Wednesday, March 18, 2015

New technologies: Why emerging markets stand to gain

MAR 13, 2015


Over the past 20 to 30 years, technology has enabled the rise of emerging markets in global trade. Improvements in communication and infrastructure have helped these markets capitalise on their cheap-labour advantage and integrate into global supply chains.

However, many now fear that this technology-driven growth burst is behind them. They argue that new digital technologies such as artificial intelligence, robotics and 3D printing pose three main threats to emerging markets:

The first threat is that skills-biased technological change, such as robotics, favours a more urban and educated workforce and will result in growing unemployment and rising income inequality in emerging markets, especially those where a large share of the population works in sectors with limited access to technology.

Second, that the rise of new technologies such as robotics and 3D printing will undermine the cheap-labour advantage that has been the bedrock of growth for many emerging markets over the last 20 years.

Third, that, if emerging markets lose their advantage in global manufacturing chains, they will not be able to compensate for the loss of growth or jobs by growing their service sectors, as most services are non-tradable and, in fact, some services might themselves become automated.

While such arguments are persuasive, we think the threats are likely exaggerated.

True, robotics will disrupt the global manufacturing chain, but it will take time for the price of capable robots to fall to the level of wages in low-income emerging economies such as the Philippines and Vietnam.

Also, it is important to note that emerging market suppliers usually offer a complete suite of services, including supplier management, packaging and delivery, only some of which can be replaced by robots.

While some manufacturing jobs will be lost to automation, new technology makes services more tradable, allowing these to become the main driver of growth. Modern services such as IT and finance, and professional business services, such as marketing, design and management support, claim much higher productivity levels and wages.

Technological innovations also often create new service sector opportunities. For example, the success of mobile money in Kenya has spawned a host of related services, including some aimed at helping parents keep track of school-fee payments.

The advantages of technology adoption in emerging markets are many. Technology is increasingly being used to save lives and improve education. For example, large-scale open online courses are being used to train new nurses in Kenya, while digital phone photography is helping to detect cervical cancer in Zambia.

The fall in the price of digital technology is yet another opportunity as it allows countries to leapfrog old technologies, reducing the cost of physical infrastructure, such as retail outlets and bank branches. Smartphones, online shopping and mobile banking are already making a big difference. New technologies can also help emerging markets overcome resource constraints and make economic growth more sustainable, with continued improvements in new energy sources, both fossil fuels and renewables, at reasonable prices.

On balance, new technologies offer greater opportunities than risks for emerging markets and could even help level the playing field with developed economies.

However, several hurdles to technology adoption still need to be overcome. These include any instability in the macroeconomic or business environment that discourages investment in technology. Lack of infrastructure - in particular, the lack of power - remains a big hurdle in many developing economies, as does the lack of education. While the average duration of schooling in countries such as the United States, Germany and Britain is 12 to 13 years, in Ethiopia and Gambia it is still as low as two to three years.

A focus on improving education, reducing labour and product market inflexibility, and providing basic infrastructure will be crucial if emerging markets are to make the most of the opportunities offered by technology.

For those that do, the potential benefits are huge.

The writer is a senior global economist at Standard Chartered.

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