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The threat of premature deindustrialisation

| Updated: September 02, 2019 20:47:22

The threat of premature deindustrialisation

Industrial economy has always been integral to the high per capita income in advanced countries. Because of this, having little or no access to either abundant natural resources or labour, countries like Japan, Germany or South Korea have reached a very high-income state. Developing countries like Bangladesh, India or Indonesia having insignificant per capita natural resources are on the move to keep growing, reaching high-income state. Obviously, the option is to expand the industrial economic base. The challenge is about value creation and capturing the globally connected competitive value chain. To develop the industrial economy, so far, developing countries have worked on infrastructure development, economic zones, generic education, incentives, and preferential trade relations-primarily for commercialisation of labour and natural resources. Are they sufficient?

Due to having a large youth population, many predicted that developing countries would keep counting on growth of jobs, as labour-intensive productive activities will keep migrating to their shores. Moreover, due to the growing domestic market, labour-intensive manufacturing for import substitution will also keep creating jobs. To facilitate such job creation, governments focused on generic education, infrastructure development, and providing incentives for both export and import substitution. But unfortunately, the demand of labour has been falling rapidly. For example, electric vehicle requires far less labour than gasoline engine-powered vehicle-- posing a threat to 1 million jobs in India.

To rein in air pollution, like many developing countries, India must go for electric vehicle (EV). To facilitate the EV diffusion, India has undertaken hefty subsidy policy--$1.4 billion annually. The replacement of gasoline engines with EVs makes many mechanical components (like engines and associated components) making jobs redundant. On the other hand, to power EVs, India is going to import batteries and other electrical and electronic components, primarily from China. Similarly, cloud-based IT infrastructure automation laid off substantial jobs in India's IT service export sector.

On the other hand, import substitution requires far less labour than before--making import substitution often economically not viable. For example, labour cost in mobile phone assembling is less than 2 per cent of production cost. As a result, labour-based value addition strategy is no longer supporting developing countries to create jobs. On the contrary to the possibility of creating a growing number of jobs for an increasing number of educated youths, India lost five million jobs during 2016-1018. Educated youths were the worst sufferers.

In India and also in many other countries, as high as 80 per cent of engineering graduates are unfit for getting engineering jobs. There could be more than one reason. But the job opportunity dynamics also matters. Still, academics are focusing on producing graduates to work as in-house employees of technology user organizations. Unfortunately, this type of job opportunity is shrinking. Growing job opportunities are in the innovation segment, which is basically overlooked in building capabilities of producing engineering graduates.

Tata Motors' $2.3bn acquisition of Jaguar Land Rover in 2008 from Ford thrilled Indians, and also other former colonies. The decision of purchasing a famous British brand was hailed as the success of India's conglomerate to grow as a multi-national. But the purchase of a matured brand around matured technology (gasoline cars) failed to produce success, as the sale of diesel cars fell sharply--due to strict emission control and the emergence of EVs (electric vehicles). As a result, Tata Motors had to announce a £3.1bn write-down of its investment in Jaguar Land Rover. On the other hand, once hailed as India's iconic innovation, Nano has turned into a very expensive adventure. The one-time impairment charge contributed to Tata Motors on reporting a record post-tax loss of $3.79bn for the quarter ending December 31, 2018, causing the stock price tumbling by 30 per cent in a single day. The advent of EV also makes Tata Motors' future fraught with serious challenges.

A recently released study finds that Bangladesh will perhaps lose 5.3 million jobs by 2041. Job loss due to the expansion of the fourth industrial revolution (4IR) may be disputable--but job loss due to automation is an ongoing phenomenon, and is supposed to accelerate. What could be the response for developing countries to offset is a daunting challenge? Is it a smart response for developing countries to borrow billions and recruit foreign trainers for re-skilling and training? People were trained to acquire skills to perform jobs because the technology needed human assistance to get jobs done. But if technology performs the whole job, what is the need for training and re-skilling?

Moreover, increasing automation is contributing to the economics of re-shoring.   Like all other technology revolutions, 4IR is also creating new opportunities. Which are they? How to leverage? Are they exploitable by muscle or brain? Should developing countries think, reason, and act smarter than before to cope up as well as leverage 4IR?

In the absence of excludable ideas or intellectual assets and properties (IA/IP), ongoing investments, often through borrowing from foreign sources, are not sufficient to produce expected success. Unfortunately, developing countries are yet to understand the role of IA/IP in developing core competence to acquire the price-setting capability to generate and sustain attractive profit in this globally connected industrial value chain. In the absence of intellectual asset-based core competence, large corporations in developing countries grew out of labour cost arbitrage, tax differential, public incentives (including cash incentives), and debt-based financing. But all of those underpinnings are weakening, and debt burden is increasing. Similarly, Small and Medium-Sized Enterprises (SMEs) and Startups are not going to succeed just by relying on preferential treatments.

M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy. zaman.rokon.bd@gmail.com


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