Twin transition (green and digital) will affect the world as we know it. Will this change be beneficial for everyone? Are there risks?
An example from the recent past
Trade liberalisation over the last 30 years has impoverished some well-defined groups of the population in advanced countries. While most economists kept repeating how good it was to lower tariffs and customs barriers in order to open up to the whole world, they underestimated the impact this would have on those affected. Autorn, Dorn and Hanson – for example – analysed government aid programmes in the areas of the US most affected by trade with China. Their study indicates that even though people in the affected areas received subsidies, these were not sufficient to cover the loss of income. The authors estimate an annual loss per adult of $549, compared to government subsidies of just $58 [1], [2]. Moreover, it is clear that purely financial aid cannot really compensate for the human and psychological difficulties caused by a job loss, especially late in someone’s working life.
The situation is different in developing countries, many of which have benefited greatly from globalisation. Countries such as Mexico, China, Colombia, India and Argentina have become richer in the last 30 years. Although the proportion of the population in extreme poverty in these countries has decreased, inequality on the other hand increased, indicating that this new wealth has not been distributed evenly. Some economists (including the two recent Nobel laureates Banerjee and Duflo) suspect a causal link between the growth of inequality in these countries and their trade liberalisation policies [3],[4] .
However, tariffs cannot be the solution: most supply chains nowadays are international, introducing tariffs has repercussions on the cost of materials used by companies. Moreover, trying to impose an industrial strategy based on old standards has a negative effect on productivity and gross domestic product. Finally, new tariffs imply higher prices of imported goods, with a consequent negative impact on the purchasing power of citizens. [5]
International trade has helped global growth, contributing to an increase in the standard of living of many citizens in developing countries and increasing the purchasing power of those in advanced countries (especially small ones). However, one cannot overlook the suffering of those who have been personally affected by the transition from certain types of economic activity (such as steel or textile) to others (e.g. business and financial consulting). Ignoring the suffering of these people – often living in production clusters – could have been one of the causes behind the radicalisation of the electorate in the West, which led to phenomena such as Trump and Brexit.
Learning from your mistakes
Today it is important not to make the same mistake with the economic recovery packages in the advanced economies. It is vital to implement them, just as it was right to open up to trade thirty years ago. This time, however, we have to make sure that no one is left behind, or further discontent will rise. It is important to think in these terms of the twin transition – green and digital – promoted by the EU Commission. These changes are already underway and will be accelerated by the €750 billion from the Next Generation EU package. Like all revolutions, this one will bring about epochal changes that have winners and losers.
Everything below is an extract – with some additions – of page 6 of the European Policy Centre’s report “National Recovery and Resilience Plans: Empowering the green and digital transitions?”, written by Marta Pilati and available here.
While there is a common goal for these transformations – reaching a sustainable and inclusive society, economy and model of growth –, the scale of the required change is not the same for everyone involved. To be successful, the sustainable and digital transitions will require adaptations in production processes, public administration and services, education, the labour market, skill base, energy mix and infrastructure, and more. There is large heterogeneity across the EU regarding these policy fields, implying that the transformation towards the common objectives will require different, tailored efforts.
From a geographical perspective, EU regions that are less developed and/or underperform economically are also less equipped to successfully engage in the twin transitions. A
recent EPC study[6] puts forward the following conclusions:
- The twin transitions may force some occupations to transform significantly or disappear completely. While they are expected to create new jobs, an issue arises if the jobs created and lost are not located in the same area and to the same workers. This is notably the case
for regions whose labour market is heavily reliant on energy-intensive industries (e.g. extraction and processing of fossil fuels). As large workforce mobility cannot be assumed, labour repurposing and retraining will be necessary to avoid higher localised unemployment. With this in mind the EU Commission launched the REACT-EU package[7].
- All economic sectors will demand more (and new) skilled job profiles with more knowledge and technology intensity. Areas where the skill base is less advanced and/or there is less capacity to support in-work training will be less successful in engaging with the transitions quickly. This could result in negative effects on prosperity in the long term.
