Across the world, industries remain a major source of formal employment. Supporting industry competitiveness has been an important part of the World Bank Group’s work for many decades. According to a recent IEG evaluation, between 2008 and 2014, the World Bank Group invested $21.6 billion (or nearly 6 percent of its portfolio) in supporting 881 industry-specific projects.
But recent trends, including growing automation in middle-income and developed economies, and deindustrialization, especially in Sub-Saharan Africa, have brought into question the future of industries. Is automation an opportunity or a threat to job creation? Should countries continue to pursue industry development? What role should institutions like the World Bank Group play?
IEG invited three World Bank experts to discuss these questions. Klaus Tilmes is a Director in the World Bank’s Trade and Competitiveness Global Practice. Humberto Lopez, is currently Director, Strategy and Operations for the Latin America Region. He has also previously served as a World Bank Country Director in a number of countries in Latin America, the Caribbean and Eastern Africa. Jaime Roberto Diaz Palacios is an Adviser to the World Bank’s Executive Director, representing Costa Rica, El-Salvador, Guatemala, Honduras, Mexico, Nicaragua, Venezuela, and Spain. Prior to joining the World Bank, he headed the National Competitiveness Agency in Guatemala. James Emery is the Head of Economics, Strategy and Communications for the Manufacturing, Agribusiness, and Service Industry at the International Finance Corporation.
Editor’s note: Responses have been edited for brevity and clarity.
Question 1: Let’s start with the elephant in the room. Does increased productivity lead to reduced employment?
Tilmes: Not necessarily. The evidence is mixed and goes either way depending on the context.
Jaime Roberto Diaz Palacios: As Klaus notes, this is not always the case. The relationship between productivity and employment is, indeed, often positive, as recent evidence from the World Bank shows. This is the case for developed and developing countries.
What is changing is that the composition of employment. For developing markets, services are creating more opportunities for employment, given the economies of agglomeration, increasing urbanization and the set of technologies that are predominant in the market. The growth of the outsourcing sector in South East Asia and Latin America is one example.
Humberto Lopez: Actually, going back to the industrial revolution, when many pundits claimed that the mechanization of production brought by the introduction steam run machinery in manufacturing would dramatically destroy employment, what traditional economics show is the opposite. What productivity brings is change in the labor intensity of economic sectors, but at the aggregate productivity is welfare-enhancing.
2: One way to increase productivity is through automation, or what some refer to as industry 4.0. The fear though is that this threatens millions of jobs. How is the World Bank Group addressing this challenge?
Tilmes: My colleague Marcio Cruz recently shared the World Bank Group’s perspectives on the broader topic of Industry 4.0 in a speech at the 2nd UN Summit on ‘Science Technology and Innovation’. To summarize, we are looking at three areas. One is the challenges and opportunities. Second, we are closely following the emerging frontiers of industry 4.0, and their implications for the achievement of multiple sustainable development goals (SDGs). Thirdly, we are looking at how firms and governments can best engage to maximize potential positive impacts and minimize potential negative ones.
3: Can you explain what you mean by industry 4.0. Is that the same thing as automation?
Tilmes: Yes. I am referring to all the new technologies that have been commonly emphasized as part of Industry 4.0. The most emphasized are the Internet of things, Big Data, 3D printing, and advanced (autonomous) robotics. But there are others such as augmented reality, smart sensors, cloud computing, artificial intelligence (AI) and machine learning, nanotechnology, synthetic biology, simulation.
Less emphasized, but also important and related, are concepts such as human machines interface, mobile devices, cybersecurity, quantum computing, horizontal and vertical integration.
4: Given these rapidly evolving technologies, is manufacturing not too volatile as a development proposition?
Palacios: The empirical evidence is not conclusive on this asseveration. It will depend on the country and the market. For instance, for countries with a demographic dividend, the manufacturing sector is expected to increase. According to the Global Monitoring Report 2016, by 2030 exports of manufactured goods and services are projected to represent a larger share in both early and late dividend countries.
Tilmes: The World Bank’s Trade and Competitiveness Global Practice is currently preparing a flagship report on the future of manufacturing-led development, which will address this question.
