Why it’s vital to gear up for the ‘globotics’ revolution

The forces of globalization and robotics – ‘globotics’ – are opening a new pathway to prosperity for developing nations . Richard Baldwin shares his vision of how this may look. Since Adam Smith’s seminal 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations , scholars and practitioners have grappled with a central question: Why are some nations rich while others are poor? While this question is of vital interest to policymakers, businesses, and citizens around the globe, we are far from a consensus. What we do have, amidst this lack of certainty, are persistent yet erroneous answers to some aspects of the grand rich-or-poor question, including the role of globalization in the world economy. But why has the misthinking of globalization remained influential for so long? Take, for example, the post-1990 model of economic development that turned on offshoring and industrialization. This held that prosperity for developing nations would come by “joining Global Value Chains (GVC)”, and to do that, all they had to do was improve their investment climate, regulatory setting, infrastructure, and trade policy. Embracing these “Washington Consensus” reforms was the ticket-to-ride on the GVC escalator to rapid industrialization. Jumping on the escalator would trigger an expanding industrial base, leading to rapid income growth and economic development. And the GVC-led development plan promised that effects would snowball: more investment would create more good manufacturing jobs locally and bring further technology development and an upskilling of the workforce, which would attract even more foreign investment and knowhow. The ultimate result would be rising living standards, falling inequality, and increased social cohesion and prosperity. That was the theory. Alas, as the old quip goes, ‘the difference between theory and practice is different in practice than it is in theory.’ The GVC-led development plan worked for a handful of emerging economies which had links, geographical or otherwise, to the then manufacturing giants: the US, Germany, and Japan. China was the standout example of how the plan could work. Unfortunately, three spanners have jammed up the inner mechanics of GVC-led development. The first spanner was the end of the offshore expansion phase (roughly 1990-2008). During this phase, unprecedented advances in information and communication technology facilitated the organization of complex production processes across international borders. This was the phase of globalization when factories (and associated knowhow) started crossing borders to arbitrage large wage differences. The second was the advent of digital technology (‘digitech’), which automated labor out of manufacturing and thus reduced the incentives for wage-arbitrage-based offshoring from G7 economies. The third is simple: China. “Other developing nations – that are competing with low-tech and low-wages – have lost out to China’s massive industrial base” China is now the world’s largest manufacturer, combining fairly high levels of technology with fairly low levels of wages. Other developing nations – that are competing with low-tech and low-wages – have lost out to China’s massive industrial base. There are still G7 pockets of industry that succeed in using a high-tech-high-wage combination to outcompete China, but overall the G7’s share of global manufacturing output has been declining since 1990. The good news is that a combination of the same forces of digitech and globalization – ‘globotics’ – is opening a new pathway to prosperity for developing nations, namely service-led development. In fact, the implications for development are potentially transformational. Why? Because, whereas manufacturing capability underpinned the old model of trade-led development, services increasingly appear to be the future for emerging economies. Since the 1950s, development theory has emphasized the significance of industrialization for economic development. China is the classic example of this industry-led development paradigm. But, where China relied on manufacturing for its growth, India’s was driven by the services sector – a highly atypical growth pattern for a developing country. The China development path It’s easy to understand why governments all over the world still look to the China model of development as a template. Implemented throughout the late 20th and early 21st centuries, a large swathe of the population moved from field to factory, wages grew, livelihoods improved, and political stability was the order of the day. Hundreds of millions of citizens were lifted out of poverty, a strong middle class arose, and China attained superpower status. But the China development pathway, for so long a model for other developing nations, is less accessible to those that follow – which means we should stop according it the status of absolute truth. International competition is key here. It’s hard for […]

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