

  1. Summarise the negative effects of Brexit on the UK economy.
  2. Why is it difficult to quantify these effects?
  3. How have UK firms attempted to reduce the costs of exporting to the EU?
  4. Why have goods exports been worse affected by Brexit than services exports?
  5. What difficulties would lie in the way of the UK negotiating a Turkish or Swiss model of trading relations with the EU?
  6. Have there been any economic benefits from Brexit and, if so, what?
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Supply shocks – long-term gain from the short-term pain?

The world has suffered from a number of adverse supply shocks in recent years. First there was the credit supply shock of 2007–9 that led to a default on mortgages, a collapse in confidence in the banking system, the drying up of the inter-bank market, the freezing of lending and a global economic contraction. Then there was the COVID-19 pandemic. This shock to the the global economy led to a a fall in output and breaks in supply chains. As recovery took place, supply-side difficulties led to a surge in inflation.

Then there was the Russian invasion of Ukraine. This shock to energy and grain supplies led to rises in fuel and food prices: a cost-push inflationary shock. More recently, the closing of the Strait of Hormuz has cut off an important supply route and again sent fuel and other other prices rising.

These supply-side shocks create a dilemma for central banks. They push up inflation, but push output and employment down – a situation of ‘stagflation’.

This can be illustrated with a simple aggregate demand and supply diagram. The shock shifts the aggregate supply curve upwards to the left, illustrated by the move from SRAS1 to SRAS2. The price level rises to P2 and GDP falls to Y2.

But central bank policy is designed to affect aggregate demand, not aggregate supply. If it raises interest rates, aggregate demand will shift to the left. The price level will fall (or at least the rate of inflation will fall), but output will fall further. If it cuts interest rates, aggregate demand will shift to the right. This will help to curtail, or even reverse, the fall in GDP, but will lead to even higher prices.

For countries where their central bank has a simple inflation mandate (e.g. keeping inflation close to 2%), sticking to this target in the short term would result in higher interest rates, lower economic growth and higher unemployment – and possibly even a recession. In such cases, central banks tend to project forward beyond the short-term shock and set interest rates to target inflation in a few months’ time. Indeed, many central banks do explicitly target inflation in the medium term (1 or 2 years) rather than the short term.

Central banks, such as the US Federal Reserve Bank, which have a dual mandate of targeting inflation but also maximising employment, the trade-off between these two objectives can be stark. Getting the inflation down requires a higher rate of interest; maximising employment in the face of an adverse supply shock requires a lower rate of interest.

The short-term economic costs, let alone the human costs if the shock involves a war, can be great. People may suffer extreme hardship. The cost to the US Treasury of the first six weeks of the Iran war were estimated by the Pentagon to be some $29bn1 – which translates into higher taxes for US residents, lower government spending on non-war related items, higher government borrowing or some combination of the three. Other estimates put the cost to the US taxpayer as much higher – up to $1 trillion over the longer term.2 Then there are the costs to consumers of higher fuel and other prices, estimated at around $410 per month.3

The costs to Iranian citizens will be much higher in terms of war damage and loss of livelihood, let alone the suffering and loss of life. Then there are the costs to the rest of the world from higher prices of fuel, fertilisers and various industrial materials that are normally shipped through the Strait of Hormuz.

Long-term economic gain?

Supply shocks often expose economic vulnerabilities that can later be addressed, making supply chains more diverse and more resilient. They can give a boost to alternative technologies, such as a switch from fossil-fuels to green energy.

After the 2007–9 financial crisis, banking systems were made more robust under the Basel III system. Capital and liquidity requirements were increased and bank leverage was decreased. Many countries, such as the UK, introduced ‘ringfencing’ to separate retail banking from the riskier investment banking. This increased confidence in the banking system.

The COVID-19 pandemic gave a boost to working remotely and the establishment of more flexible work patterns. What was a necessity during lockdowns, was seen as an effective model by many companies. Fully remote or hybrid working became commonplace for many jobs that were previously done in the office. Time has allowed employers to find the best balance of in-office and remote working, with the optimum balance often varying by type of job being performed.

The rising price of oil and gas following the Russian invasion of Ukraine in February 2022, saw many countries that had been reliant on imports from Russia, accelerating their efforts to switch to renewable energy. Supply chains were re-examined and there was a move towards ‘re-shoring’, ‘near-shoring’, or ‘friend-shoring’: that is, obtaining supplies from countries that are nearer and/or more reliable as trading partners.

