Speech by Daniel Mminele,
Deputy Governor of the South African Reserve Bank,
at the University of Zululand, MBALI International conference
Richard's Bay
1 August 2018
The Fourth Industrial Revolution and the future of work:
some implications for central banking
Introduction
Good morning, ladies and gentlemen.
I would like to start by thanking the University of Zululand for the opportunity to share
some thoughts with you on an issue which will invariably have an impact on all of our
lives, namely 'The Fourth Industrial Revolution and the future of work'.
Policymakers (including fiscal and monetary authorities), business entities and
academic institutions all around the world are grappling with the implications of the
Fourth Industrial Revolution and what this means for the future of work. This issue also
formed part of the theme of the 10th BRICS1 Summit that was concluded in
Johannesburg last week.
Indeed, this topic is also relevant for an institution such as yours, as education is the
key to unlocking benefits and avoiding the potential negative repercussions. Machines
are developing at a rapid speed and their application is becoming increasingly
sophisticated, which undoubtedly has massive implications for education and the skills
set required for moving successfully into the future. The future requires not only a
1
Brazil, Russia, India, China, South Africa
different skills set, but also a different way of learning, a commitment to lifelong
development, with young people at the coalface of this change.
Against this brief background, I would like to share with you a few thoughts about how
the future of work is changing the world of work, and some initiatives of international
organisations such as the G202 in this regard. I would also like to explore some of the
implications for central banking.
What is 'the future of work', and how is it changing the world of work?
could argue that a country's experience of the
One Fourth Industrial Revolution
depends on certain socio- and macroeconomic fundamentals, such as the level of its
development and the skills set of its labour force, among other things. But this does
not change the fact that preparedness is essential.
For many emerging markets, structural impediments have hindered development to
such an extent that artificial intelligence is not an immediate possibility, and the
adaptation of new technology to local conditions in these economies is therefore likely
to be slower. Nonetheless, adaptation is inevitable.
There appears to be a great deal of emphasis on the Fourth Industrial Revolution
currently taking place, perhaps more so than was the case with the previous three
industrial revolutions. Many are asking: why is there so much hype, and what makes
this revolution different?
Like the first three industrial revolutions, the Fourth Industrial Revolution will have
significant transformative impacts on society. However, this time, the systemic impact
is expected to be much more intense, as new technologies are developing at
exponential speed, with much wider coverage given a far more integrated and
globalised world.
2
Group of Twenty
Furthermore, it is not just a matter of manual tasks being overtaken by automation.
Rather, technology is developing tacit knowledge and completing cognitive tasks. It is
not only the low-skilled jobs or tasks that are at risk of being eliminated, but also the
more highly qualified professional jobs like those of financial analysts. There was a
time when ideas like driver-less cars and talking robots were only found in sci-fi
movies, and seemed so imaginative and unrealistic. These are no longer things of the
distant future; they are becoming part of our lives and will become increasingly
common in the coming years.
Indeed, there are conflicting views about the impact that such automation will have on
jobs, skills and wages. A McKinsey report3 estimates that, by the year 2030, at least
one-third of the activities of 60% of all the occupations could be automated. This
implies that, globally, up to 375 million people may need to change jobs or learn new
skills within the next 12 years. As Professor Klaus Schwab, the founder and Executive
Chair of the World Economic Forum, notes: these shifts mean that we live in a time of
great promise and of great peril.
The positive aspects include the ability to connect billions more people through digital
networks, improving the efficiency of organisations dramatically. There is also the
capacity to reduce costs significantly, to reduce the necessity for businesses to have
a physical presence, and to create opportunities for new, small-scale producers to
enter the increasingly globalised markets. If harnessed correctly, technological change
can bring about immense economic opportunities, new and better ways of doing
business, the creation of new industries, new and better-quality jobs, higher GDP4
growth, and improved living standards. The current technological developments have
the potential to lift growth and productivity, thereby raising living standards over the
longer term.
