Friday, June 28, 2013

The slowing escalator - has Africa missed the bus?

Dani Rodrik and Tyler Cowen have written about the bleak prospects of rapid economic growth in developing countries.

The argument goes something like this. Historically, due to its ease of replicability (of new processes and foreign technologies), sustained economic growth has been mostly based on structural transformations, in particular rapid industrialization. But this model faces challenges from three trends. Technological advances, by automating routine work, has made manufacturing much more skill-intensive and therefore less capable of absorbing large quantities of labor. Globalization has internationalized the production supply chain and increased competition among developing countries. Finally, the weak economic prospects of developed economies will make them less receptive to being passive export markets for the industrializing economies. Prof Rodrik concludes,
Manufacturing industries will remain poor countries' "escalator industries", but the escalator will neither move as rapidly, nor go as high. Growth will need to rely to a much greater extent on sustained improvements in human capital, institutions, and governance. And that means that growth will remain slow and difficult at best. 
Tyler Cowen points to efforts by Nike, motivated by rising labor costs in the factories of its traditional East Asian suppliers, to engineer labor out of its production chain using technology and innovation.

Truth to tell, even before all these studies, this fear was occasionally discussed in many forums. The rising labor costs in East Asia, especially China, and the Great Recession have brought this threat to our door-step faster than expected. So has Africa missed the bus? I believe that we need much more compelling evidence before I can agree with Prof Rodrik's pessimism. Few questions need answering.

What is the limit to the automation of factory floor work in the foreseeable future? How soon will the cost of technological innovation fall below Africa's real labor costs? Is it possible for textile manufacturers of Ghana to co-exist with their Chinese counterparts in a global market place? How rapidly will the Chinese move up the escalator, thereby vacating space for more of their own people and those from other developing countries? Which countries will occupy that space?

Most importantly, even if the aforementioned trends take hold, it will take time. Further, in the meantime, even if China's progress up the escalator slows, the space vacated will be large enough to accommodate many others. Will atleast some parts of Africa be ready to step up? If that happens, and we know that dominoes can have unpredictably surprising effects, prospects will be brighter. So there may be much more to the story before we can write its epitaph.

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