The Global Economy’s Next Winners By Susan Lund, James Manyika, and Michael Spence

What It Takes to Thrive in the Automation Age
T he countries that once led the world toward economic openness are retreating into protectionism. Over the past two and a half years, the United States has abandoned the Trans-Pacific Partnership and imposed tariffs on steel, aluminum, and a wide range of Chinese goods. The United Kingdom is in the process of leaving the world’s largest free-trade area. And rising nationalist sentiment is threatening to repeat these self-destructive acts elsewhere. The rich world is turning inward.
Its timing couldn’t be worse. Even as critics of free trade gain the upper hand, globalization, wholly of its own accord, is transforming in rich countries’ favor. Economic growth in the developing world is boosting demand for products made in the developed world. Trade in services is up. Companies are moving production closer to their customers so they can respond faster to changes in demand. Automation has slowed the relentless search for people willing to work for ever-lower wages. And the greater complexity of modern goods means that research, design, and maintenance are coming to matter more than production.
All these trends play to the strengths of developed countries, where skilled work forces, large quantities of capital, huge customer bases, and dense clusters of high-tech companies combine to power modern economies. Middle-income countries, such as China and Mexico, may also benefit from the next era of globalization (although changing trade and investment patterns may well leave sections of their work forces behind, just as they did in rich countries over the past two decades). The poorest countries, meanwhile, will see their chief advantage—cheap labor—grow less important.
Rich countries have chosen a spectacularly poor time to begin closing themselves off from trade, investment, and immigration. Rather than pulling up the drawbridge just as the benefits of globalization have begun to flow back toward the developed world, they should figure out how to take advantage of these changing patterns of globalization. Making sure that everyone, not just the already successful, benefits will be a daunting task. But the one way for rich countries to ensure that everyone loses is to turn away from the open world just as they are becoming the masters of it.
In the 1990s and the early years of this century, growth in trade soared, especially in manufactured goods and natural resources. In 2001, China’s entry into the World Trade Organization helped create a vast new manufacturing center for labor-intensive goods. The digital revolution allowed multinational companies to stretch their supply chains around the world. This spurt of globalization was fueled in part by trade in intermediate goods, such as raw materials and computer chips, which tripled in nominal value, from $2.5 trillion in 1995 to $7.5 trillion in 2007. Over that period, the total value of goods traded each year grew more than twice as fast as global GDP.
Then came the Great Recession. Global trade flows plummeted. Most analysts assumed that once the recovery gained steam, trade would come roaring back. They were wrong. From 2007 to 2017, exports declined from 28 percent to 23 percent of global gross output. The decline has been most pronounced in heavily traded goods with complex global value chains, such as computers, electronics, vehicles, and chemicals. A decade after the Great Recession, it is clear that trade is not returning to its former growth rates and patterns.
Trade in services will take up an ever-greater share of the global economy.
In part, that’s because the global economy is rebalancing as China and other countries with emerging markets reach the next stage of development. After several decades of participating in global trade mainly as producers, emerging economies have become the world’s major engines of demand. In 2016, for example, carmakers sold 40 percent more cars in China than they did in Europe. It is expected that by 2025, emerging markets will consume two-thirds of the world’s manufactured goods and, by 2030, they will consume more than half of all goods.
China’s growing demand means that more of what is made in China is being sold there. In 2007, China exported 55 percent of the consumer electronic goods and 37 percent of the textiles it produced; in 2017, those figures were 29 percent and 17 percent, respectively. Other emerging economies are following suit.
Developing countries also now rely less on intermediate imports. China first stepped onto the global trading scene in the 1990s by importing raw materials and parts and then assembling them into finished goods for export. But things have changed. In several sectors, including computers, electronics, vehicles, and machinery, China now produces far more sophisticated components, and a wider range of them, than it did two decades ago.
Trade is becoming more concentrated in specific regions, particularly within Europe and Asia. That is partly the result of greater domestic demand from emerging-market countries, but it is also being driven by the increased importance of speed. Proximity to consumers allows companies to respond faster to changing demand and new trends. Many companies are creating regional supply chains near each of their major markets. Adidas, for example, has built fully automated “Speedfactories” to produce new shoes in Germany and the United States rather than making them in its traditional locations in Indonesia. Zara has pioneered the “fast fashion” industry, refreshing its store merchandise twice a week. More than half of the company’s thousands of suppliers are concentrated in Morocco, Portugal, Spain, and Turkey, where they can serve the European and U.S. markets. Zara can get new designs from the drawing board to a store in Manhattan in just 25 days.