Emery: Manufacturing has certainly become more volatile in terms of the rapid pace of technological change, and shifting patterns of competitive advantage. It has become more difficult for IFC as a sector to invest in as a result, but we remain committed to expanding our presence in Manufacturing, and expanding the range of countries and sectors where we can invest. I would say rather that attracting Manufacturing investment has become more difficult for countries which are only beginning to industrialize; the bar is much higher now, and low labor costs are not a guarantee of competitiveness. Manufacturing still delivers important impacts, but it’s just getting harder for the latecomers to enter, and also for middle income countries to stay competitive; they need to constantly adapt and address industry needs.
5: What does this all mean for developing countries, and for the global community’s push to achieve the sustainable development goals (SDGs)?
Tilmes: A simple way to understand the implications of Industry 4.0 on SDGs is by focusing on the perspective of workers as consumers and labor suppliers. From a consumer perspective, Industry 4.0 is good. Everything else constant (as we economists like to say), consumers all around the world will (probably) be better off. These new technologies will benefit the SDGs by reducing prices and increasing the variety of goods and services.
From a labor supplier perspective, Industry 4.0 is challenging. Most of our anxieties related to technological disruption are associated with the production side, particularly the effects on labor market. The good news is that techno-pessimism is likely overblown as new technologies also create new opportunities. Fears that new technologies will displace labor and create mass unemployment date back to the first Industrial Revolution.
Industry 4.0 will likely enable the reshoring of advanced manufacturing to mature economies, although typically with fewer jobs that require more sophisticated skill sets. Automation will continue replacing routine (manual and cognitive) tasks and the best job opportunities on “non-routine cognitive’ tasks will require more skills. This can lead to more inequality within countries. But as we saw with the ICT revolution, technology disruption also created new opportunities for developing countries.
6: What are the policy implications for developing countries aiming to achieve the SDG?
Tilmes: We need a better understanding of how developing countries adopt new technologies and ideas, and how to facilitate labor mobility across sectors and regions.
From a policy standpoint, countries may need to look into social safety net benefits as a serious alternative to compensate those that do not benefit (as much) from these new technologies. We need to be more innovative on how to facilitate access to capital for entrepreneurs in developing countries and provide training on good managerial practices. Education policies and investments to develop the skills required for this new era will be critical. This is one of the many areas where the global community has a lot to learn from Finland.
Watch the event: Industry Competitiveness and Jobs: The World Bank Group's Experience
7: One policy option is for countries to select one or two key sectors to promote. What is your view on policies that essentially involve picking winners?
Lopez: Over the long run, countries tend to be successful in sectors where they have a comparative advantage (and please note that I am referring to comparative rather than absolute). The problem is when policy makers tend to support a sector where there is no such comparative advantage (i.e. kind of focusing on the wrong sector) and leads to disappointing results.
Palacios: From a country perspective, what matters are concrete actions that balance vertical and horizontal interventions. From my former experience heading the National Competitiveness Agency in Guatemala and chairing the Inter-American Competitiveness Network, more than picking winners, what policymakers pay attention to is finding policies that support firms in specific sectors to diversify, innovate, increase their returns, improve their competitive standards and enhance their ability to create quality jobs. Several initiatives in the Latin America region show the need to find the optimal mix for vertical and horizontal interventions.
Tilmes: Based on hard won experience, our position is to avoid picking winners. The World Bank’s (draft) guidance on economic diversification lays out the key arguments for those interested in exploring the issue.
Emery: IFC invests directly in individual firms, in general helping support their investment and expansion plans. These investment projects almost always have positive effects on job creation, both directly and indirectly through the value chain, as we’re financing an expansion of the business. In some cases, IFC may be financing the adoption of new technologies into an existing operation, and there is little or no net new job creation, however existing workers become more productive, and the project generates an expansion in the business which has ripple effects of indirect job creation through the supply chain. The firms IFC finances operate in competitive markets, and their expansion, introduction of new products, new technologies, new processes always has effects on other firms in competing and complementary sectors. This is also generally a positive effect, as competitive pressures force other firms also to invest in order to grow and continue to be key market participants. The process is dynamic, but it’s certainly not a zero-sum game where one firm’s growth comes at another’s expense.
8: The World Bank has been supporting science and technology projects for many years. The Bank Group provided support to Ireland, Israel at the beginning, and then Korea, Mexico and Brazil. Why are we not doing more?
