COMMENT: Manufacturing in the global south

How declining global labour costs and increasing robotics are conspiring against manufacturing there

COMMENT | OTAVIANO CANUTO | In emerging markets, manufacturing has historically been a source of productivity, growth, and jobs. Since the 1950s, industrialisation has kept economies in Latin America, Asia, and Eastern Europe on a steady glide toward higher stages of development.

But as a growth strategy for low-income countries, the efficacy of traditional manufacturing is waning. To compete in the technology-driven global economy of the future, developing countries will need new models to increase productivity and put people to work.

Two factors are conspiring to cast doubt on the wisdom of manufacturing-led development. The first is competitiveness: attracting production to low-income countries has never been harder. Labour costs, exchange rates, and infrastructure are all fiercely contested, which has led to a consolidation of global manufacturing hubs.

The second factor is technology. As robotics and artificial intelligence lower labour costs, the rationale for transferring manufacturing to emerging economies has diminished. This is particularly problematic for countries, such as those in Sub-Saharan Africa, that are just now turning to industrialisation to spur growth. In the near term, developing countries that are dependent on manufacturing can compete by improving business environments and training more skilled workers. But sooner or later, wages and workforces will stop offering a comparative advantage.

With traditional manufacturing unlikely to fuel future economic growth in the Global South, economists are exploring new models of productivity. One idea is to encourage a transition toward services such as banking, finance, telecommunications, and insurance. Some even predict that manufacturing centers could become locations for the “production” of services. For developing countries in particular, technology-dependent activities are being championed as an economic panacea, given the low marginal costs of expanding production.

But embracing the service sector in isolation will not solve the economic and employment-related challenges that the Global South faces. Unlike traditional manufacturing, which employs legions of low-skill workers, an expanded services sector will not offset the jobs lost to shuttered factories. With a few notable exceptions  including construction and tourism  nonmanufacturing industries cannot deliver productivity gains while also ensuring adequate employment. For this reason, a full departure from the status quo would be unwise.

But there is a solution: emerging markets may be able to develop more nuanced strategies that merge elements of production processes for both physical and non-physical goods. If, however, the future of production is a melding of manufacturing and services, low-income countries will have to adapt.

The world has much to learn about the interplay of manufacturing and services, but one thing is certain: technology lies at the center of the transition. As my World Bank colleagues Mary Hallward-Driemeier and Gaurav Nayyar recently noted, “interconnected manufacturing” – whereby machinery and equipment are connected to each other and to the Internet – is the future of production. These so-called “smart factories” will drive manufacturing forward, and if emerging markets are to compete in this new production landscape, those driving policy will need to raise the levels of automation, competitiveness, and connectedness in their economies.

The coming “servicification of manufacturing” will confront policymakers everywhere – but especially in the developing world – with hard choices. Not all economies will benefit from manufacturing-related services, and it will require creativity to determine how services might complement evolution on the factory floor.

But as Hallward-Driemeier and Nayyar note, regardless of where output occurs, tomorrow’s production lines will be smarter than today’s. “The agenda, therefore, should be to prepare countries to use synergies across sectors to participate in the entire value chain of a product, while also exploiting standalone opportunities beyond manufacturing.”

It is more difficult than ever to boost employment of low- and unskilled workers while maintaining healthy levels of growth. Globalisation and new technologies are dramatically changing the world’s manufacturing landscape, forcing leaders in emerging economies to reconsider their paths toward prosperity.

Fortunately, there is more that unites manufacturing and services than separates them. If the “smart factory” transition is managed wisely, economies in the Global South could find new opportunities for growth. The alternative – joblessness amid sputtering economic engines – is an outcome no one can afford.

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Otaviano Canuto is an executive director at the World Bank.

Copyright: Project Syndicate, 2018.