The growth of new technologies, such as Internet connectivity and artificial intelligence (AI), are also changing trade patterns. From 2005 to 2017, the amount of data flowing across borders every second grew by a factor of 148. The availability of cheap, fast digital communication has boosted trade. E-commerce platforms allow buyers and sellers to find each other more easily. The Internet of Things—everyday products with Internet connections—lets companies track shipments around the world and monitor their supply chains.
Yet not all new technologies lead to more trade. Some, such as robotics, automation, AI, and 3-D printing, are changing the nature of trade flows but not boosting the overall amount of trade. Factories have used robots for decades, but only for rote tasks. Now, technological advances, such as AI-powered vision, language comprehension, and fine motor skills, allow manufacturing robots to perform tasks that were once out of their reach. They can assemble intricate components and are starting to work with delicate materials, such as textiles.
The rise of automation means companies don’t have to worry as much about the cost of labor when choosing where to invest. In recent decades, companies have sought out low-paid workers, even if that meant building long, complex supply chains. That is no longer the dominant model: today, only 18 percent of the overall trade in goods involves exports from a low-wage country to a high-wage one. Other factors, such as access to resources, the speed at which firms can get their products to consumers, and the skills available in the work force, are more important. Companies are building fully automated factories to make textiles, clothes, shoes, and toys—the labor-intensive goods that gave China and other developing countries their start in global manufacturing. Exports from low-wage countries to high-wage countries fell from 55 percent of all exports of those kinds of cheap, labor-intensive goods in 2007 to 43 percent in 2017.
Trade in goods may be slowing relative to global economic growth, but trade in services is not. Since 2007, global trade in services has grown more than 60 percent faster than global trade in goods. Trade in some sectors, including telecommunications, information technology, business services, and intellectual property, is now growing two to three times as fast as trade in goods. In 2017, global trade in services totaled $5.1 trillion, still far less than the $17.3 trillion of goods traded globally. But those numbers understate the size of the services trade. National accounts do not, for example, separate out R & D, design, sales and marketing, and back-office services from the physical production of goods. Account for those elements, and services make up almost one-third of the value of traded manufactured goods. And companies have been turning more and more to foreign providers for those services. Although directly measured services are only 23 percent of total trade, services now account for 45 percent of the value added of traded goods.
Trade in services will take up an ever-greater share of the global economy as manufacturers and retailers introduce new ways of providing services, and not just goods, to consumers. Car and truck manufacturers, for example, are launching partnerships with companies that develop autonomous driving technologies, rent out vehicles, or provide ride-hailing services, as they anticipate a shift away from the traditional model of one-time vehicle purchases. Cloud computing has popularized pay-as-you-go and subscription models for storage and software, freeing users from making heavy investments in their own hardware. Ultrafast 5G wireless networks will give companies new ways to deliver services, such as surgery carried out by remotely operated robots and remote-control infrastructure maintenance made possible by virtual re-creations of the site in question.
For decades, manufacturing firms made physical things. Today, that is no longer a given. Some multinational companies, including Apple and many pharmaceutical manufacturers, have turned themselves into “virtual manufacturers”—companies that design, market, and distribute but rely on contractors to churn out the actual product.
That change reflects a broader shift toward intangible goods. Across many industries, R & D, marketing, distribution, and after-sales services now create more value than the physical goods, and they’re growing faster. The economist Carol Corrado has shown that firms’ annual investment in intangible assets, such as software, brands, and intellectual property, exceeds their investment in buildings, equipment, and other physical assets. In part, that’s because products have become more complicated. Software now accounts for ten percent of the value of new cars, for example, and McKinsey expects that share to rise to 30 percent by 2030.
Goods still matter. Companies still have to move goods across borders, even when services have played a big role in their production. Tariffs on goods disrupt and distort these flows and lower productivity. That means they act as tariffs on the services involved, too. Tariffs on intermediate goods raise costs for manufacturers and result in a kind of double taxation for final exports. In short, the argument for free trade is just as strong today as it was three decades ago.
Middle-class Americans and Europeans bore the brunt of the job losses caused by the last wave of globalization. With the notable exception of Germany, advanced economies have experienced steep falls in manufacturing employment over the past two decades. In the United States, the number of people working in manufacturing declined from an estimated 17.6 million in 1997 to a low of 11.5 million in 2010, before recovering modestly to about 12.8 million today.
