Within the framework of the debate series GeoDebates, organized by Pallas Athéné Innovation and Geopolitical Foundation, a public discussion on the relationship between the Fourth Industrial Revolution (hereinafter referred to as Industry 4.0) and catching-up of developing countries was held on 22nd March, 2018. As a central issue, the question as to whether the latest industrial revolution could narrow the gap of inequalities between developing and developed regions was arisen, and if it could, what conditions were required. As an invited guest, I argued for the positive effects exerted on developing countries by Industry 4.0, and altogether, I claimed that the latest industrial revolution could offer more economic opportunities than dangers to developing regions in the mid- and long terms. The realization of opportunities, however, depends on several conditions, and the execution of some of them requires a regional cooperation between developing regions. The article below organizes my major comments made during the debate, summing up some of them and going beyond some others.
The starting point of the opinion expressed below is that the question asked is incomplete, and after its clarification, it can be much better answered by further questions and policy proposals than an accurate statement. Primarily because the latest industrial transformation is a “new topic”, a bulk of unfinished processes, analyzable data are not available in large volumes, the response of developing countries is unknown, and developed countries are also in the reflection period.
The starting point of the analysis is that the dear reader is familiar with earlier industrial revolutions, and their effects on the labour market, therefore they are presented only by being mentioned. Similarly, the analysis does not aim at drawing parallels between developed and developing countries, therefore I acknowledge as a fact that developed economies based on export have recently outsourced a part of their labour-intensive production processes into developing countries, and that most of the economic development of developing countries is contributable to this outsourcing.
“Industry 4.0” is the abbreviated name for the Fourth Industrial Revolution. The transformation is characterized by the diffusion of automatized technologies, smart computing, the Internet of Things (IoT), cloud computing and cognitive computing. Its central element is that human-controlled labour processes will become machine system-controlled production processes. Parallel with the Fourth Industrial Revolution, the so-called “Society 5.0” appears, that is, a super smart society, which means a human-centred society in which cyber and physical spaces are intertwined. Artificial Intelligence, IoT, Big Data, robot technologies are combined. Society 5.0 seeks solutions for global problems, in a gender-, age- and social status-neutral way.
From a historical perspective, we can conclude that during industrial revolutions those high-income countries (HICs), with high productivity and GDP, gained grounds in trade that made their sectors of production successful in an export-oriented way (the majority of Western countries). It is true, however, that some countries exploiting a natural resource or building on tourism could also become rich (e.g. Venezuela, certain Arab countries, some nation-states of southeast Asia).
From the viewpoint of the labour market, the existing balance was usually upset during industrial revolutions, and demand and supply suddenly parted on the labour market. Old jobs became redundant or disappeared, and demand for new ones rose sharply and rapidly. During the first and second industrial transformation, the key to the development of manufactories (sectors of production) was the involvement of unqualified workforce in production processes. Developed countries took advantage of masses of unqualified workforce of underdeveloped or developing countries in outsourcing processes, with production bonus and positive effects to be realised in global trade. In other words, the ability of developing countries to attract FDI manifested in cheap labour. This phenomenon was enhanced by the Third Industrial Revolution, although certain developing regions (e.g. China, India, Southeast Asia) also started to gain strength in trade independently.
What Aspects Of The Latest Industrial Revolution Are Different From Earlier Industrial Transformations From The Perspective Of Developing Countries?
The dangers of Industry 4.0 lie in such innovations that make the local labour market in developing countries face the fact that there is no locally employable workforce with adequate technical qualifications or high-level technological infrastructure, which could support the transformations resulting from the latest developments. The majority of developing countries are outsourcing-dependent, and without high-level local technological adaptation they are less attractive (with the exception of centres of productions, such as China). Without digital competencies, which can be massively and cheaply employed, they can lose their competitiveness on the international market, and a part of outsourced businesses return to their country of origin, that is, a developed country ([re]shoring). According to a recent study of the World Bank, two-thirds of existing jobs in the developed world are in danger. As a result of robotization and smart technological advancements, developed countries are better off reshoring a part of cheap and labour-intensive processes into their home countries due to research & development processes, infrastructure and costs. Retraining the workforce, however, is not always reasonable; producers’ cost effectiveness can be better realised by (re)shoring – at least, in the short term. Some of the globally present enterprises, especially owing to national reshoring initiatives, follow this strategy.
