Tuesday, March 28, 2006

Feature – Understanding the next Industrial revolution

The following is a bit of departure for me, this post is submitted as a blog discussion paper, so feedback and contributions are not just welcome, it is invited. It is not directly geared towards the under-developed world but I hope to subsequently draw conclusions in that regard. It is inspired by an article Alan S. Memorial Professor of Economics at Princeton University in this month’s Foreign Affairs (subs required)
He served on the White House Council of Economic Advisers and as Vice Chairman of the Board of Governors of the Federal Reserve and he wrote the piece specifically to prompt discussion. I have added my own context and draw some conclusions that are not included in his piece. I want to develop the discussion and try understand what it means for Ireland and the underdeveloped world and like I said I am inviting collaboration, leave a comment or a link to your own post on the matter,


Understanding the next Industrial revolution

Part 1 – What is around the next bend?

The world is in the early stages of the next industrial revolution. It is taking pace in fits and starts but it is slowly accelerating. The first awareness of this phenomenon can be traced to the turn of the century dotcom boom when many of the benefits of the information age were anticipated without consideration for many of the costs of transition. As that scrappy episode showed it is very difficult in times of revolution to find a good vantage point –let alone make decisions.
I believe the appropriate context for examining what is happening right now and what is around the next bend is to develop a vantage point by addressing the stalled Doha round of trade talks and evaluating the success of the six year old Lisbon agenda.
For some perspective the first such revolution was the Agricultural revolution. It was the effect unprecedented agricultural production had on society, specifically the make up and migration of the workforce. It in turn contributed to the Industrial revolution which was the defining change of last three hundred years, when the steam engine replaced large scale manual labour and not only changed the nature of economic growth but it once again also changed the make up and location of the work force. More recently in developed economies the services sector has taken over from the manufacturing sector as the dominant form of employment with further changes in society and regional migration. Once more we are entering a defining era when a fundamental change in the services industry will transform society. This will be the next industrial revolution.

The Doha Round

The Doha round of trade talks began in November 2001 and focuses on global trade in agricultural and manufacturing with a special consideration for the developing world. It is currently stalled and has missed its original deadline of January 2005. It is due to finish before the end of 2006. The talks are stalled on the opening up of developed agricultural markets (EU, US etc) to developing nations (who have a comparative advantage in agricultural production) and the reduction of tariffs in developing countries for the manufactured products of developed countries. In terms of the coming industrial revolution and our vantage point there are two very important features to note about the talks. The first is the rise in power of India, its ability to make its voice heard and the wider shift in the balance away from the EU, US and Japan. In all likelihood this trend will continue for decades and India will more prominently. The second important observation is the fact that the main blocking point is a dispute over trade in Agriculture and Manufactured goods. These are minority sectors in developed economies and yet one of the key issues is the continued reluctance to reduce agricultural subsidies that were introduced decades ago. In hindsight such protectionism should only ever have been short-term; the leaders of the nations concerned should have moved to remove the need for such protectionism a long time ago. The desired reduction of tariffs on manufactured goods is beneficial for both the developed world and the quickly developing world. At the moment developed economies want greater access to developing markets but these tariffs are more likely to swing as a defensive issue for the developed world. It is increasingly the case that developed economies are erecting barriers to slowdown the influx of goods from economies with a massive comparative advantage in manufacturing; see China’s exports to the EU and the US.
What do these observations mean for our vantage point?
As I said, although these are very important sectors in the developed world, they are of minor importance compared to the service sector and that sector is what the laws of comparative advantage are now transforming. What is ‘tradable’ in terms of services is changing and it is changing rapidly. Technology has enabled radiologists in India to be employed by American and European hospitals. In London, the city is in transition as financial back-offices are being outsourced to India. Discount computers programmers in Eastern Europe and Asia are supporting and developing software for every cyber-inch of the industry. Equally significant to our vantage point is that while the Doha round is stuck - on a sector that has been transformed decades ago, Agriculture and one that continues to be transformed, Manufacturing - in our electronically connected world the next round of trade talks will have little influence over the revolution in the services industry.

The Lisbon Agenda
In March 2000, the EU Heads of States and Governments agreed to make the EU ‘the most competitive and dynamic knowledge-driven economy by 2010’. Such a commendable goal was targeted due to the acknowledgement and anticipation of a continued decline in comparative advantage in many areas of industry, in relation to large and growing regions outside of the EU. Much of the effort so far has consisted of doing nothing until the halfway mark and then to begin trying fix Europe’s massive unemployment problem and encourage economic growth. Of course these should have been national priorities regardless of any summit on Lisbon. The EU budget has very little effect in the investment in a ‘knowledge-driven economy’ - the significant investment comes from national budgets which indeed give it a high priority. As it has been noted in observing the increasing ‘tradable’ nature of services, highly skilled, highly paid services jobs are already beginning to be done for western companies elsewhere in the world. If this trend continues its trajectory in the coming years just being highly skilled not be enough for future job seekers. Having an expensive education in IT, biotechnology or radiology will not guarantee a future job and the current education and training infrastructure will not be appropriate.

Part 2 – What is further down the road?

Analysing some other trends also broadens the view from our vantage point. It can safely be assumed that growth in computer capacity and online connectedness will continue to accelerate; a plateau is not yet in sight. The way that businesses manipulate this increasing connectedness will continue to be innovative and it is difficult to anticipate the consequences of these developments. There however are some things we can be quite sure of if we continue on this path; it will be very difficult for some services to become ‘tradable’. Developed economies will continue to need doctors, waiters, teachers, hairdressers and other such personal services. Other industries are less dependable; it will be interesting to see how long it will be before Indian universities begin offering the basis for US legal and accounting qualifications. Such industries are personal but a large function of their behind the scenes work could be easily outsourced as many such employers are already global. From there the next natural progression would be offering similar courses in British and Irish professional subjects. This may all seem very far fetched but not so long ago it would have been ridiculous to think that impatient commuters standing on platforms in England could call to enquire about the next train and end up seamlessly speaking to someone 5,000 miles away in a call centre in India. The information age will narrow the education gap at all levels.
So it seems that developed economies will soon have a very serious comparative disadvantage in many services and unlike agricultural and manufacturing trade future leaders will be largely powerless to slow down the inevitable transition through protectionism. The logical question and one that is not being asked, least of all by the Lisbon Agenda is ‘what can we do to successfully lead the working population through this transition?’ It should be noted that in spite of Luddites, previous industrial revolutions have been overwhelmingly beneficial for the whole of the societies that have participated in them. The best beacons have always been creativity and entrepreneurship. It may well be a case of ‘the more it changes the more it stays the same‘, it will be capitalism but not as we know it now – so how do we prepare?

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