Why very few poor countries will escape poverty by taking gigantic leaps into the service industry
By Andrew M. Mwenda
Two weeks ago, I had a disagreement with the president of the World Bank, Jim Yong Kim, at a conference in Kigali, Rwanda. Kim had argued that increasing automation and use of robots is taking away jobs. He showed a slide of numbers of jobs at risk of being lost due to automation by country – China 77%, India 69%, Nigeria 65%, Ethiopia 85%, South Africa 67%, USA 47%, Argentina 65% and Thailand 72%.
The statistics may be compelling but the problem is with some of Kim’s conclusions. For example, he said that poor countries should think about the economy of the future – where most jobs are automated i.e. not done by human beings but machines and robots. This, he argued, will shift their focus away from manufacturing and into services as the source of future growth and jobs. The fear that automation takes away jobs is not new. It is as old as manufacturing.
Between 1811 and 1816, textile workers in Nottingham England began smashing new labour saving knitting machines claiming they were taking away their jobs. This was true since these workers lacked the skills to work with the new technology. They publicised their action in circulars marked “King Ludd,” a factor that led to them being called Luddites. The English government hanged 14 of them.
Their movement led to an idea called the Luddite Fallacy i.e. that an economy-wide technological breakthrough enabling the same amount of work to be done with fewer workers results in an economy with fewer workers. This argument is a fallacy because it ignores the reality that the factory could, in fact, keep the same number of workers and simply be able to produce more output. This is called “increased labour productivity”.
I suspect the basis of Kim’s argument in favour of services is the usual claim that Western nations have become post-industrial (shade off most of their manufacturing and grown into service economies). This is only partly correct. The reality is that manufacturing has declined less than presented. Rather, increasing productivity has meant that “current” prices of manufactured goods have fallen, but not as steeply as “relative” prices. Manufacturing has, therefore, declined as a share of GDP.
The richer people become, the higher they tend to spend on services – going for massage, eating in restaurants, playing golf, etc. But poor nations don’t have the incomes to raise the demand for services which would in turn employ more people and pay them better. Secondly, there are few services poor countries can export to earn higher foreign exchange. In any case, services are less tradable compared to manufactured products.