Second, the so-called Industry 4.0 strategies were and have been devised by developed countries (Nordic Council, 2016; Germany, 2016-17; Norway, 2016; Sweden, 2016; USA, 2016), with the original aim of counterbalancing the increasing economic might of developing countries. For the present, developing countries lack regionally handled strategies, although 2063 – The Africa We Want, which covers economic transformation, has been published within the UN framework. However, this is a far cry from practically realizable goals and action plans. On an international level: the Industry 4.0 strategy was included in the goals published in January, 2018 by the G20 presided by Argentina, although only in terms of agriculture and the digital sector.
Third, income deriving from the manufacturing industry peaked much lower in developing countries than in developed ones (they did not reach en masse the level of development of rich countries). The latest transformation has started and these countries do not have either any stable industrial sectors or a more educated social stratum, typical of welfare societies. Under such circumstances, the shock to the labour market shock can be felt to a much greater degree.
Fourth, industrialization processes reversed in developed countries in the 1980s, which led to job losses in manufacturing industries. The so-called manufacturing economy has turned into a service-based one. Research has shown that demand for products increases less proportionally with the increase of per capita GDP than the demand for services does in economies originally producing for export, thus the transformation in the structure of the economy has also led to a social transformation. However, a pre-requisite was that purchase power parity had to allow for that. The low “production peaks” of per capita GDP of developing countries, however, did not allow for the development of a service-based society.
According to a study published in October, 2017 by the World Bank, the global trend is combining production processes with services (servicification), and combining automatization with Big Data, which leads to independent data production and data accumulation. The strengthening of a service-based economy is important not only for the economies of scale, but also for sophisticated and automatized production. Combining and tapping smart technologies to such a degree is not typical in developed regions.
Furthermore, research results of the World Bank emphasise that the presence of robot technology, smart technologies, R&D abilities and the qualifications required for 3D printing is the most important aspect of the location of a “modern” enterprise. Advanced manufactured goods (autonomous vehicles, biochips, biosensors, smart clothes) are produced near areas with intensive R&D capacities, where the expert- and infrastructure-intensive elements of development processes are also close. And this is provided primarily in high income countries (HICs): the United States (Silicon Valley, Austin), Finland, Japan, Sweden, Estonia. Due to the R&D intensity of industrial transformation, for the present “new” production processes are not likely to move to less developed countries, because of low levels of qualifications and the lack of local advanced infrastructure.
Furthermore, one of the expected impacts of the latest industrial revolution will be felt in the transformation of traditional production processes in developing regions, since the countries that will be able to adopt more advanced technologies will become more competitive in traditional production (comparative advantage).
Finally, one of the opportunities of developing countries lies exactly in the diffusion of ITC technologies, which can reduce trade and coordination costs and can also approximate production processes regionally. The diffusion of smart tech can further improve the correlation between supply and demand. Larger and “more developed developing” countries (e.g. Brazil, India, Turkey, Mexico, Thailand) are already witnessing the emergence of technology-intensive sectors and an inflow of related foreign capital, as technical and engineering talent is available at competitive wages.
Below, I will highlight some opportunities based on which developing countries can hope that the innovations of the Fourth Industrial Revolution will be felt positively in their regions: the analogy of earlier transformations, the potential in infrastructure developments, and the role of policies supporting the economic policy. To sum it up:
1) It has been proven that more jobs were created than lost by the technological renewal resulting from specific industrial revolutions. If developing countries can ensure that smart technologies are not used by only a tiny fraction of the population but broader sections of society have access to more efficient achievements (food safety, education, healthcare), improvements in the standard of living can be felt across the society.
