How AI Investments Could Prevent Peruvian Economic Stagnation
Written by Jack Vasquez & Edited by Alexander Fleiss
Fifty years ago, East Asia and South America had similar levels of income and standards of living. Today, places like Japan and South Korea are far ahead of South America and continue to grow at faster rates. In the past decade, GDP per capita has grown at twice the rate in East Asia it has in South America. This isn’t to say that parts of South America haven’t seen high growth recently. Peru’s GDP, for example, grew by 3.9% in 2016, the second highest rate in South America. However, despite these promising numbers, Peru could see economic stagnation in the coming years.
Peru’s main problem lies in declining labor force productivity. The nation’s productivity fell 1.0% between 2011 and 2015. Despite declining productivity, output has continued to grow due to a growing labor force: In the same time period, Peru’s population increased nearly 5%. However, population growth rate is expected to decrease by around 3.5 percentage points in the next 15 years. And unlike countries where slowing population growth would be offset by females entering the workplace, data from the World Bank indicates that Peru’s female labor force participation rate is plateauing. Combined with declining productivity, slowing growth of the labor force will likely lead to slowing growth in output and income for Peru.
In order to reverse these trends and prevent a slowing or even stagnation of the economy, Peru needs to increase its productivity. Increases in technology drive productivity growth, yet Peru lags behind the rest of South America in one key technological area: artificial intelligence. Peru falls short of other South American countries in key indices that reflect AI growth. Its Global Innovation Index is 32.9 out of 100, behind that of Brazil, Uruguay, Colombia, and Chile. Its Open Data Barometer index, measuring quality of data, stands at 33.33 out of 100, behind those same four South American countries. This index is particularly important since high-quality data is a necessary ingredient in effective AI. Perhaps most striking is its Digital Evolution Index (DEI), a measurement of both current levels and expected momentum of online industry reported by Tufts University. Peru currently measures a 2.15 out of 4, in line with the rest of South America, but its momentum is by far the lowest in the continent at a mere 1.29 out of 4. These numbers reflect the fact that AI in Peru simply isn’t being utilized to its full potential.
A study by Accenture’s Armen Ovanessoff and Eduardo Plastino entitled “How Artificial Intelligence Can Drive South America’s Growth” estimates the effects that fully utilizing AI would have on Peru’s economy. If AI were fully utilized in Peru, its annual GDP growth would increase by a full percentage point, and its Gross Value Added would rise by over 43 billion USD. Peru has already seen a few interesting developments in AI. The Peruvian-based shipping startup Chazki has utilized AI to develop postal maps, and some mining companies have used computerized automation to boost efficiency. Despite these efforts, AI utilization is still far below potential, particularly in manufacturing, the study notes. The Accenture report recommends the governments of Peru and other South American countries increase investments in education, research, and development in an effort to fully realize AI’s effects on the economy.
If Peru increases its AI investments, not only would possible economic stagnation in the coming decades be prevented, but the economy could grow at unprecedented rates. Perhaps if Peru and the rest of South America become a center for AI-based industry, the continent could achieve the rapid growth and high standards of living East Asia has seen in the past few decades.
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