In the Silicon Valley circles where I have spent much of the past four years, the word “innovation” is often thrown around as if it were a panacea to all of the world’s problems. Innovation, whether technological or otherwise, has certainly propelled the global economy ever forward over the past few centuries, but this movement has not always been so clearly one-directional. Perhaps the term “creative destruction,” popularized by the economist Joseph Schumpeter, ought to accompany “innovation” in such discussions more frequently. This term describes the dislocation associated with technological advancement. For instance, during the early Industrial Revolution the dislocated ones were the weavers, displaced by the first power looms; today they are the taxi drivers, beat out by ride-hailing apps like. These innovations, among so many others, make economies far more efficient as a whole, but they also temporarily disrupt certain industry sectors and the livelihoods of those who work in them.
This issue has found its way back into the headlines in recent months as voters vented their frustration over the loss of manufacturing jobs in the West and competition from low-cost producers overseas. In a manner not unlike the Luddite weavers of 19th-century Britain, who smashed the new machines that had rendered them obsolete, many Western voters who have been outpaced by globalization have taken a metaphorical hammer to the political and economic establishment that was perceived to support their misfortune. They have thrown their weight behind fringe parties and candidates running on the promise of a return to the old ways.
With a look at the tumultuous history between technology and labor, many have started to wonder what trouble we may be in for next. As self-driving cars become more common on our roads, what will happen to the millions of Americans who make their living as cabbies, truckers, and delivery drivers? Or to those who work in the service industries, as artificial intelligence grows smarter by the day? These are concerns that have already been raised and debated in the mainstream media.
But the questions that few are asking may be some of the most important: What will be the effect of certain emerging technologies, namely improved manufacturing techniques such as 3D printing and advanced robotics, on the future growth prospects for undeveloped countries around the world? What happens if these advances, often referred to as the “Third Industrial Revolution,” leave many of the world’s developing countries behind? And what if these countries are not willing to quietly accept their fate?
Climbing the Value Chain
In a globalized world, different economies specialize in different parts of the production process, some of which require greater skills and capital investment than others. The spectrum of skills and profit margins different economies operate at is referred to as the value chain. At the lowest end of the value chain are low-skill, low-margin industries like resource extraction and manufacturing assembly, while at the high end are high-skill, high-margin activities such as design, engineering, and finance.
Consider the creation of an iPhone, from start to finish. An Apple product’s label reads “Designed in California but Assembled in China.” But of course that’s not the whole story. Production occurs at all levels of the value chain: at the low-end with manufacturing taking place in China and at the high-end with design and engineering activities in California, but between the two a Taiwanese firm manages manufacturing operations while companies in Japan, South Korea, France, and Germany produce complex component parts. Raw material extraction had to take place across the globe to supply these processes. Today, most complex products boast similar sourcing and value chains crisscrossing the world.
Countries aren’t necessarily stuck in one place on the value chain. They can climb it over time, investing the proceeds of their low-end exports in fields such as infrastructure and education to give their economies the opportunity to someday pursue higher-value endeavors. But critically, this process requires a source of capital; without it, they cannot hope to invest in the foundation they need to compete with their more developed peers.
If history serves as a guide, there are two main ways in which countries have successfully moved up the value chain: low-cost manufacturing and natural resource / staples exports. Of the two, the former has the most consistent track record. Think of the 20th century’s “Asian Tigers,” such as South Korea, Taiwan, Hong Kong, and Singapore. They are the archetypes of economic development, cheaply manufacturing goods for the developed world, investing in their education and infrastructure systems, and eventually becoming hubs of finance and technological innovation.
Pursuing economic development through resource extraction can work, but its track record is less promising. Resource extraction usually requires fewer workers than manufacturing, enabling wealthy elites to keep the bulk of the profits without reinvesting them in growth potential. Because of rampant corruption, money often amasses for only a privileged few. Still, there are some exceptions that have overcome this problem, thanks to certain institutional and incentive structures.
Norway, for instance, has grown rich from exporting oil, but its democratic political system and egalitarian culture have provided the basis for wealth distribution and investment in the economy’s well-being. Though the United Arab Emirates isn’t known for institutions of this sort, it too has dodged the curse of corruption because its resources are smaller than its neighbors.’ This reality has required Emiratis elites to build out other industries to ensure a steady influx of cash in the years ahead. But these success stories are the exceptions rather than the rule when it comes to rising up the value chain via natural resource extraction. Low-cost manufacturing still remains the most proven route.
An Ascent Interrupted
– Image above: General Electric illustration of their idea of a “Smart Grid.” Note there is no nuclear plant getting cooled by the stream in the woods. From (http://ge.ecomagination.com/smartgrid/preview)
It may not be long, however, before extraction is almost the only course of action undeveloped countries have left. Over the next few decades, a series of technological developments appear to be on the horizon that could make it very difficult for economies to move up the value chain through the most proven route. The “Third Industrial Revolution” will bring new manufacturing techniques such as 3D printing and advanced robotics to the fore, and these may well rob developing countries of their primary advantage in manufacturing.
As this revolution unfolds, manufacturing will no longer have to rely on cheap labor inputs, as it does today. Rather, the new automated systems will depend on the design and supervision of highly technologically sophisticated engineers and managers. The majority of the workers with those skills, along with the biggest markets for the goods those systems produce, are located in the developed world. It follows that advanced manufacturing facilities will be situated primarily in developed economies as well.
At the same time, the global demand for and supply of raw natural resources may diminish. The manufacturing methods of the next industrial revolution are generally expected to be less resource-intensive than our current ones. Meanwhile, advances in “green tech” will likely make products more resource-efficient and alternative energy more accessible. Over the next few decades, moreover, many resource exporters are predicting that their reserves will decline sharply – especially when it comes to oil.
– Globalization is an unstoppable force that is sweeping over the globe, taking out cultures, languages, values with its tidal waves of advanced communication, transportation, frequent travels and the huge multinational corporations. It cannot be stopped, and there are winners and losers in this game of globalization.
All of these changes will have an enormous impact on life in the developed world. But their effect on developing countries could be even more transformational – by removing any hope of transformation at all. Rather than climbing the value chain by leveraging their cheap labor costs or exporting their resources, these nations will have little choice but to watch from afar as the developed world houses the most efficient manufacturing and consumes fewer natural resources. Much as the power loom shuttered the weavers’ shops, 3D printers and robots may close the doors of sweatshops in the not-too-distant future. And while that may bring a welcome respite for those who toil under such difficult conditions, their countries will have few prospects for pulling themselves out of poverty.
A Revolution in the Making
Believe it or not, last year’s electoral surprises in the West may serve as a sign of what’s to come in the developing world. In some ways, the position that displaced Western voters are in now may be similar to that of undeveloped countries once the Third Industrial Revolution gets off the ground. Many citizens of Western countries have come to expect opportunities for upward mobility – or at the very least that their lots will improve with time. When Western workers in manufacturing and other affected industries were made obsolete by technological advances and foreign competition, they saw their prospects for a brighter future begin to dim, and protested against the system they blamed for it.
Under the global system of manufacturing, a norm has emerged where countries expect that they can become more developed, or rise up the value chain, over time. A country like Bangladesh or Vietnam can accept sweatshops and poverty today because they will lead to a brighter future. Previously China had these and they served as a tool to make the country dramatically richer over a short span of time. Before China, others like Japan and South Korea went through the same process. But if undeveloped countries come to believe that they no longer have future growth prospects due to the Third Industrial Revolution, they or their people may not accept such an outcome quietly.
Much like Western voters, these nations may decide that today’s global economic framework is no longer acceptable and must be torn down.