2) Using technology, and in particular, “using it well” can contribute to lifting out of poverty. There is evidence that the developing world will leapfrog the construction of traditional, “fixed” ICT lines and the use of desktops, and will build mobile networks directly and encourage the diffusion of mobile devices on a governmental level. The main reason is that the diffusion of mobile devices improves access to education, especially in developing countries. Developing countries, however, must cope with some phenomena, also typical in (to a lesser extent) developed countries. Such problems include the difference in the Internet use of urban and rural populations, the age- and gender gap in Internet use, and the generally low level of digital literacy. Finally, let us take a look at these and the opportunities inherent in them. There were 3.7 billion mobile phone users (GSMA, 2017), but 10 per cent of 7.2 billion people did not have access to the most basic voice-and text-based services, and one-third of them did not have access to 3G or 4G. The majority of this crowd means the – primarily rural – population of Asia and sub-Saharan Africa. Broadband mobile internet reaches 84 per cent of the world’s population (ITU, 2015), and 67 per cent of rural population can connect. The difference in 3G coverage is even more remarkable: 29 per cent of the rural population (3.4 billion people), and 89 per cent of the urban population (4 billion people) had 3G access. The gender gap can also be felt: globally, there are 14 per cent less female mobile phone owners than male ones. This rate is 38 per cent in South Asia, and is over 20 per cent in sub-Saharan Africa, with the exception of South Africa. In developing countries, mobile devices are required for using banking services, but it is also a healthcare device, and an essential part of the information flow between small enterprises. In the developing world, a remarkably higher number of men has mobile accounts than women (World Bank, 2016). As for Internet use by age groups: according to ITU’s data from 2017, 94 per cent of 15-24 year olds use the Internet in developed countries, while this rate is 67 per cent in developing countries, and 30 per cent in the least developed ones. Overall, nine of ten young non-internet users are from Africa, Asia or the Pacific region. To sum it up, it is essential to narrow geographical and gender gaps to develop the rural population and increase the share of female workforce. In order to provide them with opportunities beyond traditional agricultural work, the construction of broadband mobile networks is required. In addition, the diffusion of mobile phones, smart phones and mobile internet gives women a sense of safety, and helps keep in touch with family members. It helps users save time and money, enables financial services, makes healthcare services available, and provides educational opportunities. Labour market opportunities of young people are expanded by their use of mobile internet. The above prerequisites are indispensable for the development of digital skills and literacy.
3) The role of global companies is increasing, while that of nation states is decreasing. Facebook, Google, Amazon, Apple and the ecosystem emerging around them have more influence on economic processes than specific national policies do. To balance this, a competition law regime facilitating regional/national economic policies and a more relaxed intellectual property policy may prevent the concentration of economic might, and make the achievements of smart technology more widely available and open up the opportunity for masses to join economic processes.
The example of developed countries cannot be fully applied to developing countries. The opportunities of developing countries primarily lie in the “opportunities for mobility from the bottom to the top”.
A publication of the Global Forum of National Advisory Councils issued in December, 2017 argues that the impact of the achievements of the Fourth Industrial Revolution can be either positive or negative, depending on how the countries concerned respond to arising challenges. Developing countries want to maintain their high annual GDP growth (at least 5 per cent), but they must recognise that the key to GDP growth is their development from an input-based economy into a productivity-based one. This export-led productivity can be achieved only through planned and implemented policies.
Developing countries must be much better prepared for Industry 4.0 than their current state. Traditional outsourcing of labour-intensive production processes provides less and less countries with an opportunity to catch up. The problem is graver in countries where the earlier labour-intensive industry can be replaced by a smart-technology-led industry.
The plans of developed countries and the frequently identified dangers of the latest industrial revolution reflect a static way of thinking, and focus on opportunities opening up in a longer term. In more developed developing countries, however, robotization, the diffusion of smart technologies as well as the arising need for social efficiency can be as expected as in developed countries. The realization of opportunities, however, is subject to certain conditions: to innovation policies revamped on national and regional levels, implemented educational and development programmes, infrastructure developments, social programmes, locally developed and implemented cluster measures. Furthermore, regional cooperation and a more assertive and massive presence in global trade require the development of information and communication technology (ICT) networks and large-scale improvement in digital literacy, noticeable in a short term. Furthermore, the sustainability of changes can be ensured by regionally coordinated trade policies and a supporting competition policy. National pioneer programmes lead to regional differences, social dissatisfaction and potential risks of conflict. Developed countries must continue donor programmes through technological and infrastructure developments.
Author: Pál Belényesi