New technology, new rules of economic development

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DAN STEINBOCK

Advanced manufacturing is changing the rules of economic development. While the Philippine government is making the right moves toward infrastructure investment, the shift toward innovation must happen faster than expected.

IN April, domestic manufacturing in the Philippines sustained its growth momentum. Thanks to strong growth and increased construction, the domestic market continued to fuel manufacturing growth. In the Duterte era, the Philippines has significant potential to complete its industrialization in which previous administrations have failed.

Yet, while the industry continues to employ only some 16 percent of the labor force, it accounts almost twice as much of the Philippine gross domestic product (GDP). As Japan, the newly industrialized tigers and more recently China and other countries in emerging Asia have demonstrated, industrial manufacturers, particularly with substantial inflows of foreign direct investment (FDI), can fuel sustained high growth and rapid economic development.

Historically, manufacturing has played the key role from the British Industrial Revolution to China’s rise. But as the rules of industrial competition are changing, so are those of economic development—as evidenced by the recent rise of robotics.


Toward consolidation in global robotics
As emerging industries diffuse to mass markets, innovative startups typically become acquisition targets by major corporations that seek to consolidate the rapidly growing industry. Last year was a milestone for such acquisitions in robotics and automation with 50 companies sold for more than $19 billion.

However, as global robotics is approaching consolidation, rivalries are intensifying. In 2015, worldwide sales of industrial robots soared to 254,000 units. Almost two of three were sold in Asia; nearly half of these in China, and the rest elsewhere in Asia and Australia. In professional service robots, sales value rose to $4.6 billion; in personal service robots, to $2.2 billion.

In global robotics, the key rivals include the US, Japan and South Korea, Europe and China. The US is most capital-intensive. Japan stresses innovation. Western Europe exemplifies greatest intensity (high ratio of robots per population). However, as the largest growth market, China is moving toward production leadership.

In 2015, markets were dominated by European and North America (80 percent), as against Asia (20 percent). Yet, the uptake of industrial robots is accelerating regionally. In the first half of the 2010s, the annual supply of industrial robots rose by 70 percent in Asia/Australia.

Changing rules of economic devt
In the early 20th century, American mass manufacturing changed the rules of global competition and economic development. Today, China is rebalancing from a low-cost ‘world factory’ to a global R&D hub and world-class advanced-manufacturing power, which is heralded by new technology-related initiatives, including Strategic Emerging Industries (SEI), Sci-Tech Innovation 2030, Internet Plus, and Made in China 2025. Indeed, China’s R&D as share of the economy exceeds 2 percent—which is higher than in Europe.

In the process, the historical paths of economic development will be disrupted, due to the rise of advanced manufacturing. As China is moving from labor-intensive assembly lines to capital-intensive high-tech, robotics may help to fill the impending labor gap, which stems from aging population and rising wages.

In those emerging economies that remain largely labor-intensive, these shifts will force a rethink. Emerging South and Southeast Asia, the Middle East and Sub-Saharan Africa, even Latin America, may no longer be able to enjoy the full benefit from moving agricultural workers into low-cost factories. Nor can they depend on export-led growth in an era when weak demand is pervasive in advanced economies—as evidenced by the retreat of globalization in the West.

On the one hand, China’s increasing labor costs are seen as manna from heaven in many emerging economies – from Bangladesh and Sri Lanka in South Asia to Indonesia, the Philippines and Myanmar in Southeast Asia– which hope to emulate the past industrializers. On the other hand, the rise of advanced manufacturing will make it more challenging for them to use manufacturing jobs in their catch-up quest.

PH: From infrastructure to innovation
In the Philippines, the Duterte push for infrastructure investment is precisely what’s currently needed (and what should have taken place decades ago). It will hopefully be accompanied by a push to complete industrialization and technological maturity. But while these measures are necessary, they are no longer enough.

To counter the rising pressures from advanced manufacturing, the government should also speed up the development of national innovation, which can initially rely on the country’s strengths in capital-intensive, high-tech industries, from semiconductors and electronics to information and communication technology.

One of these areas is Business Process Outsourcing (BPO). Reportedly, the Philippines replaced Mumbai as the second ranking BPO destination in 2015. The industry is expected to hit the revenue target of $25.5 billion and 1.4 million employed by the year-end. Currently the sector contributes some 10 percent of the country’s GDP growth.

Since the size of the Philippine labor force is close to 43 million (and could be far higher if poverty rates could be surpassed), the BPO can contribute to but not dominate industrialization. However, it is a sector that could play a critical role in the accelerated upgrading of Philippine innovation.

Currently, Philippine R&D as share of the GDP is estimated at 0.14 percent. It leaves the country behind other BPO nations, such as Malaysia (1.13 percent), India (0.85 percent), Bulgaria (0.65 percent), Chile (0.38 prcent) and Pakistan (0.29 percent). Even in Vietnam, the comparable level is almost twice as high as well (0.21 percent).

In the past decades, there has been a lot of talk about creativity and human capital in the Philippines. Yet, the reality is that most previous administrations have ignored the belated, vital and urgent upgrading of human capital.

As advanced manufacturing spreads around the world, old rules of economic development will no longer apply. The transition toward innovation cannot wait until the end of industrialization. The future of development depends on decisions today.

Why wait?

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

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