Why very few poor countries will escape poverty by taking gigantic leaps into the service industry
Two weeks ago, I had a disagreement with the president of the World Bank, Jim Yong Kim, at a conference in Kigali, Rwanda. Kim had argued that increasing automation and use of robots is taking away jobs. He showed a slide of numbers of jobs at risk of being lost due to automation by country – China 77%, India 69%, Nigeria 65%, Ethiopia 85%, South Africa 67%, USA 47%, Argentina 65% and Thailand 72%.
The statistics may be compelling but the problem is with some of Kim’s conclusions. For example, he said that poor countries should think about the economy of the future – where most jobs are automated i.e. not done by human beings but machines and robots. This, he argued, will shift their focus away from manufacturing and into services as the source of future growth and jobs. The fear that automation takes away jobs is not new. It is as old as manufacturing.
Between 1811 and 1816, textile workers in Nottingham England began smashing new labour saving knitting machines claiming they were taking away their jobs. This was true since these workers lacked the skills to work with the new technology. They publicised their action in circulars marked “King Ludd,” a factor that led to them being called Luddites. The English government hanged 14 of them.
Their movement led to an idea called the Luddite Fallacy i.e. that an economy-wide technological breakthrough enabling the same amount of work to be done with fewer workers results in an economy with fewer workers. This argument is a fallacy because it ignores the reality that the factory could, in fact, keep the same number of workers and simply be able to produce more output. This is called “increased labour productivity”.
I suspect the basis of Kim’s argument in favour of services is the usual claim that Western nations have become post-industrial (shade off most of their manufacturing and grown into service economies). This is only partly correct. The reality is that manufacturing has declined less than presented. Rather, increasing productivity has meant that “current” prices of manufactured goods have fallen, but not as steeply as “relative” prices. Manufacturing has, therefore, declined as a share of GDP.
The richer people become, the higher they tend to spend on services – going for massage, eating in restaurants, playing golf, etc. But poor nations don’t have the incomes to raise the demand for services which would in turn employ more people and pay them better. Secondly, there are few services poor countries can export to earn higher foreign exchange. In any case, services are less tradable compared to manufactured products.
Therefore, Kim’s advice that poor countries should now focus on services as the engine of growth is misleading. Services have limited scope for productivity growth. Often one can only increase productivity in the service sector at the price of lowering the quality of the service. A teacher cannot teach a particular lesson at a faster rate or teach a larger number of students in one class without compromising the quality of learning.
The main issue I challenged Kim on, however, is the effect of services on poverty reduction. If you look at the world’s fastest growing economies over the last 20 years (1995 to 2015), they include Ethiopia (6th at 7.2%), Uganda (12th at 6.92%) and Vietnam (13th at 6.92%). In spite of same rate of GDP growth, Vietnam has been much more successful in reducing poverty (from 50% in 1990 to 3% in 2014) than Uganda (from 56% 1992 to 19.7% in 2014).
Vietnam began her reforms in 1986, Uganda in 1987. Vietnam’s growth has largely been driven by manufacturing, Uganda by services. Since 1986, Uganda’s manufacturing growth has averaged 9.78 and services 7.07%. Vietnam has averaged 14% on manufacturing and 6.0% on services. Thus, while manufacturing contributes only 7% of Uganda’s GDP and services 51%; in Vietnam manufacturing is 40% of GDP, service 38%.
In fact for Uganda, between 1986 and 2000, manufacturing growth averaged 14.34%. However, from 2000 to 2015, average manufacturing growth fell to 5.68% and then to 4.97% between 2005 and 2015 while Vietnam has averaged 11% over the same period. The share of manufacturing to GDP in Uganda has not grown in 15 years while that of services has literally exploded. Yet services don’t create as many jobs as manufacturing. This could be the reason our rapidly growing economy driven by services has youth unemployment is 83% while Vietnam that is driven by manufacturing is 7.8%.
This brings me to agriculture which the World Bank president ignored and which many of my debating friends say we need to take more seriously than manufacturing. Since 1986 Agriculture in Uganda grew at an average of 3.33%, not fundamentally different from Vietnam where it has grown at 4.1%. However, agriculture in Uganda still employs 80% of the labour force, in Vietnam 47%.
Why is Vietnam more successful at creating jobs and reducing poverty? It is not because it has grown its agriculture faster than Uganda. They are very close. The trick has been her manufacturing growth. Indeed, in 2014 Vietnam became the largest exporter to the US market among the 10 members of the Association of East Asian Nations. Its biggest advantage is low wage costs ($197 in 2013) compared to neighbours such as Thailand ($391) and China ($613). Vietnam is an exemplar of poverty reduction in the world because it relies largely on manufacturing.
Indeed, in 2009 high tech electrical manufactures overtook crude oil (which Uganda is eyeing hungrily) as the main source of export earnings for Vietnam. Crude oil’s share of export revenue has fallen from 22% in 1996 to less than 5% today. Yet primary agricultural exports remain the largest source of Uganda’s foreign exchange earnings. Thus contrary to what the World Bank president’s advice on services, Africa needs manufacturing if it is to create jobs for its youths and eliminate poverty.
Finally a word on agriculture: President Yoweri Museveni and his main opponent, Kizza Besigye, are arguing that peasant farmers must be protected from land grabbing by commercial interests. Their stand is certainly humane and hence politically attractive. Yet it is economically retrogressive. Allowing money barons to grab peasant land is socially harsh but it may be the solution to transforming rural relations. Dispossessed peasants can be re-united to the same land through the agency/initiative of capital – as agricultural laborers.
Without owning and tilling their own land to produce their own food, peasants would become agricultural labourers. As such they would form a market for food and other products. Secondly it is hard to move excess labour out of agriculture to industry without dispossessing peasants of their land. And without this, it is difficult to facilitate the penetration of commerce into agrarian structures.