Automation will end the dream of rapid economic growth for poorer countries

Automation is blocking the primary route for poor countries to grow rich. The solution is taxes, better use of resources and promoting the informal economy

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Publication: The Guardian

Link curator: MrWatts

September 20, 2016

For a long time – at least since the economic emergence of South Korea in the 1960s – many low-income countries have been able to achieve rapid economic growth through industrialisation.

The process usually starts with low-end manufacturing (apparel, footwear, plastics) and entails large numbers of workers moving from low productivity smallholder agriculture to high productivity export manufacturing.

Industrialisation has helped to drive an unprecedented convergence between rich and poor country wealth levels. By the early 2000s, 83 developing countries were achieving growth rates more than twice the rate of OECD members.

But this development model is being eroded – largely by the increasing automation of industrial production. And, if we don’t respond, we risk seeing global inequality spiral ever more rapidly upwards.

The rise of the robots

Harvard economist Dani Rodrik argues that industrialisation has been steadily losing its economic development magic. Most rich countries have seen declines in the share of manufacturing in their economies for a long time. But industrialisation made them richer than countries that followed after them.

Rodrik calculates that industrialisation peaked in western European countries such as Britain, Sweden, and Italy at income levels of around $14,000 (at 1990 levels). India and many sub‐Saharan African countries appear to have reached their peak manufacturing employment at income levels of $700 (at 1990 levels).

More worryingly, Rodrik demonstrates that automation has been taking out more low-skilled jobs than medium or high-skilled ones, increasing inequality.

All of this is about to accelerate. The amount of computing power that a given amount of money can buy has been doubling every year to eighteen months since the 80s. In their book Second Machine Age Brynjolfsson and McAfee show how this process drives change.

The last job on Earth: imagining a fully automated world Guardian

As a result we are seeing machines that can do traditionally human things (like driving cars) much earlier than anyone expected. This matters for factories. Automated production lines are nothing new. But increasingly the low skilled human labour that attended mechanised production lines is no longer needed.

If plentiful, cheap labour is no longer as important as it used to be for industrial production you would expect to see more manufacturing being located close to rich country consumers. Adidas is piloting highly automated footwear factories in Germany and the US that will allow consumers to order customised footwear before it is manufactured which can then be delivered directly to them. Delivery will be rapid and costs will be low.

For poor countries wishing to replicate the path India, Vietnam and China have taken from low income to middle income status this is bad news. There is already evidence that Latin America and Africa are deindustrialising – from a much lower starting point than Asia.

Green growth is the solution

Once it becomes clear that the industrialisation pathway is not going to work as well as it has in the past then developing countries will need an alternative path to prosperity. And if growth rates for poor countries aren’t going to be spectacular then it becomes even more important to make sure that the benefits of the growth that is achieved are fairly shared.

This means valuing the development potential of the informal economy, rather than seeking to substitute it. Helping small farmers achieve higher yields, better prices and reduced risk. And focusing on access to finance, energy and infrastructure for the small informal enterprises that form the bulk of the economy in many developing countries.

Women are over-represented in the informal sector worldwide so policies that support, empower and protect the rights of informal women workers are essential for gender equity.

An alternative growth path will mean the abundant natural resources of many developing countries will also need to be managed in ways that provide social value without degrading them, and without alienating resources from the communities that use and manage them.

Costa Rica reversed decades of reduction in forest cover through an imaginative range of policy measures including payment for ecosystem services, effectively giving landowners the incentive to conserve forest cover. Rwanda has developed an approach to ecotourism which shares revenues with local populations to support livelihoods while protecting the country’s biodiversity.

In the era of climate action we need to find ways of paying for work that promotes energy efficiency, spreads access to renewable energy, makes the circular economy work (the informal economy’s waste pickers tend to be pretty good at this) and manages landscapes that efficiently sequester carbon.

These kinds of climate and energy initiatives could provide jobs and economic growth for less developed countries, but some of the funding at least will need to come from transfers from richer countries. That means effective taxation of wealth and extremely high incomes. It also means taxing pollution of all kinds – particularly carbon pollution.

It may be unrealistic to expect that these green growth approaches will produce the same rate of growth for poor countries as rapid industrialisation did 20 years ago. But, done correctly, they might temper the tendency towards growing national inequality [pdf] which that model produced, as well as being more sustainable.