However, if organisations and governments fail to embrace new technologies to
capture the benefits they bring, changes in labour markets may instead contribute to
rising inequality, as the middle-skilled jobs relative to both high- and low-skilled jobs
3
Mc Kinsey Global Institute. Jobs lost, jobs gained: what the future of work will mean for jobs, skills
and wages. December 2017
4
Gross domestic product
are lost and the real wages decline among the lower-skilled workers in some countries.
These developments could aggravate income inequality both within and between
countries.5 If left unchecked, security concerns and threats may also increase,
compromising governments, businesses and individuals.
For the ladies in the audience, I should note that the World Economic Forum believes
that women tend to possess more of the human characteristics that should give them
an advantage in the new jobs of the Fourth Industrial Revolution. These characteristics
include, among others, the capacity for empathy, creativity, listening skills, learning
ability and collaboration (instead of competition).
The Fourth Industrial Revolution, and our ability and willingness to respond to the ever-
evolving needs of the workplace, is particularly important for a continent such as
Africa, because of its rapidly growing and dynamic population. How we deal with the
changing African demographics will make the difference between having either a
'dividend' of young producers and consumers, or a growing unemployment problem.6
Why is this so important for Africa in particular?
Africa emerged from each of the previous three industrial revolutions lagging behind
much of the rest of the world. We have not kept pace with the move from the
mechanisation of production to mass production, and finally to the computer age. Now
that we are entering the Fourth Industrial Revolution, Africa will unfortunately do so on
the back foot once again.
Sub-Saharan Africa (SSA) has the second-largest working-age population, accounting
for 13% of the world's total. Furthermore, more than 60% of its population is under the
age of 25, and it is estimated that, by 2030, SSA will be home to more than one-quarter
of the world's total
under-25 population.7
5
Taken from "The Future of Work: Trends, Impacts and the Case for G20 Action", March 2018
6
The 'fourth industrial revolution': potential and risks for Africa, The
Conversation
7
World Economic Forum. The Future of Jobs and Skills in Africa, Preparing the Region for the Fourth
Industrial Revolution. May 2017
However, SSA does not make optimal use of its human capital potential. The World
Economic Forum's Human Capital Index8
indicates that SSA captures, on average,
only 55% of its full human capital potential, compared to a global average of 65%. The
that the region's capacity to adapt to the requirements
World Economic Forum asserts
of future jobs, relative to the region's exposure to these future
trends, leaves little
space for complacency. On a bigger scale, urgent efforts are needed to close the
continent's skills gap.
SSA is therefore relatively underprepared for the impending disruption to jobs and
skills brought about by the Fourth Industrial Revolution, and needs to take action
quickly.
The G20 approach to the future of work
As I have already alluded, the future of work has become a topic of international focus.
Argentina's -
Under presidency as part of achieving its objective of strong,
-
sustainable, balanced and inclusive growth the G20 has recognised the importance
of focusing on the Fourth Industrial Revolution, understanding that it has an important
role to play in devising policy responses to deal with the ramifications of the future of
work.
The G20 has also recognised that policy consistency across its members, especially
can strengthen the effectiveness of individual members'
where there are spillovers,
policy efforts and increase the benefits of international collaboration. In addition,
through international cooperation, the opportunities presented by the Fourth Industrial
Revolution can be better exploited to ensure that none are left behind in the process.
With this in mind, the G20 has considered the economic and social impacts of
technological changes on the future of work. Under the Framework Working Group,
the G20 Finance Track has devised a menu of policy options that member countries
-
can draw on when responding to the impacts of technological change specifically in
8
Measures the extent to which countries and economies optimize their human capital through
education and skills development and its deployment throughout the life-course
the areas of tax, public expenditure and transfers, competitive conditions, and
measurement and data. The menu is structured around four overarching objectives:
(i) harnessing the benefits of technology for growth and productivity;
(ii) supporting people during transitions and addressing distributional
challenges;
(iii) securing sustainable tax systems; and
(iv) ensuring the best possible evidence to inform decision making.