Yet advanced economies stand to benefit from the next chapter of globalization. A future that hinges on innovation, digital technology, services, and proximity to consumers lines up neatly with their strengths: skilled work forces, strong protections for intellectual property, lucrative consumer markets, and leading high-tech firms and start-up ecosystems. Developed countries that take advantage of these favorable conditions will thrive. Those that don’t, won’t.
Manufacturing jobs are not yet flowing back to the rich world in vast numbers, but there are some encouraging signs. Several major companies, such as Adidas, Fast Radius, and Lincoln Electric, have opened U.S. facilities in recent years. Apple has announced a major expansion in Austin, Texas, and is planning new data centers and research facilities in other cities across the United States. Companies based in the developing world are also investing more in the United States and Europe.
The growth in trade in services is providing another boost for advanced economies. The United States, Europe, and other advanced economies together already run an annual surplus in trade in services of almost $480 billion, twice as high as a decade ago, demonstrating their competitive advantage in these industries. New technology will let companies remotely deliver more services, such as education and health care. Countries that already specialize in exporting services, such as France, Sweden, the United Kingdom, and the United States, are in a good position to capitalize on these trends.
Emerging economies have become the world’s major engines of demand.
Finally, as the developing world gets richer, it will buy more cars, computers, airplanes, and machinery from the developed world. Advanced economies send more than 40 percent of their exports to emerging markets, almost double the share they sent 20 years ago. Those exports added up to more than $4 trillion worth of goods in 2017 alone.
The picture for advanced economies is not uniformly rosy, however. Some industries will face fierce new competition from the developing world. Homegrown companies in Brazil, China, and other middle-income countries are branching out into higher-value-added industries, such as supercomputing, aerospace, and solar panel manufacturing, and relying less on imported parts from the developed world. Chinese companies are beginning to manufacture the computer chips they used to buy from abroad. (Although for smartphones, China still imports chips.) China’s total annual imports of intermediate goods from Germany for vehicles, machines, and other sophisticated products peaked in 2014 at $44 billion; by 2017, the figure was $37 billion. Japan and South Korea have also seen their exports of intermediate goods to China in those industries decline. The Made in China 2025 initiative aims to build the country’s strengths in cutting-edge areas such as AI, 5G wireless systems, and robotics.
Middle-income countries, such as Brazil, China, Hungary, Mexico, Morocco, Poland, South Africa, Thailand, and Turkey, will reap some of the benefits of the new globalization, but they will also face new difficulties. Such countries now play important roles in the complex value chains that produce vehicles, machinery, electronics, chemicals, and transportation equipment. They both supply and compete with the companies based in countries with advanced economies that have traditionally dominated those industries.
A number of middle-income countries enjoy a fixed advantage: geographic proximity to major consumer markets in advanced economies. As automation makes labor costs less important, many multinational companies are choosing to build new factories not in countries with the lowest wages but in countries that are closer to their main consumer markets and that still offer lower wages than rich countries. Mexico fits the bill for the United States; Morocco, Turkey, and eastern European countries do the same for western European countries, as do Malaysia and Thailand for richer Asian countries, such as Japan and the wealthier parts of China.
Other middle-income countries are poised to benefit from the shift from goods to services. Costa Rica, for example, is now a major exporter of business services, such as data entry, analytics, and information technology support. Its exports in those sectors have grown at an average annual rate of 34 percent over the last ten years, and they are worth $4.5 billion today, or 7.6 percent of Costa Rica’s GDP. The global annual trade in outsourced business services—everything from accounting to customer support—totals $270 billion and growing. That represents a lucrative opportunity for middle-income countries such as Costa Rica. Yet since AI tools could handle much of the work involved in these services, workers will need to be able to assist customers with more complex troubleshooting or sales if they are to stay ahead of the machines.
CHINA STRINGER NETWORK / REUTERS At a logistics center in Wuhan, China, November 2015
Middle-income countries also have huge opportunities to benefit from new technologies—not only by adopting them but also by building them. China, for instance, is a world leader in mobile payments. Apps such as WeChat Pay and Alipay have allowed Chinese consumers to move straight from using cash for transactions to making smartphone payments, skipping credit cards altogether. China’s third-party payment platforms handled some $15.4 trillion worth of mobile payments in 2017—more than 40 times the amount processed in the United States, according to the consulting firm iResearch. In addition to making transactions cheaper and more efficient, payment apps also create huge pools of data that their creators can use to offer individually tailored loans, insurance, and investment products. In every country, the rise of big data raises difficult legal and ethical questions; in China, especially, official use of such data has come under scrutiny. No two countries are likely to come to exactly the same conclusions, but all will have to grapple with these issues.
