The Traditionalists Part 2: What Does Automation Mean for The Wealth of Nations?

By Alberto Moel, Vice President Strategy and Partnerships, Veo Robotics

In my previous blog post I went deep into the possibilities of your job (or maybe mine!) being taken over by a robot, and I concluded (I hope you agree) that this risk is probably overblown. But the risk remains, and microeconomic policy responses will likely be required. Many options have been proposed, leaving a well-tended field of ideas and possibilities (universal basic income, upskilling incentives, taxing robots, etc.) that are left as an exercise to the reader.

Adam Smith. Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872).

Adam Smith. Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872).

There is, however, a broader (and more interesting) macroeconomic dislocation that hasn’t been as deeply analyzed: the impact and productive footprint of all this AI and automation on the global allocation of manufacturing capital. In other words, how will AI and automation affect countries’ abilities to get rich from manufacturing?

Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations (1776) first proposed the idea of absolute advantage: if an individual, a company, or a country has an advantage in producing something, then that individual, company, or country should specialize in producing that one thing, and trade for everything else.1 In the context of manufacturing, the absolute advantage over the last 70 years or so for developing economies has been low-cost labor (Figure 1).2

Figure 1.

Figure 1.

Driven by these absolute advantages in labor costs, the preferred path to economic development in emerging economies has been to open up borders to foreign investment and absorb the t-shirt, plastic toy, and sneaker manufacturing jobs coming from some other country where rising labor costs make their production uneconomic.

This rolling approach has led to serial industrialization in Asia since the end of WWII. First Japan (with an assist from the US and the Korean War) bootstrapped its way out of poverty by making goods that were no longer cost-effective to make in their ultimate end-markets (Western developed countries). Then, as Japan industrialized and moved into higher-value-added manufacturing, Hong Kong, Taiwan, South Korea, and Singapore became the preferred manufacturers for the goods Japan could no longer cost-effectively produce.

"Asia" from Americanized Encyclopaedia Britannica, Vol.1, Chicago 1892. Courtesy of the University of Texas Libraries, The University of Texas at Austin.

"Asia" from Americanized Encyclopaedia Britannica, Vol.1, Chicago 1892. Courtesy of the University of Texas Libraries, The University of Texas at Austin.

And as these Asian economies became themselves developed, they passed the baton to their nearest neighbor further down the cost curve: China. And as China industrializes and becomes wealthier, Adam Smith’s theory would predict that the manufacturing of t-shirts, plastic toys, sneakers, and other lower-value products will now roll on down to other countries with lower-cost labor, such as Vietnam, Thailand, the Philippines, or Bangladesh.

But the rise of AI and automation may be the end of the road for the Wealth of Nations, 21st century-style. In 2013, China became the world’s largest consumer of industrial robots and, by 2020, it is expected to install as many robots as every other developed economy combined (Figure 2). China seems to be taking a different approach when it comes to dealing with the mismatch between high-cost employees and low-cost manufacturing. China is not getting rid of the work. It is just getting rid of the workers.3

Figure 2.

Figure 2.

This disruption to the 20th century pattern of manufacturing activity flowing across Asia and emerging markets elsewhere could cause a profound realignment on manufacturing capital flows and production profiles, and how countries get rich in the future. As robots get cheaper and smarter and labor gets more expensive, the penetration of robotics and automation in more and more low-skill roles (such as the manufacturing of t-shirts, plastic toys, and sneakers) is likely to occur.

In that case, the ability of new emerging markets to grab those jobs and the export activity that comes with them will be eroded. For China, rising labor costs and decreasing labor availability are no longer a death knell for the manufacturing of low-value-added goods. Instead of sacrificing infrastructure for the (temporary) benefit of low-cost labor elsewhere, we can expect production to remain in China. It’s even possible that, aided by current trade frictions and reshoring trends, we could see a shift in the production of certain goods back to their ultimate developed end-markets.

The possible endgame in this new normal is that the next-in-line emerging markets whose populations continue to increase (demanding jobs and economic prosperity), will not have the absolute advantage of low-cost labor as a tool for industrialization and economic development. In other words, countries like Bangladesh, Vietnam, and Indonesia may have to find other paths to becoming wealthy nations.

What this means for the global economy should be, perhaps, of greater concern than potential job destruction or realignment in developed economies, where population growth is sparse and automation is likely to be mandatory for continued economic growth. This is a question we will continue to explore in our series on the great automation debate. But first, let’s make fun of the dystopians a bit in our next installment. Until then!


1 Book IV, Chapter 3, paragraph 31: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage.” Of course, David Ricardo proposed the theory of comparative advantage (1817), where even if a country is better and more efficient at everything, there are benefits to trading with other countries even in those goods where it has an absolute advantage. But that’s just gilding the lily of the point we’re trying to make.

2 Data from WorldData.info

3 Not that it has any choice, really. China is in the middle of a demographic time bomb, where net additions to the labor force are now negative. It isn’t willingly getting rid of the workers, it just doesn’t have enough.