Where Will All The Jobs Come From?

This article has first been published on developmentprogress.org

In the last couple of years, a spate of magazines, articles and think-pieces have predicted a new age of automation (and robots) – one that means an increasingly stark picture for labour worldwide (see the BBC and The Economist). Even Barack Obama has been seen blaming ATMs for the lack of jobs generated by America’s recent economic recovery.

This is nothing new. Gandhi rallied against technology that would disenfranchise rural labourers in India, such as rice mills. Before him, the Luddites smashed machinery across Britain that they believed were destroying artisanal jobs. On the whole, these fears have been proved wrong. Technology may destroy some jobs but usually leads to the creation of others.

Much of this recent discussion has focused on advanced economies. However, a major new study by Dani Rodrik highlights the threats to emerging economies of a trend he calls ‘premature deindustrialisation’.

Duncan Green profiled the piece in February and, thankfully, it’s starting to get a lot of attention.

As it should do…..Rodrik’s assessment of manufacturing’s historic share of employment in 42 countries reveals that industrialisation provides less and less employment than it used to. For example, manufacturing’s share of employment peaked in the UK at around 45% before World War I and in Germany at 40% in 1970. Contrast this with two recently lauded success-stories: Brazil and India. Their peaks of manufacturing employment were just 15% and 13% respectively and are already in decline.

The income levels at which peaks are reached are also found to be falling. When the US, Britain, Germany and others began to deindustrialise, per capita incomes had reached $9,000 to $11,000 (at 1990 prices). Yet manufacturing peaks in the BRICS, have occurred at income levels of just $2,000 to $5,000.

The ramifications for developing countries, repeatedly encouraged to pursue industrialisation, are severe.

How did we get here?

There are a number of explanations. And they’re not all about robots.

First, the importance of basic goods trade in the global economy has fallen dramatically. In 1980, 71% of global exports were goods. By 2008, goods made up just 57% – a reflection of the rise of services. The physical assembly of goods – the celebrated driver of growth and employment for the Asian tigers – accounts for an increasingly small share of the value of finished products.

The speed of globalisation is also being blamed for industry’s inability to create jobs. Firms are more mobile, able to set-up and close factories swiftly and change purchasing decisions at the touch of a button. As a result, emerging industrial nations cannot be sure that firms will invest large proportions of their value-chain activities in one single location for any lengthy period of time.

Added to this, the production of goods is also happening nearer to value-chain owners in the West, a process known as re-shoring. As brands demand quicker and more reliable turnaround times, goods production is more often located in better skilled, more dependable local markets.

Finally, there is the so-called ‘rise of the robots’. Manufacturing processes are being carried out increasingly by sophisticated robotic machinery, not assembly workers. This has fuelled reshoring, as companies begin to place greater trust in local production carried out by advanced machinery than by large human workforces many miles away. Foxconn, manufacturer of the iPhone, is working on an entirely automated facility in Chengdu, China. Not only does this show the increased ability of established firms and markets to hold on to industrial production but it highlights the speed at which labour is already being replaced.

How do we respond?

If industrialisation won’t be the great source of quality jobs that it was supposed to be, then what will be?

Rodrik’s paper suggests that countries will become services-based economies far earlier and at lower levels of income than ever before. This is highlighted as a concern rather than an as an opportunity. Services are often assumed to be skill-intensive and unable to absorb large amounts of labour. But a recent literature review by Claire Melamed and others at ODI found that growth episodes since the 1980s associated with falling poverty rates have been characterised by rising service employment rather than a rise in agricultural or industrial employment. Indeed Steven Kapsos’ study showed that growth in services tends to provide more jobs globally than growth in either agriculture or manufacturing. Continued success in services employment in developing countries will, however, require radical improvements in education as the forthcoming ODI-PSM paper warns.

It may be that industrial policy comes back in to fashion. ODI has already produced research in to conducting industrial policy so that it is truly wealth-creating, rather than an obstruction to growth. Given the rise of automation in some industries, governments should be allowed some leeway to support sectors that allow the positive movement of labour away from automated industries to more productive activities or tasks. Industries that provide wider local value-chain employment may also be preferred. For example, in Ethiopia, the government is supporting leather production, not just for the jobs it directly provides but because it will create increased demand from local cow farming, an activity they know has fantastic potential for rural employment.

It should also be the case that informal employment, rather than being treated as an outsider, becomes understood, in some cases as a viable short-term alternative to large-scale industry. The spread of global value chains has increased links between formal and informal firms and the former increasingly sub-contract work to the latter. There is already a growing recognition of the positive impact on employment and livelihoods from household enterprises and informal firms. Our soon to be released Employment Dimension paper reiterates the positive impact of non-farm rural employment, informal manufacturers and informal services on workers in developing economies.

Finally, the end of the industrialisation doctrine should encourage more flexibility in the way development agencies and international organisations encourage domestic policy. Countries should be allowed to adapt to these new industrial realities and adopt growth and equity-supporting policies that address viable opportunities for domestic employment. If they are prevented from doing so, it will undermine not only attempts to provide employment but developing countries’ willingness to listen to the perspectives of outsiders.