In addition, e-commerce, mobile Internet, digital payments, and online financial services tend to contribute to more inclusive growth. A 2019 report by the Luohan Academy, a research group established by Alibaba, found that the benefits of the current digital revolution are likely to be more evenly distributed than those of previous technological revolutions. That’s because digital technologies are no longer restricted to rich people in rich countries. Today’s technologies have made it easier for people everywhere to start businesses, reach customers, and access financing. The report found that in China, digital technologies have accelerated growth in rural areas and inland provinces, places that have long lagged behind the coasts.
Even as middle-income countries shift to higher-value manufacturing and services, their manufacturing workers are likely to face struggles similar to those of American and European workers who have been displaced by digital technologies. Factory workers in China, Mexico, and Southeast Asia may bear the brunt of job displacement as wages rise and automation proceeds. A study by the economist Robert Atkinson found that China, the Czech Republic, Slovenia, and Thailand are adopting industrial robots faster than their wage levels would predict. Although automation will raise productivity growth and product quality, these countries will need to help displaced workers and avoid the mistakes made by the West.
In a world of increasing automation, the prospects for low-income countries are growing more uncertain. In the short term, export-led, labor-intensive manufacturing may still have room to grow in some low-wage countries. Bangladesh, India, and Vietnam are achieving solid growth in labor-intensive manufacturing exports, taking advantage of China’s rising wages and the country’s emphasis on more sophisticated and profitable products. To make the old model of export-led manufacturing growth work, countries will need to invest in roads, railways, airports, and other logistics infrastructure—and eventually in modern, high-tech factories that can compete with those in the rest of the world. Bangladesh, India, and Vietnam have taken some positive steps but will need to do more.
Whether services can drive the kind of rapid growth in early stage developing countries that manufacturing once did remains to be seen. Some low-income countries, such as Ghana, India, and the Philippines, have thriving service industries catering to businesses around the world. But even in those countries, the services-export sector employs few people and contributes little to GDP. Like middle-income countries, low-income ones will need to shift to higher-value activities to stay ahead of automation. Tradable services, such as transportation, finance, and business services, enjoy high productivity growth and can raise living standards, but less tradable ones, such as food preparation, health care, and education, which employ millions more people, thus far show little productivity growth, making them a poor engine for long-term prosperity.
Technology may enable some people in low-income economies to jump ahead in economic development without retracing the paths taken by those in advanced economies. Internet access allows workers everywhere to use online freelance platforms, such as UpWork, Fiverr, and Samasource, to earn supplemental income. A large share of the freelancers on these platforms are in developing countries. Khan Academy and Coursera teach languages and other skills. Google Translate is removing language barriers. Kiva and Kickstarter help aspiring entrepreneurs fund their start-ups. And telemedicine services make better health care available to people in remote places. But using those services requires widespread access to affordable high-speed Internet. Countries need to invest in digital infrastructure and education if they are to succeed in a global digital economy. Although many countries have achieved near-universal primary schooling, getting students to complete secondary school and making sure they receive a high-quality education when there are the next hurdles.
Trade has done more than almost anything else to cut global poverty. If developing countries shift strategies to take advantage of the next wave of globalization, trade can continue to lift people out of poverty and into the middle class. It is advanced economies, however, that need to change their outlook the most dramatically. They are shutting themselves off from the outside world at the very moment when they should be welcoming it in.
Source : https://www.foreignaffairs.com/articles/world/2019-06-11/global-economys-next-winners?fbclid=IwAR14tXw_8bf-ete0Yg_FZmTN9Wb5_2VWqcP-t-Y19kT2Di2I9nhdgUVxEl8

About The CSS Point

The CSS Point is the Pakistan 1st Free Online platform for all CSS aspirants. We provide FREE Books, Notes and Current Affairs Magazines for all CSS Aspirants.

The CSS Point - The Best Place for All CSS Aspirants

March 2024
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031
top
Template Design © The CSS Point. All rights reserved.