If robots become the mainstay of manufacturing, the advantage of cheap labour disappears and with it the prospects for poor countries to get rich, writes Brian Caplen.

For decades, development economists have seen industrialisation as the route out of poverty for agrarian countries. The flow of capital, the application of low-level technology and, crucially, the presence of a large, cheap labour pool is the formula that put China and the Asian tigers on the road to success. It was also the strategy employed by European countries and the US a century or more earlier.

People quit their farming jobs, flock to the cities and do factory jobs that pay considerably better. The demand for labour pushes wages up and, at the some point, the workers also become consumers.  

But robotics threatens this virtuous circle. What if industry leaps directly to the high end where everything is automated and only a handful of highly skilled workers are needed?

A report from researchers at Citi and Oxford University says: “Increased automation in low-wage countries, which have traditionally attracted manufacturing firms, could see them lose their cost advantage and potentially lose their ability of achieving rapid economic growth by shifting workers to factory jobs.”

The 'The Future is Not What it Used to Be' report notes that developing countries including China have the most to lose in terms of job displacement from robotics. It puts the risk of jobs being replaced by automation at 77% in China, 69% in India, 65% in Nigeria and Argentina, 47% in the US and 35% in the UK.

China is alert to the problem and is investing heavily in robotics but in a country where 40% of the population still lives in the countryside, this will halt wealth distribution unless other measures are taken.

Indonesia is a country suffering from what one economist has called “premature de-industrialisation”. Manufacturing’s share of the economy peaked in 2002. An FT article puts this down to poor infrastructure and poor government policy.

All of which means that countries with better infrastructure and better legal and regulatory systems such as the US are on much more of a level playing field for investment with cheap labour countries than they have been for many years. 

Instead of complaining about unfair trade practices, as US president Donald Trump has done, what the US should be doing is making sure it has the skills, the policies and the technology for the new robotic manufacturing. Meanwhile development economists have some big thinking to do on what this means for the non-industrialised world. 

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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