- In order to reap the benefits of the digital transition and improved connectivity, digital infrastructure remains crucial. The ‘digital divide’ across EU regions is a cause for concern, as the lack of appropriate (digital) infrastructure can exclude entire areas from high-value
activities. It can also challenge existing activities, which might move elsewhere and therefore lead to economic decline. Similarly, it can prevent some areas from benefitting from digital public services. This is why the Commission has called for digital infrastructure to be put at the heart of recovery and resilience plans.
Social aspects must be a central focus when planning structural changes. Social cohesion will be the key determinant of the success or failure of the twin transitions. If these major transformations are perceived as leaving individuals, vulnerable groups or regions behind and/or forcing them to shoulder most of the burden, public support for these structural transitions will diminish. This would risk their overall success and thereby reduce the resilience of the EU economy. Some potential social effects of the twin transitions that are worth mentioning are listed below.
- The impact of technological change on the labour market. For example, new forms of work linked directly to digitalisation, notably platform work, have recently emerged. Social protection systems have not always been able to adapt to these labour developments, resulting in protection gaps. [8]
- The employment risk of automation. One in five low-income jobs is at risk of automation. This is one in six for middle-income jobs and only one in ten for high-income work[9]. Job disruption caused by automation represents a real concern of increased inequality and new instability.
- The symbiotic relationship between social exclusion and digital exclusion. Vulnerable and socially excluded groups use the internet and technological tools less than the rest of the population, as they tend to have fewer digital skills and access. This digital exclusion also prevents them from reaping the benefits of new technologies, leading to poor educational attainment, for example. This exacerbates their social exclusion further[10].
- Low-income groups’ vulnerability to price increases. If the ecological transition leads to higher energy or mobility prices, this will be problematic for low-income groups (at least in the short term) and affect the poor disproportionately[11].
- The digital transition’s gender dimension. As STEM (i.e. science, technology, engineering, mathematics) skills and occupations become more important and requested in the labour market, there is a risk of women being left out of the gains and the gender gap increasing, as they tend to be less present in these areas.
Outlining these risks of inequality is by no means to undermine the need for the twin transitions. Rather, it is to ensure that the transitions are successful and just. The transitions can lead to a digital and sustainable economy and more cohesive society, as long as their benefits reach the more vulnerable. For example, digitalisation and teleworking can bring jobs and economic activities to areas where it is not physically feasible. Speeding through structural transformations without a strategy to prevent distortive effects and counterbalance costs dooms the effort to failure. There is increasing recognition that Europe’s social and territorial cohesion must be protected.
Reference
[1] Abhijit V. Banerjee & Esther Duflo (2019), Chapter 3, “Good Economics for Hard Times”.
[2] Autorn, Dorn, Hanson, American Economic Review (2013) “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”
[3] Ibid
[4] Goldberg, Pavcnik (2007), Distributional Effects of Globalization in Developing Countries, American Economic Association
[5] John K. Ferraro and Eva Van Leemput (2019) Long-Run Effects on Chinese GDP from U.S.-China Tariff Hikes, Federal Reserve
[6] Pilati, Marta and Alison Hunter (2020), EU lagging regions: state of play and future challenges“, Brussels: European Parliament.
[7] La quota del react eu dovrebbe essere diretta proprio a contenere squilibri territoriali e a supportare le aree più in difficoltà. REACT-EU – Regional Policy – European Commission
[8] Dhéret, Claire, Simona Guagliardo and Mihai Palimariciuc (2019), “The future of work: Towards a progressive agenda for all”, Brussels: European Policy Centre.
[9] OECD (2019), “Under Pressure: The Squeezed Middle Class”, Paris: OECD Publishing.
[10] Martin, Chris et al. (2016), “The role of digital exclusion in social exclusion”, CarnegieUK Trust.
[11] López Piqueres, Sofia and Sara Viitanen (2020), “On the road to sustainable mobility: How to ensure a just transition?”, Brussels: European Policy Centre.
