Trade for Development News discussed the future of globalisation and pathways to development with Richard Baldwin, Professor of Economics at the Graduate Institute, Geneva, and Director of the Centre for Economic Policy Research. In his latest book, The Globotics Upheaval, Baldwin predicts a future globalisation shaped by digitally fuelled innovations in robotics and artificial intelligence that will be very different from the present and the past. This future raises important questions around prospects for least developed countries in a dizzying era of global disruption.
TfD: Before peering into the future, let us first take a quick step back to understand where we are today. In your previous book, The Great Convergence, you describe a process where globalisation changed and accelerated in the early 1990s through information communications technology and global value chains. You refer to this as the “second unbundling” that arose from the relaxation of constraints on the cost of moving ideas. This led to the phenomenal rise of emerging economies, especially China and other Asian nations, through the offshoring of production stages and the transfer of know-how to low-wage nations. Why did this transformation in global manufacturing concentrate in a few developing countries and largely exclude least developed countries?
RB: There are essentially two reasons linked to the fact that geography and transportation costs still matter a great deal for this sort of integration.
The first is related to value added versus gross trade. Back and forth trade in parts and components is often time sensitive with little value added at each stage of production. Although transportation costs are low relative to the gross value of the good, trade costs can increase significantly when low added-value items cross borders multiple times for final production. This has led firms in industrialised countries to produce parts and components in factories located within the same region. The second reason is that managers or technicians operating in these transnational value chains occasionally have to cross borders. The need to limit the time and costs of moving personnel between facilities has also led to regional concentration.
In other words, the clustering forces around industrial hubs within countries during the earlier phases of industrialisation are still at play today.
TfD: In The Globotics Upheaval you build on the framework developed in The Great Convergence and look at the next stage in globalisation, which you call the “third unbundling.” Here, the third constraint holding back the globalisation of markets, the cost of moving people, is dramatically reduced through digital technologies. What are the characteristics of this new wave of globalisation for which you coin the term “globotics”?
RB: A simple way to think about this evolution is as follows. The first unbundling expanded markets through falling shipping costs and the classical liberalisation of goods across borders. The second unbundling, which we have just discussed, was factories crossing borders. This new unbundling is offices crossing borders. In other words, future globalisation will be about the things we do and not just the things we make.
Globotics smashes together globalisation and robotics: it is both at the same time. What is meant here is people sitting in one country and working in offices in another. I call this telemigration and there are a variety of ways in which this is done.
Business process outsourcing is one model where corporations take advantage of salary differences to hire talented service providers in developing countries, essentially running overseas factories for services rather than parts and components. Another is multinational firms based in developing countries, Infosys in India for example, which provide outsourced services delivered via telecommunications. And a third is online freelancing platforms, like Upwork, which enable telemigration at a smaller scale. Basically we are talking about Mode 1 trade in services as defined under the WTO General Agreement on Trade in Services.
TfD: Your book further considers how the spread of innovations like robotics and artificial intelligence will affect the international distribution of labour through augmented telepresence and the global arbitrage of wage differentials. You argue that “telemigration” will be as disruptive to office workers in rich countries as past globalisation was to blue-collar workers in industrialised nations. But who will be the main beneficiaries of these export opportunities and the potential transfer of hundreds of millions of tasks?
RB: The big winners will be firms in rich countries that can import their services for cheaper and the exporters of services in developing countries. White-collar workers competing with those imports will lose as jobs are displaced, and service exporters will typically gain as they will be able to sell their wares for a higher price.
That is why in a new paper on globotics and development, co-authored with Rikard Forslid, I argue that the emerging market miracle will continue and spread geographically. However, it will resemble India’s success rather than China’s. In other words, it will be driven by service-led rather than manufacturing-led export development and it will extend beyond the previous wave of emerging nations to the many low-cost economies endowed with talented individuals.
The previous wave of emerging market growth was based on the export of goods of two types: manufacturing goods through global value chains that was mostly limited to a narrow set of countries of which China accounted for over half; and this in turn created a commodity boom that benefitted other emerging nations. The trade landscape is now going to be about services. And since the whole issue of transportation essentially disappears through digital technologies and the internet there will be a wider geographical spread.