Countries are encouraged, when devising their growth strategies9, to identify policy
actions as well as areas of potential international cooperation.
South Africa is an active member of the G20 and has been contributing to the debate
in its growth strategy, an outline of South
on this topic, and will include, Africa's policy
approaches to this priority area.
The future of work and central banking
Much of the research being conducted on the future of work in relation to the Fourth
Industrial Revolution revolves around issues directly related to fiscal policy. Beyond
this, many of the policy areas being affected, such as skills and competition, are
outside of the direct ambit of central banks. However, insofar as the future of work
-
could have an impact on the macroeconomy through its effect on labour, aggregate
-
demand and supply, prices and therefore the equilibrium interest rate it certainly
could influence the conduct of monetary policy.
Monetary policy could be affected through various channels. Prices could be lowered,
for example, as retail sales become digitalised, as many already are. As a result,
inflation could decelerate because online retailers face much lower operational costs
than traditional businesses. Anders Borg, Sweden's
former Minister of Finance, also
notes that feed-through from exchange rate depreciations might be less than it has
9
Under Australia's G20 Presidency in 2014, all G20 countries were asked to prepare
medium-term
growth strategies to provide a systematic framework for addressing policies and priorities in the growth
agenda. The strategies prepared are comprehensive in scope, spanning macroeconomic policies and
structural reforms to promote strong, sustainable, and balanced growth.
been historically. The theoretical starting point is that a permanent depreciation should
be fully absorbed by consumer prices. In a digital world, currency depreciation could
imply that the profit-margin squeeze is accelerating. The recent limited impact of dollar
appreciation on inflation in some of the emerging markets shows that this could be at
least one underlying factor.10
Monetary policy will also be affected by labour demand and supply. One can assume
that, during a transition, jobs will be lost. However, should the displaced workers be
unable to find other jobs, the equilibrium rate of unemployment could increase, shifting
the Phillips curve11 outwards. Inflation could decelerate if we assume that the
productivity of robots will be greater than that of humans, causing a decline in the
wages of the remaining workforce. However, the shape of the Philips curve can also
be affected if, for example, trade union power is reduced or the expected disinflation
is not realised because firms decide to increase mark-ups, cancelling out the impact
of lower wage growth. The macroeconomic impact of these developments remains
uncertain. What is clear, however, is that monetary policy will have to keep pace with,
and be cognisant of, any potential changes in this regard, and adjust accordingly.
An area where technological advancement is indeed having a profound impact on
central banking is in the financial technology (fintech) space. Fintech architecture, with
which some central banks are currently experimenting (e.g. blockchain and distributed
ledger technology (DLT) solutions), is making it possible to manage massive numbers
of transactions as well as the transfers and settlements of large sums of money.
However, in many ways this is a technology that is still in its infancy, and the extent of
efficiency benefits still have to be demonstrated. But further developments could
certainly see much greater efficiencies and a reduction in costs.
The South African Reserve Bank (SARB) recently launched Project Khokha, which
had as its scope the trial of interbank wholesale settlement using DLT. This was South
10
World Economic Forum. How will the Fourth Industrial Revolution affect economic policy? 28
January 2016.
11
The Phillips curve, named after William Phillips, describes the historical inverse relationship between
rates of unemployment and corresponding rates of wage increases that are evidenced within an
economy. According to the theory, faster economic growth leads to higher inflation, which in turn leads
to more jobs and less unemployment.
Africa's first DLT
initiative, whose aim was to contribute to the global initiatives that
assess the application and use case for DLT. Project Khokha was successful in that it
proved that the typical daily volume of the South African payment system could be
processed in less than two hours with full confidentiality of transactions and settlement
finality. This demonstrated to us that DLT has potential, but it has also become evident
that there is a long road ahead before large-scale adoption can be considered.12
New technology is increasing the efficiency of key banking functions through enabling
the creation of new financial services. In terms of lending and borrowing, for example,
'crowd-funding'13 and online 'peer-to-peer lending platforms'14 are buzzwords. These
applications are closely related to financial intermediation, a core and heavily
regulated element of financial institutions. The fintech applications in this field are still
a small fraction of overall credit, but are growing very rapidly in some jurisdictions.
