Digital disruption

For many years, the underlying forces of industrial production and competitive integration of world markets have remained unchanged. Past decades were marked by a steady increase in the globalisation of economic activities. This trend was only temporarily dented by the global financial crisis after 2008. Currently, the trend of competitive global integration even seems to withstand growing protectionist pressures.  

Yet the relative importance of countries has changed. The share of developing countries and emerging markets in global production and exports has increased with China’s fast and uniquely successful rise making the biggest difference.

If business continues as usual, we could expect an on going trend towards an ever more interconnected global economy, with international value chains becoming ever more important. However, some things may change dramatically in the years to come. While the speed and magnitude of technological change remain unpredictable, patterns of international specialisation are likely to be redrawn.

Technological innovations – ranging from robotics to additive manufacturing, big data and the internet of things (OECD 2017) – will have significant impacts on the prospects of developing countries making efforts to industrialise. Some observers even suggest that the conventional manufacturing-driven pathway to prosperity may gradually be closed (Hallward-Driemeier/Nayyar 2018).

For many decades, we have observed the so-called “flying geese” dynamics. Industrialisation typically took off on the basis of low wages. The countries concerned became increasingly competitive, kept upgrading their capabilities and eventually opened up space for other newcomers. Other emerging markets would industrialise according to the same pattern, with wages increasing in line with enhanced skills. Today, some observers consider the impact of new digital technologies to be so dramatic that the next goose may no longer fly behind the previous birds. Industrialisation, specifically manufacturing, may not be a viable path to economic development anymore.

Compounding this challenge, the boundaries between manufacturing and services are becoming increasingly blurred. Ever more services are contained in manufactured goods (“embodied services”) or sold in packages with manufactured goods (“embedded services”).

So, does this spell the end of latecomer industrialisation as a viable development path? Dani Rodrik (2015) speaks of a trend towards “premature deindustrialisation”, claiming that developing countries are becoming service economies before reaping the full benefits of industrialisation. Digital technology might reinforce such at trend.

Things may also turn out quite differently, however. A sober assessment must acknowledge the following points:  

• So far, we do not have conclusive evidence on the correlation of digitalisation-induced job losses and per-capita income levels. It is therefore unclear to what extent low-income countries will be affected.  
• We have far more evidence concerning what is technologically feasible than what is economically viable. It may take a long time before digital technology really affects labour-intensive production in developing countries. Furthermore, the process will differ from sector to sector. Digital automation and robotics are rapidly changing the electronics and automotive industries, but are being introduced in the garments and footwear sector more slowly.
• The alleged trend of industrial production being “backshored” (i.e. moved back to advanced economies after an earlier offshoring) is more hype than reality. The few systematic studies available (in particular De Backer et al. 2018) suggest that the scope and speed of offshoring to developing countries is being gradually reduced by robotics, but there is only anecdotal evidence of genuine backshoring.

Digitalisation does not happen overnight. Low-income countries at incipient stages of industrialisation are likely to enjoy some breathing space. Hence, in the medium term building up low-skill, labour-intensive industries should remain a viable option. Recent research differs widely on the magnitude and timing of technology-induced job losses, but it should take digitalisation two to three decades to fully permeate the world economy. Speed will depend on various factors including labour markets (wage and skill levels), regulatory environments and societal acceptance.

That said, the impact of new technologies can prove fast and wide ranging at the micro level of individual factories. For example, Vietnam’s leading manufacturer of ceramics and porcelain reduced the number of workers through automation from 400 to just 20 without any loss in quality. In the same country, a food producer has fully automated egg processing with machinery imported from the Netherlands. Such innovations are not only brought about by foreign investors. Domestic companies producing for their home markets are involved as well.

As I argued in a study prepared for the German Development Institute (Lütkenhorst, 2018) developing countries should prepare now for the impact of digitalisation. Generally speaking, they should adopt a forward-looking industrial policy and actively promote their potential competitive advantages (also see D+C/E+Z e-Paper 2018/01, page 16). This involves rallying all relevant stakeholders behind a shared vision. More specifically, it is important to build digital infrastructure and to foster digital skills. Low and middle-income countries need to build up digital platforms for communication, finance, consumption and production. Internet access must become universal and affordable.

Moreover, the requisite skills must be developed and up-graded. Vocational training and the general education system must rise to the challenge of fostering:

• genuine ICT skills (programming, handling of complex databases et cetera),
• complementary ICT skills required for working in digital environments (for instance  planning digital work processes),
• basic skills (literacy and numeracy) as well as
• a set of soft competencies.

Indeed, creativity, emotional intelligence and social competence are of crucial relevance. In a way, they represent the ultimate line of resistance to digital automation. They will grow in importance in increasingly complex manufacturing-service systems. Ways to promote such skills include:

• gearing schools to the needs of vocational and technical training,
• involving the private sector in educational partnerships aimed at designing innovative training programmes,
• encouraging on-the-job training and internships, and
• providing financial incentives for training efforts.

Especially small and medium-sized enterprises (SMEs) will need support. SMEs often do not have the resources to implement their own skills upgrading. At the same time, existing training programmes often do not meet their specific needs.

Positive good-practice examples are subsidised training consortia in South Korea or the Skillnets facility in Ireland. The latter is state-funded yet enterprise-led. Development cooperation programmes could play an important role in disseminating key lessons learned in such successful digital training schemes.

Low-income developing countries may benefit from future employment opportunities arising from innovative IT-enabled services. This is illustrated by various IT-service clusters in Kenya and Rwanda, for example. Moreover, the digitalisation of a range of services from online purchase transactions to online banking can drive productivity.

Inevitably, some of the above reflections remain speculative. We find ourselves on the cusp of radical change, and we are only beginning to understand the longer-term implications. Discussing digitalisation, Michael Spence, the economics Nobel laureate, remarked a couple of years ago:  "No one knows fully how all of this will play out”. That is still true.

Wilfried Lütkenhorst is a GDI associate fellow and previously was a managing director at the United Nations Industrial Development Organisation (UNIDO).
wluetkenhorst@aon.at

References

De Backer, K. et al., 2018: Industrial robotics and the global organisation of production, Paris: OECD.
https://read.oecd-ilibrary.org/industry-and-services/industrial-robotics-and-the-global-organisation-of-production_dd98ff58-en#page1

Hallward-Driemeier, M., Nayyar, G., 2018: Trouble in the making? Washington, DC: World Bank.
https://www.worldbank.org/en/topic/competitiveness/publication/trouble-in-the-making-the-future-of-manufacturing-led-development

Lütkenhorst, W., 2018: Creating wealth without labour? Bonn: German Development Institute.
https://www.die-gdi.de/uploads/media/DP_11.2018.pdf

OECD, 2017: The next production revolution: Implications for governments and business, Paris: OECD.
https://read.oecd-ilibrary.org/science-and-technology/the-next-production-revolution_9789264271036-en#page1

Rodrik, D., 2015: Premature deindustrialization, Cambridge, Mass.: Harvard University.
https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/premature_deindustrialization_revised2.pdf