The Great Transition examines the rise of the information economy in the context of the debate around ‘secular stagnation’. It is our view that the information economy should herald a better global economy, but this can only occur after a period of difficult transition, which requires sound policy and patience.
The transition is occurring in the context of a profound productivity shift as a consequence of China, smartphones in the hands of 1.75 billion people and the rise of services. This positive change is made problematic by both the disruption and the inability of contemporaneous statistics to properly capture the change.
Like most upheavals, the information revolution will not be pain-free. Traditional businesses and business models will fall as the industrial economy declines and the information economy expands.
However, the end result should be a better global economy, one in which consumers are increasingly empowered. It will be an economy driven by perfect competition with remarkable personalisation and a rising demand for services, some of which will come in forms that we have not yet imagined.
For western economies the challenges are immense, with the decline in entrenched industrial economies. But in the coming decade this stagnation may moderate as the information economy continues its rapid growth.
Rather than stagnation, we are facing a transition. The future will bring a world economy that works differently, that will bring opportunities and challenges to which governments, businesses and investors will need to adapt.
In The Great Transition, we examine three key themes: Productivity, Capital Consequences and Historical Rhythms.
Productivity
‘Productivity’ considers how the nature of production is changing. Analysis includes:
- How the smartphone will drive the new economy. In 2014, almost half a billion new mobile devices were produced, 88% of which were smartphones. In that same year, mobile data traffic grew by 69%, an amount 30 times larger than the entire internet traffic of 2000.
- China’s role in the information revolution. China has been largely responsible for putting these incredibly powerful devices in the hands of one in five of the world’s people.
- The secrets of China’s success. In 2006, a 42-inch LCD television cost US$4000; in 2015 you could pick one up for US$384. This phenomenon has often been credited to an almost endless supply of cheap Chinese labour. However, since 2006, China’s labour costs have risen 15% a year. What China has done well is improve productivity through encouraging competition and infrastructure development.
- The move towards services. Living standards are rising. The richer and more connected we become, the less time we have and the more we demand services. This helps improve our lives through higher consumption of leisure while increasing the employment opportunities in the same fields.
Capital consequences
‘Capital consequences’ looks at the erosion of capital’s value and the rise of the intangible. Analysis includes:
- Declining capital. China’s perfect competition model and better outcomes for consumers will lead to an erosion of capital’s earnings power.
- The power of connectedness and information. Consumers will no longer pay more for products due to convenience, geography or lack of information.
- Big firms losing their advantage. Cheap information allows much smaller organisations to effectively compete with big ones. Consumers will expect personalised, high quality, competitively priced products and services, increasingly provided by individuals rather than firms.
- The rise of GAFA. Google, Apple, Facebook and Amazon may have a distinct lack of tangible assets, but they are at the forefront of the new economy and its new rules. Their assets may be intangible but their sales are not.
- The “Tetris economy”. How using resources more efficiently can lead to an expansion in economic activity without so many inflationary pressures.
Historical rhythms
Finally, ‘historical rhythms’ looks at how the Long Depression of the late 19th century can teach us important lessons about the Great Transition. Both periods feature rising living standards, but also financial crises and deflation. Analysis includes:
- Technological progress and its consequences. What the railway, the steamship and the telegraph can teach us about the information revolution.
- The financial consequences of the Long Depression. How falling prices, interest and profits led to the destruction of historic capital and the rise of newer capital.
The Great Transition describes a world in which technological change allows more to be done with fewer resources. It is a world of improved productivity and the crumbling past, higher living standards but slow growth, where the old corporate economy gives way to an economy in which consumers and producers interact directly.
Sound policy and patience will be required in the years ahead. The rate of change will be exponential: in 2015 alone we may see the demise of business models and methods once considered impregnable. The transition will change our economic and investing lives profoundly, but it will also bring a wealth of opportunity.
James White is an Economist for Colonial First State Global Asset Management. This article is for information purposes only and does not consider the circumstances of any investor..