Revolution 4.0: Challenges to inclusive growth

The pervasive sentiment of Asian financial leaders and economists who gathered for the ADB's 50th annual meeting in Yokohama in the past few days was optimism about Asia's prospects. They expressed confidence that the region would continue to lead global economic growth, despite some political instability and indications of protectionism seen elsewhere.

The optimism appears justified given that 95 percent of the Asia's population now lives in middle-income economies, while as recently as the 1990s, more than 90 percent of Asians were low-income earners.

The region's rapid transition and current robust growth also encourage the economies to look forward to a higher stage of development — to become high-income countries. However, the transition is expected to be more challenging and might take longer.

In fact, the number of the poor in the region substantially declined mostly thanks to Asia's large populous countries such as China, India and Indonesia. In many other developing countries, poverty and inequality are still challenging governments seeking to sustain inclusive growth.

The challenge will likely be more stubborn under the circumstances of the ongoing Fourth Industrial Revolution that is already fundamentally changing the way people live, work and connect to each other by eliminating physical boundaries and overcoming technology limitations.

The Fourth Industrial Revolution or Revolution 4.0 — a concept first put forth by Klaus Schwab, the Founder and Executive Chairman of the World Economic Forum (WEF) at the Davos economic summit in 2016 — might hurt developing economies rather than create a promising future, for the following reasons.

Job losses

First, it could cause more unemployment.

According to Schwab, the Revolution 4.0 is characterised by developments of a range of new technologies such as genetic engineering, artificial intelligence, robotics, nanotechnology and biotechnology. The resulting job displacement would likely occur in labour-intensive industries.

The WEF's "Future of Jobs" report in 2016 shows that on a global scale, by 2020 the "Manufacturing and Production" job family will see a decline of 1.63 percent in employment growth rate, led by labour-substituting technologies, more resource-efficient sustainable production use, lower demand growth in ageing societies and threats to global supply chains due to geopolitical uncertainty.

On the other hand, the "Architecture and Engineering" jobs will experience a growth of 2.71 percent, driven by the demand for skilled workers able to use 3D printers or robotic systems, and the employment rate for "Computer and Mathematical" jobs will grow by 3.21 percent.

The report, issued in early 2016, also forecasts a negative employment outlook in ASEAN countries. The employment rates in all three job groups mentioned above are predicted to decline, even though the number of employees in these sectors is already much lower than in others groups.

The ASEAN region now has 9.34 million people working in manufacturing and production jobs, 3.6 million people in the computer and mathematical job group, and nearly 2.2 million employees in the architecture and engineering family of jobs.

The prediction is understandable as most ASEAN economies are pursuing an export-led, labour-intensive and natural resource dependent growth model. From both objective and subjective perspectives, this model would not be easy to shift to a technology-driven one overnight.

Let's take Vietnam as an example. The country has a strong textile and garment industry using cheap labour as a comparative advantage in global trade competition and integration, and most of its revenue is export generated.

However, a recent report of the International Labour Organisation predicted that robots would replace 85 percent of workers in the Vietnamese textile and garment sector in the next few decades.

One might argue that the figures of job loss in ASEAN, which comprises only ten Asian countries, are not sufficiently persuasive and representative to prove that developing Asian countries would probably be more negatively affected by Revolution 4.0. This is especially true given that debates over whether the revolution will create a net job growth or a net job loss are continuing. The second reason explained below might make the argument invalid.

Rising inequality

On the cusp of Revolution 4.0, income disparity could grow, especially in a region where the income gap and inequality in opportunities to access education have been persistent.

Cyn-Young Park, an ADB economist, wrote in an opinion piece "Inequality in Asia: the case for inclusive growth" for the East Asia Forum in June 2016 that "The [Asian] region remains home to two-thirds of the world's extreme poor living on less than USD 1.9 a day, with evidence pointing to deteriorating income inequality in recent years."

Clearly, the displacement of workers in more sophisticated manufacturing and production sectors results in a strong increase in demand for high-skilled engineers and specialists. As a result, talent and intellectual white-collar workers would obviously be offered higher salaries and benefits, compared to less educated and low-skilled labourers, intensifying the income gap.

The WEF Human Capital Report 2016 assesses the effectiveness of countries' investment in education and human capital usage. Among the indicators used in the survey, one shows the ease or difficulty of finding skilled employees in each economy.

According to the report, Laos, Cambodia, Myanmar and Vietnam are among one fifth of 124 countries ranked at the bottom. Notably, countries ranked high on this indicator like Malaysia (4th), Singapore (20th), Japan (23rd), and China (27th) are those classified as high-middle income or high-income nations.

To some extent, the large gap in the ranking among the Asian countries reflects different stages of education development in various countries, and income inequality is the direct consequence of the skill premium shortage.

It should be noted that income disparity occurs not only between countries in the region but also within countries because of the unequal provision of education services, especially between rural and urban zones.

Therefore, as long as changes in education do not catch up with the advancements of technologies, the skill-biased technological transformation will affect people with insufficient or unsuitable education, perpetuating the vicious cycle of poverty and inequality.

More human resource investment needed

The solution to the negative impact of Revolution 4.0 on countries' path to inclusive growth is none other than increasing investment in human resource development. Particularly, inequality in opportunities to access education, usually between rural and urban areas in developing countries, needs to be addressed.

In order for the next generations to be fully and equally prepared for the technological revolution, increased education spending is an essential condition.

Amid the rapid change in technologies, it is critical for businesses to take part in education and training of the current workforces through reskilling and upskilling as they cannot wait for the next generations to mature. They must change from accepting ready-made human capital to designing their workforce on demand.

Governments should cooperate with businesses in making up an innovative and creative education environment and create favourable conditions for talents to live up to their full potential.

In short, it might be a little bit early for low-middle income countries in the region to think of leap frogging to a higher stage of development, but it is not early for them to make a shift in human capital investment. Their ability to take advantage of the positive aspects of Revolution 4.0 for productivity improvement and growth promotion in the future totally depends on their actions today.

The writer is Editor Assistant Việtnam News.