Emerging markets face both promise and disruption from AI

Artificial intelligence (AI) stands poised to both drive growth and create disruption in emerging markets, as projected by UN Trade and Development (UNCTAD) to surmount the USD 4.8 trillion mark by 2033. For advanced economies, AI offers substantial productivity improvements, while for emerging economies, its effects are more intricate and two-pronged.

AI can expedite development, enhance public services, bolster industrial expertise, and bypass antiquated infrastructure. However, it also jeopardizes established competitive advantages and amplifies the disparity between affluent and impoverished nations, particularly those with substantial service sectors reliant on cheap manual and repetitive labor.

Consequently, the stakes are heightened for the developing world. The ultimate impact of AI on any economy hinges not solely on the technology itself but also on a nation's ability to embrace and adapt it. Emerging markets enter this AI-driven transition with a unique blend of advantages and vulnerabilities compared to advanced economies.

This article delves into both facets of AI's influence on emerging markets: the potential to boost productivity and growth, juxtaposed by the possible obfuscation of industries that have flourished for decades. On one hand, AI presents a substantial opportunity to augment productivity and hasten development in economies plagued by skilled labor shortages and uneven institutional capacity.

AI-powered tools can extend the reach of scarce expertise. In education, AI translation models can accommodate regional dialects and low-resource languages, diminishing structural communication barriers. Personalized tutors can enhance access to high-quality education by adapting lessons to individual students' skill levels. In healthcare, AI-assisted diagnostics can extend services to rural areas and improve initial diagnosis quality, with potentially transformative effects on infant mortality and average life expectancy.

In finance, AI-assisted credit scoring using unstructured and behavioral data can augment micro-finance's availability to small producers and entrepreneurs while mitigating associated credit risks. Similar to mobile technology enabling many developing countries to bypass fixed-line and internet broadband networks, AI could propel emerging markets by facilitating the leapfrogging of historical growth constraints.

Emerging markets have already emerged as significant players in the digital economy, exporting over USD 1 trillion in digitally deliverable services in 2024. When AI is harnessed effectively, it could intensify this momentum and foster entirely new industries. Conversely, AI also poses a significant disruption to labor markets and the development model that has long characterized emerging economies.

The technology is eroding the economic edge of repetitive remote tasks, shifting from labor arbitrage, which exploits low-cost human workers, to algorithm arbitrage, which relies on more affordable AI agents. The International Monetary Fund estimates that approximately 40% of jobs in emerging markets are susceptible to AI, particularly in industries and services characterized by manual and routine work.

Generative AI and AI agents can now execute rudimentary cognitive tasks, data processing, and basic billing at a lower cost than hiring overseas staff. This impact is already evident across India's USD 300 billion IT outsourcing industry. Routine junior developer and business process outsourcing roles are gravely exposed, resulting in sharp declines in campus recruitment across Indian technology centers.

The Nifty IT index, which monitors India's leading software companies, has experienced a decline of around 15% this year, compared to a 20% increase in the broader MSCI Emerging Markets Index. In essence, artificial intelligence offers emerging markets a defining chance and a formidable risk. Realizing this opportunity necessitates circumventing relegation to the periphery of the forthcoming AI-driven global economy.

This will hinge on decisive action across three fronts: fortifying digital infrastructure, cultivating data ecosystems, and investing in skills. Economies that proactively strengthen these pillars stand to convert AI into a potent engine for catch-up growth. Those that fail to do so may witness the gap with the technological frontier widening further, rendering AI one of the paramount determinants of economic divergence in the years to come.