12 July 2017

The Threat of Automation to Emerging Markets

The ability of many Asian emerging markets to rise from poverty to become relatively wealthy countries over the past few decades has raised hopes among poorer emerging markets around the world that they could follow the same path to prosperity.  By developing export-oriented manufacturing sectors, many Asian emerging markets were able to record long periods of high rates of economic growth, using what were relatively cheap and efficient labor forces to develop manufacturing centers that could compete with the world’s best. 

This has led to expectations among today’s poorer emerging markets that, as these Asian manufacturing centers become more expensive due to rising labor costs, some of this manufacturing would shift to poorer countries.  In particular, many emerging markets in places such as Central Asia, South Asia and Africa, where working-age populations are soaring and labor costs are low, expected to be next-in-line for such manufacturing investment.  However, a major threat has emerged.  This threat is the spread of automation throughout the world’s leading manufacturing industries.  As automation spreads, the world’s poorer emerging markets could face potentially devastating ramifications for economic growth and internal stability.

For decades, automation has been playing an ever-increasing role in the world’s manufacturing industries.  Starting in Japan in the 1980s, automation within the manufacturing sector has really picked up steam over the past ten to fifteen years and is now having a major impact on labor forces around the world.  In fact, while populist politicians in developed economies like to blame the loss of manufacturing jobs on foreign competition, the actual culprit has been automation, which has caused major job losses in the manufacturing sector in places such as North America and Europe. Moreover, when new manufacturing operations are started in developed economies today, they are typically extremely automated. 

There are numerous examples of this trend.  For example, when the US-based furnace manufacturer Carrier made a high-profile decision not to shift production to Mexico from the US state of Indiana earlier this year, it only did so by deciding to increase the amount of automation at its Indiana operations, thus cutting hundreds of jobs there regardless.  Another example is the sporting goods company Adidas, which recently built a completely-automated production facility in Germany, one that created almost no new manufacturing jobs for German workers.  There are thousands of such examples as the trend towards automation rolls forwards.

Automation in undoubtedly a major threat to manufacturing jobs in developed economies, as we have witnessed in recent years.  However, automation poses a much greater threat to the future of the world’s poorer emerging markets.  This is due to the fact that manufacturing investments had been expected to boost the long-term growth prospects for these poorer emerging markets.  Now, as automation becomes both cheap and more productive, there is a significant possibility that the expected shift in low-cost manufacturing from countries such as China to the world’s poorer emerging markets may never take place. 

The regions most as risk from this trend towards automation are easy to find.  They include Central and South Asia, where many had expected India and its neighbors to receive major increases in foreign investment in their manufacturing sectors as cost levels continued to rise in China and other manufacturing centers in East Asia.  Another region is Africa, which is seen by many as the long-term center of low-cost manufacturing investment.  In fact, both regions have fast-growing working-age populations, low labor costs and improving infrastructures.  However, should the pace of automation continue to accelerate, they may find themselves being too late to attract the levels of manufacturing investment that they had expected.

Should automation kill the dream of a manufacturing-driven economic revolution in these poorer emerging markets, the long-term implications could be devastating.  Without the development of large-scale manufacturing industries, job creation levels in these emerging markets will remain very low, as most of the other sectors of their economies are unable to generate the levels of job creation needed for such rapidly-expanding working-age populations.  Moreover, the increase in wage levels that would accompany such investment will not materialize, leading to higher rates of poverty.  The lack of manufacturing industries would also prevent most poorer emerging markets from diversifying their economies, leaving them exposed to threats such as falling commodity prices or weather-induced reductions in agricultural output. 

Without the economic benefits that manufacturing industries would bring, many of these emerging markets will be faced with a greater threat of internal unrest, something that could provoke much higher levels of emigration, causing a migration crisis that is much greater than the one today.  In fact, for all of the benefits that automation can bring to the world, the dislocation that it can cause in poorer emerging markets has the potential to be a major destabilizing factor for the entire world.