In an upcoming report on 15 dec available on www.martenblix.com, I will discuss the effects of digitalization on a modern economy, such as Sweden.
The effects on modern economies will likely be far reaching, but the disruptive forces may be even stronger for countries in Asia, see recent article in by Kathy Chu and Bob Davis in the Wall Street Journal. China was able to leapfrog several steps in technological development and was not inhibited by having old systems in place or the need to cater to political forces the way democratic countries must. As a result, some southeast Asian countries have more modern capital stock and infrastructure than many OECD countries.
In the last decades of this rapid development, southeast Asian countries have benefited from work outsourced from OECD countries, all from manufacturing of iPhones to support centers or software development. With plenty of cheap labor available, outsourcing was attractive and allowed global companies to keep costs low. The same logic of keeping costs low may now lead to a wave of reshoring – manufacturing of electronics and other products may return to OECD countries but in the form of jobs for robots instead of people, especially as labor costs in some of those countries have been rising.
If jobs in manufacturing and textiles are indeed reshored, the upheaval in southeast Asia may be considerable. With little or no social safety nets, the unskilled workers in factories will find it hard to find other work. Also, the political processes that may have prevented some of the outsourcing from OECD countries may even accelerate this process.
There is a risk that reshoring may be much more disruptive for developing countries without adequate social safety nets than outsourcing was in the OECD. It is sometimes said of China that it may grow old before it grows rich; reshoring due to digitalization may intensify this trend. As expressed by Dani Rodrik, professor at Harvard University, the emerging world may have to cope with “premature industrialization” or, with regard to India, in the words of Raghuram Rajan, now governor of the Bank of India and former Chief Economist of the IMF, “premature non-industrialization,” discussed in the Economist last year. This captures the challenge of having a manufacturing base without other functioning features of economies in the developed world, especially services. Should manufacturing in China and emerging economies become uncompetitive, there are too few other exports to support growth.