This requires ongoing monitoring by central banks.
Fintech also provides opportunities to increase financial inclusion, and provides
unbanked households and firms with access to loans and savings. Low-income
countries still have a large part of the population lacking access to services that are
widespread in high-income countries, such as formal savings in financial institutions.
Greater competition in the banking sector, concentration risks, and greater security of
remittances are added benefits which ultimately mean reduced costs for participation
in the formal economy and easier access to public services based on improved
government databases.
However, while new technology provides opportunities, it also poses a number of
challenges, including financial stability risks and cyber security risks. The more
financial systems depend on electronic platforms and digital records, the more
exposed they are to cyberattacks, which can disrupt the flow of funds across the
12
Some of the considerations relate to the interlinkages and cost-speed-and-scale comparative
analysis with current systems, and the fit with current legal and regulatory requirements.
13
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from
a large number of people, typically via the Internet.
14
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals
or businesses through online services that match lenders with borrowers.
economy and create financial instability. Therefore, a robust cyber-resilience and
cyber-risk framework is crucial to creating an enabling environment for financial
services innovation.15
One area which has been receiving increasing attention in central banking circles
relates to so-called crypto-currencies. The rapid pace of usage, and the complexities
of such crypto-assets, have forced central banks to reassert some fundamentals
relating to the definition of money, its characteristics, and the role of the central bank
in this regard. There is a broad consensus that crypto-assets do not meet the
traditional definition of money, as they are not a means of exchange, a store of value,
nor a unit of account. At the very least, as explained by Augustin Carstens, the General
Manager of the Bank for International Settlements16, they lack the characteristics of
'good money'
as what constitutes 'good money' is the level of trust and credibility that
the public has in the currency, and that trust has to be earned and supported. Central
banks, however, are exploring the use of central bank digital currencies, which could
be of more benefit and would likely be safer.
As part of its fintech Programme, the SARB has taken cognisance of the investigatory
studies done on crypto assets, and has placed high emphasis on monitoring the
has adopted a 'back basics' approach by focusing on
developments in this area. It to
the underlying economic function or activity being performed (deposit taking,
The SARB's
payments, lending and investments) rather than the specific technology.
position on crypto-assets is that these are not recognised as currency or legal tender
in South Africa, and that only the SARB is allowed to issue legal tender. Any merchant
or beneficiary has a right to refuse crypto-assets as a means of payment.
Although the Financial Stability Board has concluded that there are currently no
immediate financial stability risks arising from crypto-assets, there are other potential
risks arising with respect to consumer and investor protection, market integrity, tax
15
The SARB undertook a cyber-crisis simulation exercise last year, with assistance from the World
Bank. The simulation included three different but related cyberspace incidents, namely failure to settle
Treasury bills, a failure of the stock exchange, and an attack on a small bank paying out social grants.
Much was learnt from this exercise. It also allowed authorities to test the strength of their crisis
communication arrangements, coordination and decision making under critical situations, including
recovery and resolution strategies.
16
banks?"BIS, February 2018
Augustin Carstens, Money in the digital age: what role for central
evasion, money laundering and terrorism financing, which require ongoing monitoring.
We therefore need to ensure that as these technologies evolve, we robustly assess in
parallel dimensions such as legal, governance, risk and operational frameworks.
I have said much about how the Fourth Industrial Revolution could be changing the
world of work and the implications that it might have for central banking, from monetary
policy to financial stability, currency operations and payment systems.
Recent monetary policy developments
SARB's
At the conclusion of its most recent meeting about two weeks ago, the
Monetary Policy Committee (MPC) decided to leave the repurchase rate unchanged
at 6.5% per annum. This was judged to be consistent with a still accommodative
stance of monetary policy given the current weak state of the economy.