This approach was further boosted by the extensive tariffs imposed by the Trump second administration. One of the responses to the higher tariffs was to seek markets, both for exports and imports, away from the USA. To the extent that there is ‘re-shoring’ (substituting exports and imports for production and consumption within the country), then this amounts to deglobalisation. If this represents a move from low-cost to high-cost production and is contrary to the law of comparative advantage, then there will be a net economic loss. If, however, the reduction in risk of disruption and the boost to domestic industries allows a reduction in costs, there could be a net gain.

The most recent example of the Iran war has led many countries to reconsider sources of supply and to make their supply chains more robust and less risky. Gulf countries are considering expanding their pipeline network to avoid the Strait of Hormuz. For other countries, it is providing a further boost to green energy. Increased investment in the renewable sector will help to bring down costs and make countries less vulnerable to future conflicts involving oil-producing countries or sea passages.

To summarise: if initially adverse supply-side shocks cause a diversification and strengthening of supply chains, a diversification of energy sources, accelerated technological innovation and the adoption of new more efficient techniques, the long-term supply-side effects could be positive. Pain today for gain tomorrow?

But the short run comes before the long run and today’s costs are real and mounting. A shock may stimulate a positive response, but the current shock is persisting, and forecasts are getting more dire by the day. And even when the Iran war is over, there may be more shocks around the corner – ‘unknown unknowns’. As Keynes said: ‘In the long run we’re all dead’.

References

  1. Pentagon’s estimate for Iran war grows to $29B

    2. Politico, Mark Sweney (12/5/26)

  2. World Politics The Iran war could cost the American taxpayer $1 trillion, says Harvard academic

    3. CNBC, Joseph Wilkins (14/4/26)

  3. The Economic Costs of the Iran War

    4. American Enterprise Institute, Roger Pielke Jr. (2/4/26)

Articles

Questions

  1. What policies have central banks pursued during the Iran war?
  2. Paint an optimistic scenario for the global economy five years hence.
  3. Paint a pessimistic scenario for the global economy five years hence.
  4. Compare the sources of supply of oil and gas for Europe directly prior to the Iran war with those directly prior to the Russian invasion of Ukraine.
  5. Compare the relative merits of globalisation and deglobalisation. Does this depend on the nature of globalisation and deglobalisation?
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The Russian economy after four years of war

At the fourth anniversary of Russia’s invasion of Ukraine, we look at the effect of the war on the Russian economy. Two years ago, in the blog The Russian economy after two years of war, we argued that the Russian economy had seemingly weathered the war successfully.

Unlike Ukraine, very little of its infrastructure had been destroyed; it had started the war with a current account balance of payments surplus, a budget surplus and a low general government debt-to-GDP ratio; it had achieved a lot of success in diverting its exports, including oil, away from countries imposing sanctions to countries such as China and India; it was the same with imports, with China especially becoming a major suppliers of machinery, components and vehicles; it has a strong central bank, which engenders a high level of confidence in managing inflation; the military expenditure provided a Keynesian boost to the economy, with production and employment rising.

The situation today

But two years further on, the Russian economy is looking a lot weaker and on the verge of recession. GDP growth fell to 0.6 per cent in 2025 and is forecast to be no more than 1 per cent for the next two years. (Click here for a PowerPoint of the chart.) And despite growth still being positive (just), this is largely because of the growth in military expenditure. Retail and wholesale trade fell by 1.1% in 2025, reflecting supply chain problems and high inflation dampening consumer demand.

With labour being diverted into the armaments and allied industries or into the armed forces, this has led to labour shortages. This has been compounded by the emigration of up to 1 million people by 2025 – often young, educated and skilled professionals.

Official CPI inflation averaged 8.7 per cent in 2025, although the prices of food and other consumer essentials rose by more, especially in recent months. At the beginning of 2026, supermarket prices rose by 2.3% in just one month, made worse by a rise in VAT from 20% to 22%. The central bank has responded to the high inflation with high interest rates, which averaged 19.2% in 2025, giving a real rate of 10.5%. With such a high real rate, the response of households has been to save. This has masked the constraints on production, or imports, of consumer goods. Savings have also been boosted by large payments to soldiers and bereaved families, with the money saved by the recipients being used in part to fund future such payments. So far there has been trust in the banking system, but if that trust waned and people starting making large withdrawals of savings, it could be seriously destabilising.