To further pick up on this idea of beneficiaries. I think it will first benefit the middle class in middle income countries equipped with the right skills and with access to reliable and affordable internet connection and electricity. It will help some countries emerge from the middle income trap with their workforce joining the global labour market through technology.
TfD: Least developed countries have for the most part been bypassed by the previous industrial revolutions and remain stuck in 19th and 20th century trade in low value-added products and commodities. How do these countries fit into this new wave of globalisation and complex value chains that you describe?
RB: I do not see many of these countries fitting into this new evolution for the next five to ten years. The basic connectivity and skills to participate are missing. On top of that there is another important consideration which is that international banking connections in the poorest countries do not exist. They have essentially been cut off because of Know Your Customer requirements. Many least developed countries will get left behind.
With the exception of countries like Laos and Cambodia that are located close to areas where this type of cross-border activity is developing, the idea that least developed countries will participate in these sophisticated value chains is not there. They do not yet have the conditions in terms of business environment, infrastructure and human resources to take advantage of global labour arbitrage in services. One of the first things they will need to do is get their digital infrastructure in line.
TfD: There is another aspect to the fourth industrial revolution which is the share of developing country exports in manufacturing sectors that is rapidly being automated by trade partners. What are the prospects for export-led industrialisation and employment generation in low wage countries that are latecomers to development in this changing manufacturing landscape?
RB: The subtitle to my recent paper on robotics and development is: when manufacturing is jobless and services are tradeable. The future ability of manufacturing to generate employment for unskilled workers in poor countries will be reduced. There is a report on this subject by the World Bank entitled “Trouble in the Making” which is a play in words on how automation is pulling out the rungs of the traditional development ladder.
My analysis of trends is that more manufacturing products will be produced locally. As the use of robots and automation develops and spreads, labour costs will be become so minimal as to overwhelm the delay and trouble of shipping goods. So Europe, for example, will make most of its goods, while Africa will also manufacture most of its products. We’re essentially talking about a reduction in trade – or to put it differently, manufacturing goods become non-traded while services become tradeable.
TfD: Least developed countries have young and rapidly growing populations. As discussed, wages will become less important in global manufacturing and the sector may no longer offer its historical pathway for poor nations to create jobs and develop through labour-intensive and productivity-enhancing activities. How best should these countries prepare tomorrow’s workforce for the future of work?
RB: This is something that needs to be thought through hard because the traditional development route is being shut off by automation. There is simply no way that human wages – as cheap as they are in countries like Burkina Faso – will compete with robots in mass manufacturing. It may not be in ten years, but most manufacturing will probably be automated within forty years at most.
So policymakers need to prepare for the challenges and opportunities ahead. However, I do not think that preparing the workforce for service exports is any different to preparing them for the jobs of the future. They must be literate, healthy and connected.
When looking at robotics and pathways to development, I am combining two strands in the literature. The first is that manufacturing’s contribution to employment and growth will change because of automation. The second is that service exports offer an alternative route.
In fact my argument is stronger: there will be no more Chinas. Not because of trade restrictions but automation. The service-led development path will become the norm and that is what we need to think about.
TfD: To conclude, let us briefly turn our attention to international trade cooperation and the reaction of populations in rich – and possibly also emerging – countries to the distributional consequences of the rapid and massive loss of jobs to lower wage destinations in service sectors. Are you confident that the rules-based trading system will prove resilient in the face of this upheaval?
RB: I believe it will and can accommodate this expansion in service trade. We should not forget that globalisation is a two-way street. My tendency is to think that the anger will not necessarily be directed towards globalisation but rather some technological aspect – for example companies in robotic process automation or providers of more sophisticate artificial intelligence seen as responsible for the loss of jobs in the workplace. Although globalisation could certainly get wrapped up in this type of backlash. The globotics revolution is inevitable and, in my opinion, will be beneficial in the long run. Policymakers in import competing countries should lay emphasis on helping their workforce through labour market policies that protect workers and not jobs.