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Nobel laureate Paul Romer sees diminishing returns for AI, as FDI still ‘killer app’ for emerging economies

  • AI is ‘going through a kind of a bubble right now’, the Nobel Prize-winning economist said, suggesting limits to the tech’s capabilities could soon set in
  • The US and China should compete in foreign direct investment, but projects like Belt and Road must focus on sustainable areas like real estate, he said

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Nobel Prize-winning economist Paul Romer (right) speaks on urban economic growth during the UBS Asian Investment Conference in Hong Kong on May 29, 2024. Photo: Handout
The artificial intelligence (AI) industry is “going through a kind of a bubble right now” and could soon hit a ceiling when it comes to productivity gains, according to Nobel laureate and former chief economist at the World Bank Paul Romer.
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“The growth of digital technology hasn’t in the past ushered us into this new era of much more rapid productivity growth, and I doubt that it’s going to do it now,” Romer told the South China Morning Post on the sidelines of the UBS Asian Investment Conference in Hong Kong on Tuesday. “So I think the perception that somehow everything has changed is like the perception that cyber currencies are going to change the world.”

An escalating tech war between the world’s two largest AI powers, the US and China, has threatened to force emerging economies to pick a side, with ramifications for their future growth. AI development has proven significantly lopsided across different cultures and languages.

For Romer, though, waiting for AI to push worker productivity growth to new heights is a fool’s errand. The surest way to growth, he said, is foreign direct investment (FDI).

“There’s two different ways you can think about globalisation unfolding,” he said. “One is Japan has companies that make cars, and then they put those cars on boats, and they ship them all over the world. Another is Japan has companies that are good at making cars, and then they go make cars in the United States and other places around the world. I think people underestimate, especially in the developing world, the gains that can come from that type of direct foreign investment.”

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The primary reason for that is how workers will gain new skills on the job, he said, and that has downstream implications for an economy. Without those work opportunities, people miss out on chances to build up that knowledge and experience.

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