Global Deindustrialization Threatens the Development of Poor Countries

The global economy is facing a major, game-changing problem: an exceptionally rapid decline in manufacturing employment as a result of automation, with no immediately obvious new sector of job growth to mitigate the loss.

For the past 15 years, the manufacturing sector's share of global GDP has been decreasing at a slow but steady pace, while the share of employees working in the manufacturing sector has been falling at a much greater, and indeed alarming, speed. This phenomenon, a result of tremendous progress in automation and robotization, is expected to only accelerate in the coming decades, which is raising enormous concern about employment in all advanced economies.

This is of huge concern in developing countries too, particularly in the poorest ones which are still at a pre-industrialization stage of development. The fact is that they may never be able to industrialize. They may find themselves trapped in a cycle of glacial, erratic development based on raw commodity and natural resources exports. This is especially problematic in a region like Sub-Saharan Africa where the labor force is expected to increase by half a billion people over the next 40 years or so.

It had been hoped that China and other manufacturing exporters in Asia would expand into other sectors as rising labor costs pushed labor-intensive manufacturing to low-wage, low-income developing countries, whose turn would then come to industrialize. In this respect, the example of Chinese investments in shoe manufacturing in Ethiopia has been much-publicized. But as automation continues apace, the production of these goods may ultimately remain in Asian manufacturing exporters - and may even be repatriated to developed countries - preventing pre-industrialized countries from reaping the benefits of development, and drastically reducing employment in developing and developed countries.

In a globalized economy with freer and freer trade flows, industrializing requires a degree of competitiveness not available in poor countries and, even if manufacturing were competitive in those countries, it would not create the jobs needed to employ their exploding labor force because of reduced labor intensity. Should those countries have to rely on services as their main engine of growth? As most services there primarily respond to domestic demand, they can hardly be a growth engine, except perhaps in small countries with booming tourism sectors.

What is left, then? In most countries, modern tropical agriculture and natural resources. Can the global demand for these goods be expected to grow faster than the global economy in the long run? Probably not. Yet, this would be the condition for low-income raw commodity exporters to catch up with high-income or even present-day emerging economies and for global poverty to fall at a rapid pace.

So the wave of automation, which according to experts is only just beginning, will not only be a problem for rich countries. It will be a global problem. The idea of today's low-income countries simply following in due time the Asian economic development path has to be abandoned, except perhaps for a few exceptions.

Having said this, economists are probably right in thinking that, as with previous technological revolutions, the coming one will generate faster growth and a fundamental shift of employment in directions we cannot yet imagine. Witness, for instance, the massive growth is recent years of software engineering and related fields. But we must recognize, in light of historical evidence, that the coming transition period may be protracted and difficult. Economic historians regard the first industrial revolution to have started in the late 1770s - but growth only really kicked in 40 years later, in the 1820s. In the interim, the employment problem was pretty serious, and income inequality surged. This process may already be underway in advanced economies. It could spread to the global economy and may well prevent the poorest people in the world from getting out of poverty.

What can be done? In developed countries, the transition period will unavoidably require a huge income redistribution effort and perhaps a drastic reform of our redistribution system towards some kind of basic income scheme, guaranteeing everybody some minimum standard of living. At the global level, something similar may have to be invented at the international level for developing countries, going far beyond the present Official Development Assistance schemes.

We need to recognize these challenges now and work to mitigate their effects. Failure to anticipate the real-world economic effects of our current warp-speed technological development could have catastrophic consequences: stalled development, the failure of the UN's recently launched Sustainable Development Goals, and an explosion of global inequality and poverty - potentially reversing years of good work. We must begin working on this now.

François Bourguignon is a Professor at the Paris School of Economics, former Chief Economist of the World Bank, and one of the world's leading scholars on poverty and inequality. He will be awarded the Dan David Prize for Combatting Poverty this Sunday in a ceremony at Tel Aviv University.