Driven by extreme automation and extreme connectivity, the Fourth Industrial Revolution will have significant implications for investors, the global economy and the relative competitiveness of developed and emerging nations, according to UBS.

In a white paper entitled ‘Extreme automation and connectivity: The global, regional, and investment implications of the Fourth Industrial Revolution,’ the Swiss bank explores the potential consequence and likely winners and losers of the Fourth Industrial Revolution. The paper coincides with this year’s World Economic Forum annual meeting’s main topic.

As the world has seen three industrial revolutions – mechanical production and steam power, mass production and electricity, and electronics and IT –, we are now embarking on an additional one in which artificial intelligence is likely to play a much greater role.

“We expect artificial intelligence (AI) to be a pervasive feature of the Fourth Industrial Revolution,” UBS writes. “Extreme automation can also be coupled with extreme connectivity, allowing computing systems to control and manage physical processes and respond in ever more ‘human’ ways.”

Some radical implications may arise from the Fourth Industrial Revolution:

Increased economic inequality and polarization of the labor force

UBS warns that automation is threatening lower-skilled workers’ jobs and will likely cause heightened political tensions due to “increasing economic inequality.”

“Polarization of the labor force as low-skill jobs continue to be automated, and this trend increasingly spreads to middle-skill jobs,” the bank predicts. “This implies higher potential levels of inequality in the short-run, and a need for labor market flexibility to harness Fourth Industrial Revolution benefits in the long-run.”

Increased cybersecurity risks

Extreme connectivity increases the risks posed by cybersecurity breaches. “In particular, the rise of extreme automation and connectivity via ‘smart grid’ systems while improving energy efficiency and helping match supply with demand more effectively, may be vulnerable to hacks which shut down electricity transmission or generation systems entirely,” UBS says.

Increased geopolitics risks

Extreme connectivity can foster geopolitical tensions notably by enabling diverse groups to organize protests and offering the potential for greater publicity to violent extremists.

The bank cites the example of the widely distributed images of Mohamed Bouazizi, and his self-immolation in protest over police corruption, which helped give rise to a mass movement that displaced the Tunisian government and triggered the broader Arab Spring in the Middle East.

Regional winners and losers

Flexibility will be key to success in the Fourth Industrial Revolution, the bank says. Economics with the most flexible labor markets, educational systems, infrastructure, and legal systems will be the relative beneficiaries.

“How an economy and its labor force adapt to changing economic structures will determine how successful a nation is in responding to the Fourth Industrial Revolution,” the paper reads.

“As a general rule, however, it is an economy’s ability to adapt to the changes associated with new technology that matters.”

That said, because emerging markets have more lower-skilled workers and less flexibility to raise skills than developed markets, the Fourth Industrial Revolution is expected to entail fewer headwinds for developed markets than their emerging peers.

“Emerging market economies are at risk of squandering their demographic prime, if they are yet to move from low-income to middle-income,” it says. 

“Many of these economies have still not dealt with the challenge of previous industrial revolutions. Their output and employment are still largely driven by agriculture, small-scale manufacturing and low-skilled services, large parts of which are in the informal economy. These are economies with low capital stock and high population growth rates.

“They will face the threat of the Fourth Industrial Revolution compromising low-skilled jobs via extreme automation, but may not have the technological ability to enjoy the relative gains that could be re-distributed via extreme connectivity.”

Read UBS’ ‘Extreme automation and connectivity: The global, regional, and investment implications of the Fourth Industrial Revolution’ white paper: https://www.ubs.com/global/en/about_ubs/follow_ubs/highlights/davos-2016.html

Featured image: Robotic character, by Ociacia, via Shutterstock.