Whilst the high real interest rates have helped to mask shortages of consumer goods, they have had a seriously dampening effect on investment by domestic companies. Gross capital formation fell by 3% in 2025, not helped by an increase in the corporation tax from 20% to 25%. At the same time, foreign direct investment remains subdued due to high perceived risks. The lack of investment, plus the labour shortages, will have profound effects on the supply side of the economy, with potential output in the non-military sector likely to decline over the medium term.

The balance of payments and government finances are turning less favourable. The balance of trade surplus has declined from US$173bn in 2021 to US$67bn in 2025. This could decline further, or even become a deficit, if oil prices continue to be weak, if Western sanctions are tightened (such as stopping the flow of Russian oil exports in the ‘shadow’ fleet of tankers) or if major importing countries stop buying Russian oil. Indian refiners have announced that they are not taking Russian crude in March/April as India seeks to finalise a trade deal with the USA.

The budget balance has moved from a small surplus of 0.8% of GDP in 2021 to a deficit of 2.9% in 2025. Although the government debt-to-GDP ratio remains low by international standards at 23.1% of GDP in 2025, this was up from 16.5% in 2021 and is set to rise further as budget deficits deepen. Nevertheless, as long as the saving rate remains high, the debt can be serviced by domestic bond purchase.

Russia’s economy is definitely weakening and labour shortages and low investment will create major problems for the future. But whether this deterioration will be enough to change Russia’s stance on the war in Ukraine remains to be seen.

Articles

Videos

Reports

Data

Questions

  1. What constraints are there currently on the supply side of the Russian economy?
  2. Some economists have argued that the economic effects of a stalemate in the Ukraine war would suit the Russian leadership more than peace or victory. Why might this be so?
  3. Under what circumstances might a deep recession in Russia be more likely than stagnation?
  4. In what ways does Russia’s current financial system resemble a pyramid scheme?
  5. What cannot a Keynesian boost contunue to support the Russian economy indefinitely?
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Who pays Trump’s tariffs?

Three recent reports (see links below) have suggested that US consumers and businesses pay most of the tariffs imposed by the second Trump administration. The percentage varies from around 86% to 96%. US customs revenue surged by approximately $200 billion in 2025, but this was a tax paid almost entirely by US consumers and businesses. Foreign suppliers largely maintained their (pre-tariff) prices. They took a hit in terms of reduced volumes rather than reduced pre-tariff prices.

The incidence of a tariff between consumers, domestic importers and overseas producers will depend on price elasticities of demand and supply. The following diagram shows a product where the importing country is large enough to have a degree of market power, which will normally be the case with the USA. The greater its buying power, the flatter will be its demand curve, showing that the foreign supplier will have little influence on the price. With no tariff, the equilibrium price paid by importers will be at point a, where demand equals supply. Q1 would be imported at a price of P1.

Imposition of a tariff will shift the supply curve upwards by the amount of the tariff. The new equilibrium price paid by importers will be at point b, where the new supply curve crosses the demand curve. Importers thus now pay a post-tariff price of P2: an effective rise in price of P2 minus P1. Foreign exporters receive P3, which is what they are paid by importers after the tariff has been paid.

The consumer price will be above P2 as that includes a mark-up by US businesses on top of the price they pay to import the product. Importers may bear some of the increase in price and not pass the full amount onto consumers, depending on competition and their ability to absorb cost increases.

President Trump argued that there would be very little rise in price from the tariffs and that overseas suppliers would bear the brunt of the tariffs. Indeed, recently he has argued that this must be the case as US inflation has been falling. In response, critics maintain that the rate of inflation would have fallen more without the tariffs and that current prices would be lower than they are. Also, if US importing firms or retailers bear some of the increased cost, even though this helps to dampen the price rise, their lower profits could damage investment and employment.

The Reports

The first report is from the New York Fed (one of the regional branches of the Federal Reserve Bank). It examines the effect of tariffs imposed in 2025, over three periods: (i) January to August, (ii) September to October, and (iii) November. In the first period, 94% of the tariffs were paid by US importers and 6% by foreign exports; in the second period, the figures were 92% and 8% and in the third period, 86% and 14%.

The second report is The Budget and Economic Outlook: 2026 to 2036 from the Congressional Budget Office. Box 2-1 notes that, as of November 2025, ‘the effective tariff rate was about 13 percentage points higher than the roughly 2 percent rate on imports in 2024’. Its analysis suggests that 95% of the tariffs will be borne by importers. Of these higher import prices, 30% will be borne by US businesses, largely through reduced profit margins, and 70% by consumers through higher prices. This will also allow many businesses which produce goods that compete with foreign imports to ‘increase their prices because of the decline in competition from abroad and the increased demand for tariff-free domestic goods’.

