New policies needed to ensure developing countries can ompete

Advances in technology and changing trade patterns are affecting opportunities for export-led manufacturing. Smart automation, advanced robotics and 3-D printing are new factors influencing which locations are attractive for production. While these shifts threaten significant disruptions in future employment, particularly for low-skilled workers, they also offer opportunities, according to a new report released yesterday by the World Bank Group.

The report, Trouble in the Making? The Future of Manufacturing-Led Development, underscores the resulting changes in the manufacturing sector’s ability to create jobs and lift people out of poverty in developing countries. It encourages policymakers to adjust their approach to spurring job creation in manufacturing and readying workers for the jobs of the future.

“Technology and globalization are changing how manufacturing contributes to development. We will need to embrace this change rather than fear it. In the past, the manufacturing sector created jobs for unskilled workers and increased productivity. In the future, developing countries will need to update their policies along with their infrastructure, firm capabilities and job creation strategies to meet the demands of a more technologically advanced world,” said Anabel Gonzalez, the World Bank Group’s Senior Director for Trade & Competitiveness.

Changing technologies and shifting globalization patterns are destined to reshape manufacturing-led development strategies, according to the report. Trade is slowing. Global value chains remain concentrated among a relatively small number of countries. Smart automation, advanced robotics, 3-D printing and other advances being incorporated by global manufacturers of cars, electronics, apparel, consumer and other goods are shifting how countries and firms compete for production.

While these trends raise fears that manufacturing will no longer offer an accessible pathway to growth for low- and middle-income countries, the report seeks to identify policy priorities that can help these economies face the challenges and embrace the opportunities they bring.

“Countries can seize promising new opportunities for productivity growth and job creation if policymakers pursue approaches that adapt to changing technologies and changing patterns of globalization,” said Mary Hallward-Driemeier, a Senior Economic Advisor in the World Bank Group’s Trade & Competitiveness Global Practice and the report’s co-author. “Those countries that don’t are likely to face not just economic costs, but also social costs associated with increased inequality and more limited access to opportunities.” 

The report offers “3Cs” for countries seeking to bolster their manufacturing sectors: competitiveness, capabilities and connectedness. 

• Ensuring competitiveness will increase the importance of reforms that reduce unit-labor costs. But it will also require each economy to be better able to consider new business models; to seek new contracting relationships that embrace new technologies; and to devise new ways for manufactured goods to also deliver services.

• Building capabilities will involve giving workers new sets of skills, strengthening firms’ abilities to absorb new technologies, and providing new infrastructure and new rules to support the use of new technologies.

• Promoting connectedness will continue to emphasize openness to trade in goods, including raw materials and components. But it also increases the importance of grasping the synergies with services that are increasingly embodied and embedded within manufactured goods.

“New processes and new technologies will change how traditional goods are made,” said Gaurav Nayyar, an Economist in the World Bank Group’s Trade & Competitiveness Global Practice and the report’s co-author. “To make the most of each economy’s potential, policymakers and private-sector decision-makers will need to seize new opportunities by re-thinking their manufacturing-led development strategies.”

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Trouble in the Making? The Future of Manufacturing-Led Development

Throughout history, lower-income countries have relied on manufacturing, which provides jobs for unskilled workers, helps increase productivity, and drives economic growth, as a central driver of development. However, success in manufacturing and global value chains is currently concentrated in a limited number of countries. In 2015, 55% of the world’s manufactured goods were produced in high-income countries. China, the world’s largest producer, accounted for another 25%. Where does this leave other countries?

The The Future of Manufacturing-Led Development report explains that the criteria for becoming a desirable manufacturing location are changing. Companies once influenced by the prospect of inexpensive labor costs are beginning to favor locations that can better take advantage of new technologies.

The increasing adoption of industrial automation, advanced robotics, smart factories, the internet of things, and 3D printing are transforming the manufacturing process. “The use of new technologies to produce traditional manufactured goods will be disruptive in developing economies – whether they are using the new technologies or not,” says Mary Hallward-Driemeier.

“If labor represents a smaller share of costs, more production may happen in richer countries, closer to consumers. Fewer businesses may move to lower-cost locations and local firms will face steeper competition. But it is not all bad news. There are new opportunities too – and that part of the story needs more attention.”

The pattern is a familiar one – in some sectors, robots and other technological advances are automating jobs once done exclusively by people.  In China, for example, factories are projected to have more than 400,000 industrial robots installed by 2018, the highest number of any country in the world. FoxConn – the firm known for producing Apple and Samsung products in China’s Jiangsu province – recently replaced 60,000 Chinese factory workers with industrial robots.

By reducing the relative importance of wages, robotics and “smart” factories can change what it takes for locations to compete in global manufacturing markets. Philips in the Netherlands and Adidas in Germany are two companies who recently “reshored” production of their shavers and sneakers back home to be closer to final consumers. In each of these cases, the newer factories powered by technology provided cost savings over their offshore plants powered by low worker wages.

At the same time, changes in the global economy are presenting other challenges.  Weak import demand resulting from the trade slowdown following the 2008 financial crisis, the declining trade in parts and components, China’s continued expansion at the lower end of global value chains, and emerging threats of protectionism can all dampen the potential for growth in manufacturing.

The intersection of these trends in technology and trade shape where and how production happens, where different types of jobs are being created, and the extent of economic opportunities around the world. There is a risk that manufacturing may no longer be an accessible pathway for low-income countries to develop.

However, The Future of Manufacturing-Led Development asserts that the future is not all doom and gloom. Although dramatic, media reports of massive job losses due to automation may be overblown in developing countries. In fact, according to the report, the threat of automation to today’s jobs may be a relatively modest two to eight percent for developing economies. The bigger unknown, according to the report, is “tomorrow’s jobs.” On one hand, there is a real risk that countries will lose out on jobs that are never created. On the other, new technology could also lead to entirely new occupations that can’t be predicted today.

Despite a rising bar for economies to be globally competitive, there are opportunities ahead for developing countries. The production of tradable goods such as textiles, garments, and footwear continue to be labor-intensive and do not feature much automation yet. Ethiopia is an emerging hub for this type of textile production, attracting large amounts of investments from China and serving as a garment source for major European brands such as H&M.

Commodity-based manufactures, such as food processing, wood and paper products, and basic metals will also remain an entry point for less-industrialized countries. Brazil is one country that has excelled in this area, with $44.2 billion in exports in 2016.

Finally, services, including those related to businesses – such as call centers and data centers – and those related to manufactured products – such as design, marketing and distribution – are another area where developing countries can take advantage of future opportunities. With its success in call centers, the Philippines, for example, has made a name for itself as an offshore business services hub, employing 1 million employees with an estimated $18 billion in exports.

“Countries absolutely need to address the costs of change. However, to enable development, more attention should be focused on positioning firms and workers to take advantage of new opportunities.  This work helps to shift the focus on what needs to be done in this critical agenda,” says Anabel Gonzalez.

Manufacturing will remain a part of development strategies, but its contribution to inclusive growth is likely to be lower than in the past. The feasibility of attracting production and enabling local firms to use new technologies is becoming more challenging. As countries adjust to the changing global economic environment, meeting the policy agenda is urgent.

“Change creates winners and losers,” says Gaurav Nayyar. “Policy makers need to identify concrete ways for developing countries to position themselves to address the disruptions of technology and take advantage of globalization. Not being prepared could be costly, and complacency is not an option.”