Technology and Reform: Two Steps Forward, One Step Back

Technology may be aiding reforms in a couple of ways, but it may be holding it back in another.

Today’s developing and emerging economies don’t need to spend so much time catching-up by re-inventing the wheel, so to speak. They are already standing on the shoulders of those that have come before them.  The spread and use of technology, according to some economists is all that is required for poor countries to get richer in this world of global trade, transport and communication. That point is debatable, based on the specific circumstances involved.

I would like to offer two broad areas in which I believe this holds true, and one in which it is probably less true today than it was a few decades ago.

A Step Forward

The first has to do with modern medicine in improving the health of nations. Using The Gapminder, developed by Hans Rosling, a health economist from Sweden, or even the public data explorer available on Google, we can test the assumption that modern medicine has improved the lives of millions in the developing world.

In the clip below, Rosling demonstrates just how vividly the stats stack up to prove it. Sticking to a few important indicators such as life expectancy and child mortality, he reveals that at the start of this century, most of the developing world has achieved similar levels compared to what their Western counterparts did at the some point in the last century. Modern science has allowed this gap between rich and poor to be narrowed significantly.

In the case of modern medicine, poor countries got healthy before getting wealthy. The modern public health system led to a rapid rise in life expectancy across the globe chiefly through a reduction in child mortality. Only in Sub-Saharan Africa has the yawning gap between rich and poor remained. The growth of the world’s overall population which is expected to peak at nine billion by the middle of the century owes much to this modern miracle.

And Another

The second step forward, I admit, is a little bit iffy because it is based on some demonstration cases at this point than any systematic cross country analysis. It has to do with modern devices for bringing about good governance and anti-corruption involving the Philippines and Indonesia.

In the past, the only way to guarantee that public officials didn’t behave badly was to pay them well. Lord Clive, the one responsible for establishing the East Indies Company, the global trading arm of the British Empire, was once quoted as saying that it was “absurd to give men power, and to require them to live in penury”.

With the implementation of the salary standardisation law mark two (a law which came about during the Arroyo administration), the pay packets of Philippine public officials are being raised to levels that would allow them to escape a life of penury. It cannot be denied however that a large incentive still exists for crookedness particularly in agencies that raise revenues for the government, enter contracts and issue franchises, licenses and permits, and adjudicate cases and elections.

Because of this incentive gap, it becomes necessary to equip anti-corruption agencies with the powers and resources to use modern devices to wield the proverbial stick when the carrot doesn’t work to keep erring officials in check. Indonesia’s version of the Philippine Ombudsman, the KPK (stands for Corruption Eradication Commission), has demonstrated to some degree what can be achieved when this happens. Their near-perfect conviction rate on a significant number of senior public officials is what I refer to.

In the 2010 elections, the successful use of automated voting and counting machines which many had projected to be an abject failure led to what I would regard as a watershed moment in Philippine history. Up until then, many doubted the capacity of a poor country to oversee and manage such a large scale system and deal with the inevitable bugs and prevent electoral fraud. To the credit of the officials who designed the process and the media that shone a light on it, the system worked relatively well in comparison to the doomsday scenarios being touted by conspiracy theorists.

In the second case of electronic computing technology, poorer countries are now able to gain more transparency and fight corruption in a manner they were not able to before. What prevents them from applying such tools could be a lack of political will and a bunch of laws that serve the interests of those who benefit from corruption, namely the politicians. If citizen’s groups clamoured for better methods of enforcement, the results could be as dramatic as in the case of modern medicine. Governments would be able to counteract the cancer of corruption more effectively.

Now Take a Step Back

The final backward step that I would like to highlight ironically was the one proven to be so potent in the last half-century for lifting millions out of poverty. I am referring to modern manufacturing technology which unlike the two cases I have just cited has evolved today to become less efficient or effective in spreading its benefits to the poor.

In the new growth theory developed by Stanford Professor Paul Romer from 1986-90, an economy’s output was driven not only by the productivity of labour and physical capital, but also by the diffusion of knowledge in the form of human capital and new technology. In fact the latter two made the former two even more productive. A positive feedback loop to the stock of existing knowledge amplified the growth emanating from new discoveries, and a perpetual cycle of growth would occur.