The third report is from the Kiel Insitut. In its Policy Brief, Americaʼs Own Goal: Who Pays the Tariffs?, it finds that US importers and consumers bear 96% of the cost of the 2025 tariffs, with foreign exporters absorbing only about 4%. It bases it findings on shipment-level data covering over 25 million transactions valued at nearly $4 trillion. This also shows that exports to the USA declined as foreign exporters preferred to reduce volumes rather than absorbing the tariffs.

The tariffs raised some $200 billion in 2025, around 3.8% of Federal tax receipts. But, as we have seen, this was paid largely by US consumers and business. It goes some way to offsetting the annual cut in tax revenues of around $450 to $520 billion per year from the tax cuts, largely to the better off, in Trump’s ‘One Big Beautiful Bill’.

Reports

Aricles

Questions

  1. Summarise the findings of the three reports (but just Box 2-1 of the Congressional Budget Office one).
  2. Assess the argument that protectionism leads to inefficiency in the protected industries.
  3. Under what circumstances would exporters to the USA absorb a high percentage of tariff increases? Consider questions of elasticity.
  4. Can tariffs ever be justified on efficiency grounds?
  5. Can tariffs be justified as a bargaining ploy? Can they be used as a means of achieving freer and fairer trade?
  6. Read the blog, President Reagan on tariffs and summarise President Reagan’s arguments. Are they still relevant today?
  7. Consider the arguments for and against the EU raising tariffs on US goods.
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Will AI make the world less equal?

With businesses increasing their use of AI, this is likely to have significant effects on employment. But how will this affect the distribution of income, both within countries and between countries?

In some ways, AI is likely to increase inequality within countries as it displaces low-skilled workers and enhances the productivity of higher-skilled workers. In other ways, it could reduce inequality by allowing lower-skilled workers to increase their productivity, while displacing some higher-skilled workers and managers through the increased adoption of automated processes.

The effect of AI on the distribution of income between countries will depend crucially on its accessibility. If it is widely available to low-income countries, it could significantly enhance the productivity of small businesses and workers in such countries and help to reduce the income gap with the richer world. If the gains in such countries, however, are largely experienced by multinational companies, whether in mines and plantations, or in labour-intensive industries, such as garment production, few of the gains may accrue to workers and global inequality may increase.

Redistribution within a country

The deployment of AI may result in labour displacement. AI is likely to replace both manual and white-collar jobs that involve straightforward and repetitive tasks. These include: routine clerical work, such as data entry, filing and scheduling; paralegal work, contract drafting and legal research; consulting, business research and market analysis; accounting and bookkeeping; financial trading; proofreading, copy mark-up and translation; graphic design; machine operation; warehouse work, where AI-enabled warehouse robots do many receiving, sorting, stacking, retrieval, carrying and loading tasks (e.g. Amazon’s Sequoia robotic system); basic coding or document sifting; market research and advertising design; call-centre work, such as enquiry handling, sales, telemarketing and customer service; hospitality reception; sales cashiers in supermarkets and stores; analysis of health data and diagnosis. Such jobs can all be performed by AI assistants, AI assisted robots or chat bots.

Women are likely to be disproportionately affected because they perform a higher share of the administrative and service roles most exposed to AI.

Workers displaced by AI may find that they can find employment only in lower-paid jobs. Examples include direct customer-facing roles, such as bar staff, shop assistants, hairdressers and nail and beauty consultants.

Such job displacement by AI is likely to redistribute income from relatively low-skilled labour to capital: a redistribution from wages to profits. This will tend to lead to greater inequality.

AI is also likely to lead to a redistribution of income towards certain types of high-skilled labour that are difficult to replace with AI but which could be enhanced by it. Take the case of skilled traders, such as plumbers, electricians and carpenters. They might be able to use AI in their work to enhance their productivity, through diagnosis, planning, problem-solving, measurement, etc. but the AI would not displace them. Instead, it could increase their incomes by allowing them to do their work more efficiently or effectively and thus increase their output per hour and enhance their hourly reward. Another example is architecture, where AI can automate repetitive tasks and open up new design possibilities, allowing architects to focus on creativity, flexibility, aesthetics, empathy with clients and ethical decision-making.