Tilmes: This a very important question. Under the Addis Action Agenda, the signatories to the SDG have recognized and elevated the role of ‘Science, Technology and Innovation’ (STI) as the second means (next to the finance for development track) for achieving the SDGs.
Under the so-called Technology Transfer Mechanism, the World Bank has compiled a first systematic inventory of STI programs and investments across the UN system. I presented the findings of this first ever global STI expenditure review earlier this month at the UN conference on STI. A key finding of this report is that the World Bank is by far the largest provider of financing, knowledge and STI implementation across international organizations.
9: From your experiences, what would you consider to be the most important drivers of competitiveness?
Palacios: I would suggest three aspects – scale, skills, and support. To be competitive, you need access to bigger markets, which can foster competition and innovation, and better integrated value chains in specific regions and within countries. Investing in skills development is critical because it enhances productivity and access to better quality jobs. Thirdly, the commitment by policymakers to support and delivery efficient interventions to address market, policy and institutional failures is critical. One form of support is providing appropriate incentives.
Lopez: All countries are different and hence generalizations can be too simplistic. But focusing on the countries I have followed over the past 3 years (Central America) I would highlight education, infrastructure, and investment climate. It is difficult to be competitive other than by lowing wages unless you have human capital that may allow you to produce high value added products. Infrastructure is another one. Many times, we focus on prices (and hence productivity) at farm/factory gate, but in practice what determines your competitiveness is the wholesale price, which is affected by logistics costs (and these can in some cases represent up to 40 percent of the final price).
Finally, on the investment climate, we want to make it easy for entrepreneurs with good ideas to invest and create new firms, without barriers to entry and without having the face costs that reduce dramatically the profitability of the projects.
10: What have you found to be the most critical public sector reforms to enhance competitiveness?
Palacios: The most critical element that the policy maker has is the ability to create trust. For that I will recall the discussion we had in Guatemala on the 2017 World Development Report. In short, good governance is critical for effective and sustainable reforms. It is important to recognize that reforms in competitiveness require a fair amount of trust that coordinates actions among different stakeholders in the public, private and civil society arena. Trust for these reforms is built on enduring institutions that are based on principles and set up clear goals and plans to achieve them. You need these institutions to have strong technical staff and a credible voice in the political arena and with key stakeholders in the public and private sector.
Lopez: Once again, it is difficult to offer generalizations, but one valid reflection in the Latin America context was the impact of exchange rate management. The good years of the commodity super cycle contributed to high growth in the region, and to lower poverty. And this needs to be recognized. But the inflows associated to commodity exports contributed to Dutch Disease type of effects, which in turn penalized the domestic manufacturing sector. Interestingly, Dutch Disease with potential hysteresis effects may have pushed manufacturing companies out of the market with little possibility to return over the short run. So appropriate management of monetary and fiscal policy in this context is critical.
Tilmes: The World Bank’s trade and competitiveness global practice has published a guidance note in which we outline how we can engage with countries seeking to diversify their economies. I would recommend that as a resource.
11: Why is the World Bank Group not doing more to promote regional cooperation? Is it not a good way to help to increase competitiveness?
Lopez: Actually, the World Bank Group is quite committed to promoting regional cooperation at different levels. Beyond the positive development benefits of trade, economic integration can be useful to diversify trading partners (and hence contribute to better absorb economic shocks) and particularly in small economies, exploit the benefits of economies of scale (hence increasing efficiency and productivity). But we cannot ignore that economic integration tends to also increase risks for less competitive industries and that makes the political economy of these processes extremely complex as traditionally there are groups in the countries that oppose this type of efforts. Under these conditions progress tends to be slower than desired.
Tilmes: Africa is at the forefront of regional cooperation. A new regional integration strategy is close to being finalized. The regional integration portfolio is sizeable and reflects the renewed emphasis under IDA 18.
Emery: IFC supports regional integration through supporting the expansion of firms which are competitive in their domestic markets to expand regionally. In doing so, they are often able to take advantage of differences in markets and factor costs to optimize their operations across a sub-region, and bring additional competition and innovation to those markets. A “sweet spot” for IFC has been helping to take dynamic firms and support their regional expansion. Being able to do so is of course dependent on having facilitative regional structures that encourage trade and investment across borders.