Artificial intelligence and the economy

Artificial intelligence and the economy | Daily Tribune

In a group discussion on artificial intelligence (AI) I attended earlier this month, a question was posed that I found very profound: Can AI change the shape of the business cycle? While it may still be early days for AI, the powerful changes it will make require more urgency for business and political leadership in any country.

Even as we grapple with the corruption issues plaguing the nation, outside the Philippines, the effects of the rapid growth of AI as a global issue are raging and affecting us indirectly.

The major issue in the US market is whether there is an AI bubble, given that the valuations of AI champions, such as Nvidia and Meta, are being questioned over the high capital expenditures in their own ecosystem, which drives valuations in so-called circular financing.

Given this, warnings about overvaluation and the risks of a correction because expectations over AI’s benefits and the market “real estate” it is creating may not be met are becoming louder or more visible. These bubble concerns are responsible for the recent volatility in the US stock market and the correction in valuations.

One of the potential economic risks raised by investors is the high growth of capital investments by AI firms, which are funded by debt at still elevated interest rates. If the promised revenues from these investments do not appear, given that AI is still evolving, this could result in an increase in loan defaults. This is a legitimate concern given the experience of the dotcom bubble in the early 2000s.

As a small economy and price takers, the Philippines would be, on the aggregate, unaffected by such a potential scenario unless the loans are globally linked such as collateralized debt obligations (CDOs) during the global financial crisis in the latter part of the same decade as the dotcom bubble.

In addition, control over this real estate of growth is a global security concern and is driving many other global issues, such as tariff increases, export control over rare earth minerals, AI computer chips, data centers, and the need for renewable energy to power them. Regardless of these risks, AI will drive the future of technology for everyone.

Given that we are only in the giant shadow of this global AI evolution, the Philippines needs to harness its promised productivity benefits to leapfrog our economy. AI, as the name suggests, is the technology that allows machines to learn very much like humans do — given a set of objectives by humans. This enables machines to perform certain tasks that humans can do and, in some cases, do it better.

Because of this, economies that rely heavily on human capital in performing services such as transportation, recreation and the arts, and business processes are expected to be affected by the AI evolution. In the case of the Philippines, certain business process outsourcing (BPOs) such as call centers are at risk of becoming obsolete.

At the national level, we are preparing for the potential impact of AI on the economy. The government has a national strategy or roadmap in place for AI. The Bangko Sentral ng Pilipinas (BSP) has been evaluating the use of AI in the banking system and is considering regulations.

One of the interesting points raised in the discussion on AI was the expectation that its biggest buyers or markets would be governments.

This makes sense given that the biggest employer is the government. If we choose to, we can increase the productivity and reach of government agencies by employing AI tools. A side benefit could be increased transparency and reduced losses due to corruption.

With AI tools already being deployed in private firms, Filipinos are getting some taste of the productivity benefits of this technology beyond what they see on ChatGPT, TikTok, and Google searches. There is a need to be both excited and curious about AI but also fearful of the costs that its growing adaptation can incur.

The greatest cost, of course, is not adapting to AI. We are far behind our ASEAN peers and have already been overtaken by Vietnam. We must be smarter with our choices and take every opportunity to accelerate our development and earn our spot outside the shadow and instead shine in our own light.