An important distinction is between disembodied and embodied AI investment. Disembodied AI investment could include AI ‘assistants’, such as ChatGPT and other software that can be used in existing jobs to enhance productivity. Such investment can usually be rolled out relatively quickly. Although the extra productivity may allow some reduction in the number of workers, disembodied AI investment is likely to be less disruptive than embodied AI investment. The latter includes robotics and automation, where workers are replaced by machines. This would require more investment and may be slower to be adopted.

Then there are jobs that will be created by AI. These include prompt engineers, who develop questions and prompt techniques to optimise AI output; health tech experts, who help organisations implement new medical AI products; AI educators, who train people in the uses of AI in the workplace; ethics advisors, who help companies ensure that their uses of AI are aligned with their values, responsibilities and goals; and cybersecurity experts who put systems in place to prevent AI stealing sensitive information. Such jobs may be relatively highly paid.

In other cases, the gains from AI in employment are likely to accrue mainly to the consumer, with probably little change in the incomes of the workers themselves. This is particularly the case in parts of the public sector where wages/salaries are only very loosely related to productivity and where a large part of the work involves providing a personal service. For example, health professionals’ productivity could be enhanced by AI, which could allow faster and more accurate diagnosis, more efficient monitoring and greater accuracy in surgery. The main gainers would be the patients, with probably little change in the incomes of the health professionals themselves. Teachers’ productivity could be improved by allowing more rapid and efficient marking, preparation of materials and record keeping, allowing more time to be spent with students. Again, the main gainers would be the students, with little change in teachers’ incomes. Other jobs in this category include social workers, therapists, solicitors and barristers, HR specialists, senior managers and musicians.

Thus there is likely to be a distribution away from lower-skilled workers to both capital and higher-skilled workers who can use AI, to people who work in new jobs created by AI and to the consumers of certain services.

AI will accelerate productivity growth and, with it, GDP growth, but will probably displace workers faster than new roles emerge. This is likely to increase inequality and be a major challenge for society. Can the labour market adapt? Could the effects be modified if people moved to a four- or three-day week? Will governments introduce statutory limits to weekly working hours? Will training and education adapt to the new demands of employers?

Redistribution between countries

AI threatens to widen the global rich–poor divide. It will give wealthier nations a productivity and innovation edge, which could displace low-skilled jobs in low-income nations. Labour-intensive production could be replaced by automated production, with the capital owned by the multinational companies of just a few countries, such as the USA and China, which between them account for 40% of global corporate AI R&D spending. For some companies, it would make sense to relocate production to rich countries, or certain wealthier developing countries, with better digital infrastructure, advanced data systems and more reliable power supply.

For other companies, however, production might still be based in low-income countries to take advantage of low-cost local materials. But there would still be a redistribution from wages in such countries to the profits of multinationals.

But it is not just in manufacturing where low-income countries are vulnerable to the integration of AI. Several countries, such as India, the Philippines, Mexico and Egypt have seen considerable investment in call centres and IT services for business process outsourcing and customer services. AI now poses a threat to employment in this industry as it has the potential to replace large numbers of workers.

AI-related job losses could exacerbate unemployment and deepen poverty in poorer countries, which, with limited resources, limited training and underdeveloped social protection systems, are less equipped to absorb economic and social shocks. This will further widen the global divide. In the case of embodied AI investment, it may only be possible in low-income countries through multinational investment and could displace many traditional jobs, with much of the benefit going in additional multinational profit.

But it is not all bad news for low-income countries. AI-driven innovations in healthcare, education, and agriculture, if adopted in poor countries, can make a significant contribution to raising living standards and can slow, or even reverse, the widening gap between rich and poor nations. Some of the greatest potential is in small-scale agriculture. Smallholders can boost crop yields though precision farming powered by AI; AI tools can help farmers buy seeds, fertilisers and animals and sell their produce at optimum times and prices; AI-enabled education tools can help farmers learn new techniques.

Articles

Questions

  1. What types of job are most vulnerable to AI?
  2. How will AI change the comparative advantage of low-income countries and what effect will it be likely to have on the pattern of global trade?
  3. Assess alternative policies that governments in high-income countries can adopt to offset the growth in inequality caused by the increasing use of AI.
  4. What policies can governments in low-income countries or aid agencies adopt to offset the growth in inequality within low-income countries and between high- and low-income countries?
  5. How might the growth of AI affect your own approach to career development?
  6. Is AI likely to increase or decrease economic power? Explain.