2018/10/08: Upon closer inspection, GVCs and new technologies exhibit features that limit the upside to – and may even undermine – developing countries’ economic performance. One such feature is an overall bias in favor of skills and other capabilities. This bias reduces developing countries’ comparative advantage in traditionally labor-intensive manufacturing (and other) activities, and decreases their gains from trade.
Second, GVCs make it harder for low-income countries to use their labor-cost advantage to offset their technological disadvantage, by reducing their ability to substitute unskilled labor for other production inputs. These two features reinforce and compound each other. The evidence to date, on the employment and trade fronts, is that the disadvantages may have more than offset the advantages.
The usual response to these concerns is to stress the importance of building up complementary skills and capabilities. Developing countries must upgrade their educational systems and technical training, improve their business environment, and enhance their logistics and transport networks in order to make fuller use of new technologies, goes the oft-heard refrain.
But pointing out that developing countries need to advance on all those dimensions is neither news nor helpful development advice. It is akin to saying that development requires development. Trade and technology present an opportunity when they are able to leverage existing capabilities, and thereby provide a more direct and reliable path to development. When they demand complementary and costly investments, they are no longer a shortcut around manufacturing-led development.
Compare the new technologies with the traditional model of industrialization, which has been a powerful engine of economic growth in developing countries. First, manufacturing is tradable, which means domestic output is not constrained by demand (and incomes) at home. Second, manufacturing know-how was relatively easy to transfer across countries and, in particular, from rich to poor economies. Third, manufacturing did not make large demands on skills.
These three characteristics collectively made manufacturing a fantastic escalator to higher incomes for developing countries. New technologies present a very different picture in terms of the ease of transferring know-how and the skill requirements they imply. As a result, their net impact on low-income countries looks considerably more uncertain.