The MPC did, however, note with concern that the risk profile to both the growth and
inflation outlooks had deteriorated when compared to the observations at its previous
and this was reflected in the Bank's forecasts.
sitting in May 2018, A number of risks
that had been highlighted in previous meetings had either materialised or still
persisted, in an environment that continued to be characterised by heightened
uncertainty. While the external environment has had a more dominant influence on
the outlook, domestic factors also played a role.
Headline inflation is now expected to average 4.8% in 2018 (down from 4.9%) before
increasing to 5.6% in 2019 and decreasing again to 5.4% in 2020 (up from 5.2% in
both years). The forecast for core inflation is expected to average 4.6% in 2018 (up
from 4.5%), 5.5% in 2019, and 5.3% in 2020 (up from 5.1% in both years). Although
the forecasts suggest that inflation outcomes will remain within the inflation target
range, the MPC is concerned that they are drifting further away from the midpoint of
the target band.
The MPC deemed the key risks to the inflation outlook to be higher oil prices, a more
depreciated exchange rate, and higher electricity prices. Although oil prices have
retreated from the recent high levels of around USD80 per barrel, they are expected
to still remain at relatively elevated levels over the forecast period. Together with the
depreciation of the domestic currency, upside risks to domestic fuel prices and
ultimately to inflation remain. The nominal effective exchange rate of the rand has
depreciated by almost 9% and exhibited increased volatility from the first quarter of
2018 to the second quarter. The increased volatility resulted from a deterioration in
sentiment towards emerging markets, owing to the combined headwinds of tightening
financial conditions, weakening economic growth, and rising trade tensions, which
resulted in capital outflows. The rand is likely to continue to be vulnerable to these
developments. In addition, electricity prices continue to pose a further upside risk given
the uncertainty around the speed at which Eskom will adjust electricity tariffs.
Should these risks materialise, it may become necessary to adjust monetary policy
settings in the future to ensure that inflation remains more comfortably inside the target
range and closer to the midpoint, and to ensure that inflation expectations are
anchored towards the midpoint of the target range. The MPC will not hesitate to act
when deemed appropriate. However, in line with flexible inflation targeting, the MPC
will also continue to be careful not to overreact to initial price pressures and be guided
by its assessment of second round effects of any price pressures, which could
contribute to inflation moving too far away from the mid-point of the range, or even
exceeding the target range, on a sustained basis.
SARB's forecast for GDP growth for 2018 was revised down from
The 1.7% to 1.2%,
while the forecasts for both 2019 and 2020 were slightly higher at 1.9% and 2.0%
respectively. Following the broad-based contraction of 2.2% in the first quarter of 2018,
indications based on high frequency data suggest continued sluggish performance of
the economy in the second quarter, but with a likelihood that a technical recession will
be avoided.
As indicated previously, with South Africa having no fiscal space and monetary policy
similarly currently not being able to provide further stimulus, the attention needs to
firmly shift towards fully restoring confidence and urgent implementation of structural
reforms to help lift the potential rate of growth of the South African economy.
Conclusion
Let me conclude by reiterating the remarks made by Robert Shiller of Yale University
"You cannot wait until a house burns
on the subject of the Fourth Industrial Revolution:
down to buy fire insurance on it. We cannot wait until there are massive dislocations
in our society to prepare for the Fourth Industrial Revolution."
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Indeed, it is up to us whether we succeed in the Fourth Industrial Revolution whether
it will be a time of great promise or a time of great peril, both for the continent and for
our country. New technologies will transform the world we live in. The exponential
speed and scope of this transformation brings with it the potential for unlimited
possibilities and endless opportunities, but also massive challenges.
Educational institutions need to understand the implications of the Fourth Industrial
Revolution in order to better prepare their students for this new future. Our fate is in
our hands. We cannot afford to be left behind, and institutions such as the University
of Zululand have an important role to play in ensuring that we are not left behind.
Thank you for your attention.