Population growth and technological innovation don’t necessarily have to widen inequality in developing countries. They can also offer new opportunities to increase growth and create jobs: the long-term outcomes depend on today’s policy choices. But those choices are not easy because policies for sustained and inclusive growth may conflict with short-term needs. We look at the trade-offs and how to balance short- and long-term goals for sustainable and inclusive growth.
Population growth and automation
Compared with advanced economies, which already face the challenges of aging and declining population, developing countries are still experiencing demographic growth as today’s children become working-age adults. The United Nations estimates that in Africa the under-25 generation represents 60 percent of the population. As population growth potentially boosts the supply of low-skilled workers, while automation simultaneously squeezes labor demand, this new generation of workers will advance only if they can acquire marketable skills.
Automation is already affecting job creation in advanced economies, and eroding the traditional cheap-labor advantage of developing countries, where, according to World Bank estimates, two-thirds of jobs are susceptible to mechanization. For instance, a recent McKinsey report indicates that robots using current technologies could already carry out more than 50 percent of work activities in countries like Kenya and Colombia. In addition, technological advancement could help further “polarize” the labor market into very low-skilled and high-skilled workers, leading to growing inequality and undermining inclusive growth.
The shortage of skilled workers and infrastructure such as electricity and roads further constrains inclusive growth. As Harvard economist Dani Rodrik argued in his keynote speech at the recent IMF low-income countries conference “Towards 2030: Trends, Opportunities, Challenges, and Policies for Inclusive Growth”, the continuous skill upgrading in manufacturing has so far led to a decline in low-skilled manufacturing jobs. This process of `premature deindustrialization’ is reshaping the growth model in developing countries, which are starting to deindustrialize earlier and at lower income levels than in the past. In this sense, low-income countries may miss the opportunities that fostered the development of many East Asian countries, as automation could reduce the competitiveness of their labor supply.
Technology can help
Technology, however, also has the potential to support development and growth through greater information for better job matching, lower consumer prices, and greater access to new markets and services, thanks to lower connectivity costs. In Kenya, for instance, access to the mobile money M-PESA increased per capita consumption levels and lifted 2 percent of Kenyan households out of poverty, especially households led by a woman. In Rwanda, a start-up is using drones to deliver medicines and blood in remote areas.
Technological change can also revolutionize the provision of public services, by improving transparency and efficiency. For example, in 2013 Tanzania adopted a new tax payment system using mobile phones, lowering the risk of carrying money to banks and reducing the cost of doing business by saving time spent to queue in banks. Supported by USAID, the city of Batangas in the Philippines launched a similar system in March 2014 to help businesses to pay taxes via mobile devices.
Investing in education and improving mobility and connectivity are key for keeping up with the fast-changing world. Yet in many developing countries there are not enough schools, infrastructure is inadequate, and teacher training is often poor. An experiment in Afghanistan showed that setting up good quality village schools significantly increases the enrollment and academic performance of pupils, especially girls. The focus of investment in education should be primarily on the quality of education, its alignment with the labor market demands, and on on-the-job training.
Harvard economist Ricardo Hausmann, the other keynote speaker at the conference, emphasized that growth potential depends on the diffusion of know-how and technology, stressing the need for improved connectivity, more open migration policies, and the development of special economic zones to attract foreign investment. Technologically advanced transportation networks can broaden the benefits of urbanization, create new opportunities, and increase jobs. Migration policies, directed not only at facilitating the participation of foreign workers in domestic labor markets, but also at providing the right incentives to the diaspora to invest at home, can foster diversification and growth, through the diffusion of technology and innovation. In Hausmann’s words “it is easier to move brains than it is to move the relevant information into brains.”
While we seem to have the right answers to avoid harm from technology, translating them into policy action is a revealing reality check. When it comes to implementation, policymakers often point to trade-offs between efficiency and equity considerations. One such trade-off is concentrating resources in one part of the country where they can boost innovation and create jobs, which simultaneously widens the income gap between the rich and the poor areas. That can lead to social and political unrest. In addition, some of the policies that can generate higher growth in the long term may not provide wide benefit in the short term, diminishing the political incentive to engage.
Here lie the key challenges, as long-term sustainable and inclusive growth can only be achieved by balancing short-term imperatives with longer-term goals. Discussing how the world will be in 20 years is not a theoretical exercise, but a practical one, which we have to face today to be ready for tomorrow.