Phuah Eng Chye (6 July 2019)
The favoured path to development was to climb the industrialisation ladder. Dani Rodrik notes “three characteristics collectively rendered manufactures a fantastic escalator to higher incomes for developing nations”. “First, manufacturing know-how was relatively easy to transfer across countries and, in particular, from rich to poor nations…Second, manufacturing is tradable. There is always an external market, and domestic manufacturing production does not need to be constrained by demand (and incomes) at home…Third…Developing countries have essentially an unlimited supply of unskilled workers in the countryside. So labor-intensive manufacturing was especially suitable to developing countries and could expand without running into supply-side bottlenecks”. In addition, industrialisation is a critical stepping stone as it involves the building of physical and soft infrastructure (i.e. human capital, legal framework and financial system) which support greater use of information.
However, there is concern on the emergence of new technologies that seem to be disrupting the traditional path to development. An UNTACD report points out “recent industrialization patterns are causing increasing pessimism about manufacturing as an engine of development. Peak shares of manufacturing in total employment and output in today’s economies are lower and in many developing countries occur at lower levels of per capita income than in the now industrialized countries – a phenomenon known as premature deindustrialization.” The “darkening prospects for traditional export-oriented industrialization strategies” is compounded by “the global trade slowdown and expected prolonged structurally weak growth in developed countries”, recent trends in “international production sharing through global value chains”, robotization and “reshoring to developed countries”.
UNCTAD highlighted two implications of the new trends: “(i) A reduced scope for traditional export-oriented industrialization as a development strategy, implying that developing countries may need new sources of activities that allow for employment and per capita income growth; and (ii) an ambivalent role of digitalization: it may cause reshoring and oust manufacturing as an engine of development, or it may cause manufacturing and services activities to be more closely interwoven, with the ensuing servicification of manufacturing providing novel ways for industrialization to drive economic development”.
In this context, Dani Rodrik asks whether the “new technologies present an opportunity or a threat to developing economies? For the optimists, the knowledge economy, artificial intelligence, and advances in robotics represent a historical chance for developing economies to leapfrog to a more advanced-economy status. Others worry about the ability of poor countries to compete in a world economy in which others have much greater capacity to capitalize on new technologies”.
The attractive proposition held out by the new technologies is that they offer developing countries the opportunity to leapfrog industrialisation. Jeremy Rifkin points out “the distributed features of the new economic paradigm arising during the Third Industrial Revolution will enable the least developed regions to leapfrog the developed world…It is often cheaper and quicker to erect virgin infrastructure than to reconfigure existing infrastructure. We are already witnessing a surge of activity in some of the poorer regions of the world with the introduction of solar, wind, geothermal, small hydro and biomass harvesting technologies and the installation of distributed renewable energy micro grids…the introduction of cell phones has helped precipitate the development of a nascent Third Industrial Revolution infrastructure…The phones are used as much for carrying on commercial activity as for personal communications. In rural areas, far removed from urban banking facilities, people are increasingly relying on cell phones to facilitate small money transfers…A single solar panel affixed on the tin roof of a rural hut would provide enough electricity to not only charge the cell phone but also power electric lights…What’s going on in Africa heralds a historic transformation as households leapfrog from the pre-electricity era directly into the Third Industrial Revolution age…In poor urban outskirts, isolated towns and rural locales – where infrastructure is scant, access to capital spotty at best and technical expertise, tools and machinery virtually non-existent – 3-D printing provides a desperately needed opportunity for building a Third Industrial Revolution infrastructure. Today, the emerging Internet of Things infrastructure provides the means to lift hundreds of millions of human beings out of abject poverty and into a sustainable quality of life.”
In addition, Dani Rodrik points out “new technologies tend to reduce prices of goods and services…lead to the creation of new products. Consumers benefit from these improvements, regardless of whether they live in the developed world or the developing one”. There were many “clear instances of technology working to improve the lives of poor people”. It should also be considered that the global value chains (GVCs) and new technologies will “increase opportunities for developing countries to access global markets by making it easier for them to engage in production of particular tasks without developing domestic supply chains”.
