Investment executives are closely assessing how the global artificial intelligence (AI) revolution might impact emerging markets (EM) as it reshapes industries and economies worldwide.
For the past decade, South Korea, Japan, mainland China, and Taiwan have earned the moniker “Big Four” semiconductor regions, spearheading innovation in products crucial for digital technologies like AI, alongside meeting demands for automobiles and smart devices. According to Deloitte, the global market of semiconductors will exceed US$1 trillion in 2030.
Last year, abrdn’s senior investment director for Asian equities, Pruksa Iamthongthong, said the AI revolution would mark a “new era” for emerging markets.
“The inflection point for the commercial adoption of AI has largely been achieved due to two factors: the availability of data and lower computing costs thanks to semiconductor advancements. These advancements have made AI more accessible and affordable, opening up the technology to companies beyond big tech,” she added.
“This should allow EM countries to reap the benefits of years of research while also leveraging their agility to adapt and innovate.”
Iamthongthong pointed out that EM countries’ lack of legacy infrastructure could offer them an advantage in moving quickly compared to their developed market counterparts. This advantage includes the ability to design optimal data centre architecture without the constraints of reconfiguring existing systems.
“Data centres are also poised to shift from providing storage to providing computing power, creating sizeable opportunities for businesses in the sector. Generative AI is tipped to revolutionise several industries, with applications ranging from automating mundane tasks like minute-taking in meetings to groundbreaking innovations in healthcare.
“EM companies’ ability to embrace these opportunities could be transformational,” she stated.
However, recent analysis from the International Monetary Fund (IMF) suggests AI could actually negatively reshape the nature of work in emerging markets and developing countries.
In January this year, it flagged that many of these countries don’t have the infrastructure or skilled workforces to harness the benefits of AI, raising the risk the technology could worsen inequality among nations over time.
“AI could also affect income and wealth inequality within countries. We may see polarisation within income brackets, with workers who can harness AI seeing an increase in their productivity and wages – and those who cannot falling behind,” the IMF remarked.
“In most scenarios, AI will likely worsen overall inequality, a troubling trend that policymakers must proactively address to prevent the technology from further stoking social tensions.”
Speaking at an investment conference in Melbourne last week, Victorian Funds Management Corporation’s chief investment officer, Russell Clarke, flagged that AI in EM was a trend being monitored closely as the fund rethinks its EM allocations.
He described this as one of the fund’s more “controversial” strategies as it aimed to adapt its portfolios to align with the current market environment.
“If we take it from a very high level of what’s changed and we operate in an industry where things continuously evolve and innovate and you have to evolve to stay current […] the thing we’re really mindful of is that we’re going to need frameworks, systems, and, I guess, a DNA within the team that will allow us to evolve the portfolios more quickly than has been the case in the past,” he said.
“We’re really thinking hard about how we can create an environment that will allow us to evolve the portfolios to the circumstances in which we find ourselves and, obviously, it’s hard to know what that’s going to be.”
According to Clarke, a lot of the trends in AI could prove to be net negative for many EM countries.
Having enjoyed huge economic growth and benefiting greatly from the tailwinds of globalisation, EM could now face the headwinds of deglobalisation spurred by the pandemic and technological trends, he argued.
“The conventional wisdom has been, if you invest anywhere where there’s strong growth, then you will do well from a return standpoint. The complete opposite has actually been the case. Emerging markets have had a good economic outcome as a whole, but delivered a poor return to investors,” he pointed out.
“We’re now in a world where emerging markets have, as a whole, have significant headwinds. Obviously, the world is deglobalising and much more inwardly focused. A lot of the trends in AI will probably be net negative for many, not all, but many emerging market countries. If you think of the primary advantages of those countries, it’s a cheap source of labour, so naturally, we might think AI is not going to be beneficial for those locations.
“There might still be economic growth there, but we’re really thinking: does it make sense to have a material allocation to emerging markets? It doesn’t mean you won’t invest in some emerging market countries that will do well and clearly, there’ll be some companies and some industries that still do well, but as a whole, it may not be the place to be.”
A chance for worker redeployment
Speaking to InvestorDaily, Fidelity International’s head of investments for Asia, Marty Dropkin, disagreed that AI is poised to affect EM markets by eliminating jobs, rather, he proposed the technology trend would spur individuals to reskill and retrain.
“AI is clearly a phenomenon. It’s clearly linked to a very strong investment in data centres and servers and many companies across the sphere – large technology companies, financial service companies, you name it – are investing in it because there are productivity factors that we clearly haven’t seen in a long time,” he said.
He considers it a “step change”, noting that decades of innovation prior to AI, like personal computers and networking, have sparked further job creation.
“People had to retrain but at the end of the day, you still need skilled workers in every possible field,” he observed.
“Whether it be, say, mining sectors where perhaps you might have innovation and the ability to locate minerals [through AI], or you might have machinery that makes things proficient, it hasn’t reduced enough for people necessarily in those industries. It just means that they’re doing slightly different things.”
Dropkin acknowledged that AI could contribute to the development of low-cost manufacturing in other markets, which have been a core strength of EM for many years.
“It might accelerate [manufacturing] a bit, but I don’t know if it really changes at all that much,” he said.
“This might be going a bit against the grain, but I’ve always believed that humans adapt and evolve pretty easily, and we manage through it.
“I push back a bit on the notion that this is going to just eliminate loads of jobs. I think it’ll reposition roles.”
The IMF analysis also argued that, although still developing, emerging markets and developing economies might experience fewer immediate disruptions from AI. This is due to approximately 40 per cent of employment in these regions being considered affected, a lower figure compared to around 60 per cent in advanced economies.
Ultimately, though, the impact could boil down to the preparedness of each country.
“Advanced and some emerging market economies are well positioned to harness AI thanks to their high exposure and preparedness. Other emerging market economies and low-income countries may find it difficult to harness potential AI benefits given their inadequate infrastructure, their workers’ lack of skills, and the absence of institutional frameworks – putting them at risk of competitive disadvantage,” it said.
“Policies must promote the equitable and ethical integration of AI and train the next generation of workers in these new technologies; they must also protect and help retrain workers currently at risk from disruptions.”
