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Fixing the roof while the sun is shining


Robotics and AI: Visitors touching a robot arm at the 2017 World Robot Conference in Beijing. Asia’s speed of installation of robotics and artificial intelligence means that the door for cheap-labour growth strategy in manufacturing in Africa, Latin America and the labour surplus economies is closing. — AFP

Robotics and AI: Visitors touching a robot arm at the 2017 World Robot Conference in Beijing. Asia’s speed of installation of robotics and artificial intelligence means that the door for cheap-labour growth strategy in manufacturing in Africa, Latin America and the labour surplus economies is closing. — AFP

SPRING is the season of big meetings – Davos, Boao and coming this weekend, the Spring Meetings of the International Monetary Fund (IMF)/World Bank in Washington DC. Here, the Davos men (and increasing women) gather with the central bankers, ministers of finance, bankers, policy wonks and academia to debate the state of the world.

These are often casts of thousands, listening to the latest guru expounding on technology, politics, trade and finance.

I was in Lake Como last week at a smaller conference hosted by the Italian think tank Ambrosetti, a more cosy setting at the magnificently baroque lake-side Villa D’Este.

The mood there was dominated by the breaking US-China trade war, better described as opening skirmishes with more posturing than actual action so far. The underlying worry was whether the unfolding war would have more collateral damage and impact on everyone else.

Italy has just emerged from a confusing election result in which there is no clear consensus who will form the next government. The Hungarian election results this week showed that in Europe, the far right or populist sentiments are all gathering momentum.

In France, reformist President Macron is now battling the railway unions to try and get serious labour reforms going. This reminds us of how Margaret Thatcher took on the British unions in the early 1980s and won.

Unfortunately, there are no Thatchers left in the UK, only the messy aftermath of a divorce announcement in which the divorcee is left holding a very large bill. One guru gloomily forecast that Britain may soon have her first Marxist prime minister in the form of Labour leader Jeremy Corbyn.

The IMF traditionally offers an important World Economic Outlook forecast at the Spring Meetings. This year is expected to continue the fairly bullish outlook of a broad-based recovery world wide with notable upside surprises in Europe and Asia. Speaking at the Asia Global Institute, University of Hong Kong this week, IMF managing director Christine Lagarde exhorted Asians, which account for two-thirds of global growth, to “fix the roof whilst the sun is shining.”

Basically, she saw the three big holes in the roof as follows: protectionism, financial and fiscal risks and social inclusivity. In a sense, all three gaping holes are the consequences of failed policies to deal with the global financial crises of 2007/2009.

Protectionism has arisen because advanced countries did not adequately take care of their working middle class. Global debt has risen 40% higher than before the crisis, because governments basically used money to bail out the banks or pumped into more welfare and military spending that did not raise productivity.

Financial risk is highest ever because of the lowest ever interest rates created huge asset bubbles.

If you squeeze the wages of the middle class, and then paid zero interest rates on their bank deposits, while house prices become unaffordable, are you surprised that income and wealth inequality has worsened?

Lagarde is basically correct that present policymakers face a stark choice: either copy the policies of the past or they can paint a new economic landscape – open fair trade, safer financial systems and digital revolution for all.

In Trumpian terms: can you drain the swamp and fix the roof at the same time?

The newly published IMF World Economic Outlook asked the basic question whether manufacturing would continue to be a creator of jobs in the future?

I have been arguing that East Asian economies are already beginning to use the opportunity of new technology to make an important leap forward in labour productivity and income growth.

Moving beyond the Middle Income Trap means pushing real wages higher, so that the businesses will invest in higher labour productivity through technology and skills training. The International Federation of Robotics has forecast that by 2020, there will be three million industrial robots in operation globally, of which 1.9 million will be running in Asia, where China will account for 950,000.

Asia’s speed of installation of robotics and artificial intelligence means that the door for cheap-labour growth strategy in manufacturing in Africa, Latin America and the labour surplus economies is closing.

But why is manufacturing so important for growth strategy?

The IMF study has argued that in many countries, manufacturing has faded as a source of jobs, especially in the advanced economies.

In the developing economies, service jobs are now beginning to replace jobs in manufacturing. This shift into the service sector is an inevitable “structural transformation”.

The more important question is whether an emerging market can leap-frog straight into the higher earning services sector without an intermediate phase of manufacturing. The East Asian experience seems to suggest otherwise.

One tends to forget that Hong Kong and Singapore were initially manufacturing centres. As Hong Kong labour became more expensive, the shifting of manufacturing across the border to southern China was very mutually beneficial.

Today, the Chinese economy is building on its manufacturing prowess towards more value-added services. India, without that supply chain advantage, finds the transition much harder.

Why is the Trump Administration so concerned about on-shoring of manufacturing in America? The answer is that when you focus exclusively in services, you lose important skills in manufacturing that are critical for the manufacturing and prototyping of new products and services.

This explains why Shenzhen has become the proto-typing centre of the world, because it has some of the best manufacturing craftsmen and engineers who can take an idea and proto-type it into reality. And the best ideas are useless without a finished product.

The Ming Dynasty Chinese philosopher Wang Yangming concluded that “knowledge and action are one”, meaning that knowledge on paper is useless on its own. It has only value through practice.

We should therefore be sceptical of the view that it may be possible for some economies to bypass a traditional industrialisation phase straight into the services area. You can never run before you can walk.

Only economists can fix roofs without first building the ladder.

Andrew Sheng writes on global issues from an Asian perspective.

Analyst Reports , Sheng , column

   

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