Why the machines might not be rising as quickly as we think

Rural wages are surging in Asia as fewer people enter the rural workforce and manufacturing growth draws people into cities, according to an important study by the Overseas Development Institute’s Steve Wiggins and Sharada Keats.

It’s a huge story. Wiggins says it’s “almost certainly the end of mass poverty in Asia” although he points out that pockets of chronic poverty will persist.

One of the most interesting impacts is on manufacturing wages: “manufacturers can’t get dirt-cheap labour off the land anymore, and they have to start putting up their salaries.” Industry will have to locate to inland China and low-income Asian countries like Cambodia, Bangladesh and Burma.

Fascinatingly, Wiggins also reckons factories will be forced to move to Africa, the last big pool of cheap labour. Until recently Chinese direct investment in Africa has mostly been resource-seeking, a hunt for oil and minerals. But cost-saving investment is also underway. Millions of jobs may move across the Indian ocean as factory owners try to cut the wage bill:

The World Bank reports Ethiopian factory wages for unskilled labour as being one-quarter those of Chinese wages. Logistics costs are higher, but overall costs are lower. Outside Addis Ababa, the first pioneer wave of relocated Chinese plants can be seen. Now these have broken the ice, how many more will follow? [Former World Bank chief economist Justin] Lin… speculated that 85 million factory jobs could leave China in the coming years. If half of those came to Africa, it would transform a continent where there is a surge in youth entering the labour market.

Duncan Green features the report on his blog under the title: “A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa.”

Some of the commenters beneath Green’s blog express scepticism , saying that increased mechanisation will limit the benefits for Africa. Chinese iPhone contractor Foxconn is already replacing workers with robots, points out one commenter. Another cites an Oxford Martin School study showing that nearly half of US jobs could be at risk of computerisation.

Ryan Avent argues in the Economist that:

More manufacturing work can be automated, and skilled design work accounts for a larger share of the value of trade, leading to what economists call “premature deindustrialisation” in developing countries. No longer can governments count on a growing industrial sector to absorb unskilled labour from rural areas. …new work for those with modest skill levels is scarce compared with the bonanza created by earlier technological revolutions.

The rise of the machines, in other words, will rob workers of potential factory jobs.

I don’t buy this story, at least in poor countries. For a start it overestimates the kind of pay and work we’re talking about. Sierra Leone’s minimum wage, the lowest in the world, is 3 cents an hour. No machine can compete with that. The electricity costs of running a robot are higher, not to mention set-up and maintenance costs. According to Wikipedia the minimum wage in Uganda is US$ 29 a year. Tanzanians are lucky in comparison, earning a minimum of US$ 303 a year. (Whether or not many people actually earn the minimum wage and how much it will buy at local prices are different questions.)

The Oxford study might well be true but it’s less relevant in impoverished nations. Plenty of bottom-end jobs will continue to be performed by low-paid workers in the developing world. It just doesn’t make sense to fully automate garment manufacture when people will make t-shirts for a few cents an hour. Unfortunately not much computerisation goes on in clothing factories: it’s just rows of (usually) women sitting at sewing machines.

Premature deindustrialisation is mostly due not to automation but to neoliberal economic policies: sudden trade liberalisation killed off a lot of manufacturers. Inflation-paranoia and overvalued exchange rates added to the pain.

Some commenters worry about Africa’s low productivity and infrastructure. But these fears, too, are misplaced. Fifteen years ago people doubted whether China itself possessed the infrastructure for rapid development. Now much of the country is criss-crossed with highways and high-speed trains. Given the right incentives, foreign (and local) investors will build the infrastructure. Chinese roads and buildings are already springing up across the continent. The promise of profits can achieve miraculous things.

The productivity argument is similarly misplaced: productivity is, by definition, the ratio of output per worker, which is mostly influenced by the capital-intensiveness of production. A shoemaker can produce far more if she works on a production line than if she has to do the job on her own, from scratch. Africans are only less productive because they generally don’t currently work in factories featuring cutting-edge machines and production processes.

Economic development is by nature a process of increased investment. Almost without fail the fastest-growing countries are the ones with higher rates of capital formation. Ha-Joon points out that in China the ratio of investment to GDP was as high as 45% in the last few years. For the world as a whole it’s 20-22%, and in some African countries it’s only 10%. “No economy has achieved ‘miracle’ rates of growth (that is, over 6 per cent per year in per capita terms) over a period of time without investing at least 25 per cent of GDP,” says Chang. Worries about the existing state of productivity in African are really just worries about the lack of investment rather than legitimate fears about future prospects. Productivity is weak because investment is low; low productivity isn’t a deterrent to investment or an obstacle to growth.

The whole debate reminds me of 19th Luddite worries about  machines replacing human labour. Whilst the industrial revolution cause a lot of pain, and governments must act to mitigate the impact on the worst-off, eventually new sorts of work emerged in response to the new economy. Workers in rich countries might legitimately fear that robots and computers will take their jobs, and the Economist report cited above points out that it’s mostly middle-level jobs which are at risk. But in much of the poor world the situation is completely different. Poor quality, low-paid work is here for a long while yet (i’m still not convinced that Africa will undergo Asian-style industrialisation, and in many countries the services sector might play a bigger role, but that’s another story).

People have also historically misunderstood the reasons and prospects for the outward expansion of capitalism. Capitalists didn’t just look overseas to get resources or establish new foreign markets; they went abroad to access cheaper (and sometimes slave) labour. Companies will keep hunting for cheap workers.

Little about this story is particularly pleasant — who really wants to flog away on an assembly line for a few dollars a day? — but for unemployed Africans or those living a subsistence lifestyle and facing the horrors of extreme poverty, it’s a bleak source of optimism. Some work is better than no work, and eventually it should enable many countries on the continent to start moving toward higher value-addition and better pay and conditions, not to mention the myriad other benefits of development. Unfortunately there’s only one thing worse than exploitation: not being exploited.

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Image courtesy of jiggoja at FreeDigitalPhotos.net