Dani Rodrik notes concerns that “GVCs and new technologies also exhibit features that limit the upside and may even undermine developing countries’ economic performance”. One consideration is the productivity gains from GVCs may not be large enough. In this regard, “the expansion of GVCs seems to have ground to a halt in recent years…developing-country participation in GVCs…has remained quite limited, with the notable exception of certain Asian countries…most worryingly, the domestic employment consequences of recent trade trends have been quite disappointing…It appears that exports are creating fewer and fewer jobs, and GVCs are certainly not helping”.
Dani Rodrik also suggests the skill-bias of the new technologies reduces the comparative advantage of developing countries in traditionally labor-intensive activities. The consequence is that “employment in urban services has been expanding much faster and at lower levels of income”. The increasing volume of trade in services and GVC can raise productivity and enable services to absorb large amounts of employment. However, “the consequent reorganization of these activities around larger, more capital-intensive producers often tends to be detrimental to employment. A large part of the problem in such services (e.g. retail trade) is the preponderance of small, low-productivity firms that absorb the excess supply of labor. When these firms are driven out, employment is hit…The problem with labor moving into urban services is that too often the expansion of services comes at the cost of lagging productivity over time”. Dani Rodrik adds that “for technology to make a real and sustained contribution to development it must not only provide better and cheaper products, it must also lead to more better-paying jobs…The new products and services may be cheaper, but without ever-more productive jobs, workers in the developing world are bound to lag” .
Jan Drahokoupil adds that investments “driven by the exploitation of lower labour costs and the modernisation introduced by FDI failed to develop local innovation systems. Instead, the region relied on the transfer of technology and knowhow through the networks of multinational corporations. Dependent reindustrialisation thus gave rise to a group of second-rank economies with low research and development (R&D) intensity… Dualised economies have emerged, with highly productive, often foreign-controlled firms, paying higher wages, but employing fewer people than domestic firms with less complex products and often in a position of second-tier suppliers to multinationals”.
Overall, the new technologies have not yet diminished the benefits of pursuing the industrialisation path to development. This is evident from the experience of countries such as Vietnam and Thailand which have achieved recent success in pursuing industrialisation. We should view the new technologies as opening up new paths to development.
Dani Rodrik (October 2018) “New technologies, global value chains, and developing economies”. NBER. https://www.nber.org/papers/w25164#fromrss
Jan Drahokoupil (2018) “Central and Eastern Europe: Raising living standards through innovation-driven growth.” Max Neufeind, Jacqueline O’Reilly, Florian Ranft. Work in the digital age: Challenges of the fourth industrial revolution. Policy Network, Das Progressive Zentrum. Rowman & Littlefield International Ltd. http://bruegel.org/wp-content/uploads/2018/07/Work-in-the-Digital-Age.pdf
Jeremy Rifkin (2015; updated 6 December 2017) “How developing nations can leapfrog developed countries with the sharing economy.” Huffpost. https://www.huffpost.com/entry/developing-nations-sharing-economy_b_8419960?utm_hp_ref=world
Phuah Eng Chye (24 November 2018) “Future of work: Redefining work (Part 3: Bad jobs, good jobs and what governments could do about it)”.
Phuah Eng Chye (19 August 2017) “The services economy: Deindustrialisation & global unbundling”.
United Nations Conference on Trade and Development (UNCTAD) (October 2018) “Digitalization and industrialization: Friends or foes?” UNCTAD Research Paper No. 25. https://unctad.org/en/PublicationsLibrary/ser-rp-2018d7_en.pdf
 A term attributed to Dani Rodrik. See “The services economy: Deindustrialisation & global unbundling”.
 See “Future of work: Redefining work (Part 3: Bad jobs, good jobs and what governments could do about it)”.