The true disruptive impact of artificial intelligence on economies and financial markets may not become apparent until after a recession occurs, which could escalate into a full-blown crisis if the risks of AI are not addressed, the deputy head of the IMF warned recently.
During speech at the AI summit in Switzerland On May 30, IMF First Deputy Managing Director Gita Gopinath said the debate about AI risks has largely focused on privacy, security and disinformation. But there is much less talk about the risk that AI will worsen the next recession.
In a world of widespread AI adoption, the technology could turn a normal recession into a much deeper economic crisis, disrupting labor markets, financial markets and supply chains, she said.
Risks of AI in labor markets
In normal economic times, companies have historically tended to invest in automation but retain workers because they have the profit margin to do so. But when companies cut costs during a recession, workers are laid off and replaced by automation, she explained.
Gopinath pointed to IMF research that shows that in advanced economies, 30% of jobs are at high risk of being replaced by AI, compared with 20% in emerging markets and 18% in low-income countries.
“So we have a much broader scope of potential job losses that we could have,” she warned. “Again, the risks of long-term unemployment are quite serious.”
Risks of AI in financial markets
The financial industry has long used automation and earlier forms of artificial intelligence such as algorithmic trading, and today the sector is rapidly adopting new artificial intelligence technologies.
Gopinath noted that some AI trading is being replaced by more sophisticated models that can learn on their own, and projections show that robo-advisors will oversee more than $2 trillion in assets by 2028, up from less than $1.5 trillion US dollars in 2023.
While AI can make markets more efficient and inclusive, risks associated with AI are also more likely to surface during downturns, she added. This is because new AI models will perform poorly in new events different from what they were trained on.
“And one thing we know is that no two recessions are the same,” Gopinath said.
According to her, in such a scenario, AI could stimulate a rapid and simultaneous transition to safe assets, which would lead to a fall in the prices of risky assets.
The AI models then detect the price decline, view it as confirmation of their previous actions, and then double it by increasing asset sales. And given the black box nature of AI, such behavior can be difficult to control.
“There could be massive sell-offs and harmful behavior, leading to further fall in asset prices,” Gopinath said.
AI risks in supply chains
As businesses adopt AI, they can allow it to play a larger role in deciding how much inventory to store and how much to produce.
In normal economic times, this could improve efficiency and productivity. But artificial intelligence models trained on “stale data” can introduce serious errors and lead to a cascade of supply chain failures, she said.
Ways to Mitigate AI Risks
While laying out the bleak scenarios, Gopinath also made recommendations to mitigate the risks of AI without downplaying the positive aspects of AI.
One way is to ensure that tax policy does not ineffectively favor automation over workers, although she was careful to note that she is not proposing a specific tax on AI.
Another way is to help workers get an education and gain new skills, and strengthen the social safety net with more generous unemployment benefits.
AI can also be part of the solution, for example in improving skills, more targeted assistance and identifying early warnings in financial markets, she added.
“I think there is a real need for parallel efforts to ensure that we also protect the global economy from artificial intelligence,” Gopinath said.
Her warning comes a year after she said we may not have much time to figure out how to protect people from AI.
“We need governments, we need institutions and we need policymakers to act quickly on all fronts, in terms of regulation but also in terms of preparing for what may be significant disruptions in labor markets,” she said. That Financial Times.