AI 'widening economic inequality', IMF chief warns

International Monetary Fund (IMF) chief Kristalina Georgieva warned on Wednesday that the rapid growth of artificial intelligence (AI) is risk widening global economic inequality by leaving some nations behind in the AI boom. She attributed this to a lack of "decisive action" from heavily indebted advanced nations, and called for "very tough policy choices" to restore the health of their public finances.

Georgieva stated that AI investment-to-GDP is likely to surpass the investment in traditional infrastructure such as railroads, electricity grids, or telecommunications networks. Growth in AI-related trade is currently being observed most prominently in the United States, China, and India, where companies are investing in data centers, chip manufacturing, and robotics.

Georgieva emphasized that AI is already a key driver of countries' relative fortunes in the global economy, and its rapid advancement is increasingly bypassing other nations, thereby exacerbating economic inequality. She acknowledged the need for cooperation among countries, stating that it stems from self-interest rather than charity.

The surge in AI investments has fueled a market rally to record levels over the past two years, with tech firms continuing to rise even after a summer slump. Chipmaker Nvidia, for instance, reached a record high on Tuesday, pushing its market capitalization to almost $5.7 trillion. Georgieva cautioned that if earnings fall short, the leverage of hyperscalers and the accumulation of large global US equity holdings could turn a disappointment into a far-reaching shock.

In addition to focusing on AI, Georgieva addressed the rising debt levels among governments, which have been exacerbated by higher borrowing costs due to inflation and interest rate increases, along with substantial bond issuance by companies to finance their AI investments. She highlighted the urgent need for credible medium-term fiscal consolidation plans in high-debt advanced economies, supported by upfront fiscal measures.

Georgieva warned that although the surge in oil prices caused by the Middle East war has been largely contained by stockpiles, energy efficiency, and contingency planning, oil remains above $100, with diesel prices at record highs. She also expressed concern over severely impaired natural gas supplies from the Gulf, particularly affecting Asia and Europe.

Despite central banks' efforts to combat inflation by raising interest rates, Georgieva advised that "now may be a good time for a prudently hawkish bias in many countries' monetary policy." She cautioned emerging markets, low-income countries, and the most vulnerable in society, who could face higher borrowing rates, volatile capital flows, and be forced to cut crucial development spending.

Georgieva concluded by urging world economic policymakers to take decisive action, explaining the necessity of consolidation and outlining complementary structural reforms, even if it means "taking some pain today for growth tomorrow."