This meant the end of business cycles. It was this mistaken belief that we had entered into a “new economy” which was what fed the dot-com boom and bust of 2001. It was also part of the justification that the US Congress and Federal authorities gave for deregulating their banking system (to pave the way for “financial innovation” but led instead to corruption) which in turn led to the Enron scandal and the subprime mortgage meltdown of the late-2000s.

In his book, The Great Stagnation, Tyler Cowen talks about how the rate of technological innovation has actually slowed, not sped up since the 1970s. He says that unlike the invention of modern conveniences early in the last century, items like electricity, running water, vaccines, modern medicine in general, mass public school systems, and the car, which transformed life as we knew it and enhanced productivity tremendously, today’s inventions pale by comparison.

In terms of how this affects middle income countries such as the Philippines, there is what is known as the technology or development trap. Previously, it was observed that with the spread of new ideas, poorer societies diversified their economies as they grew wealthier. The quick catch-up that East Asia exhibited in the last half of the last century demonstrated the fact that countries by borrowing the innovations developed in the West could forego the costs associated with research and development and give birth to new industries and export opportunities.

Only once they had caught up to the West would they then need to focus on innovating themselves. Around the ten thousand dollars per capita mark was when this happened. Around this point countries had to begin specializing in certain sectors to remain competitive. The problem is that today, countries like the Philippines seem to be specializing much too early in the catch-up process, before they even reach a decent level of income per capita. This has led to pockets of industry surrounded by a sea of poverty.

The “jobless recovery” phenomenon that was observed in the country throughout the 2000s is being observed in the United States today, with weak jobs growth coinciding with successive quarters of economic growth. This has led many analysts to say that a structural shift has taken place in the economy. I have commented on this development highlighting the fact that too much innovation rather than too little of it could be what is driving down industry’s demand for workers. But regardless of what the cause is, what is true is that developing countries today have a much tougher time catching-up than they had half a century ago (and we haven’t even tackled the problem of climate change).

The Takeaway Message

There are potentially three points we can take from the preceding discussion on technological breakthroughs and their impacts on reform-minded governments:

• If with the help of modern medicine, poorer countries like the Philippines are able to achieve better health and well-being, then this could compensate them for the lack of growth somehow. Perhaps the king of Bhutan got it right, we ought to be focusing more on boosting gross national happiness instead of gross national product,
• If with modern computing, poorer countries can restore a sense of fairness and a sense of public trust in public institutions and govern themselves more effectively, then that would strengthen social cohesion and a sense of civic responsibility, things which have been eroded in the past in their quest for modernity, and
• If we are indeed on the cusp of a new technological frontier, one in which less inputs from manual labour will be required to produce things, then this means that nations will have to exert greater effort to locate industries within their borders, more than ever before. This will be the only way to finance the entitlement programs on which their citizens depend.

Indeed many things can derail countries on the straight and narrow paths (emphasis on the plural, there is more than just the one path) to wealth and well-being. To avoid falling even further behind, they will have to employ new ideas and ways of doing things more intelligently and effectively to reach their final destination.

Is Too Much Regulation or Too Much Innovation Responsible for Killing Jobs?

Earlier this year, Tyler Cowen suggested that the Great Stagnation in productivity and incomes observed recently in the West primarily in the United States has been occurring since the 1970s and is a result of it having exhausted the "low-hanging fruit" of innovation.

An opposite case can also be made that too much innovation has led to this slowdown. The Economist through its science and technology blogger comments on the practical advances occurring in the field of Artificial Intelligence or AI:

Today, automation is having an impact not just on routine work, but on cognitive and even creative tasks as well. A tipping point seems to have been reached, at which AI-based automation threatens to supplant the brain-power of large swathes of middle-income employees.

The pace of technological progress rather than having slowed down, appears to be speeding up. So much so that as "capital becomes labor" in many industries, leading to cheaper goods and better products, income growth for workers has stagnated while corporate profits have soared.

Advanced manufacturing, financial engineering, creative industries and even mining no longer require as much labor as their first wave cousins might have. Yet to attract such industries, governments have had to cut taxes, lower regulatory hurdles and so forth. This in turn has led to more constrained fiscal spending on their side.

The one area in which more regulation has led to greater innovation is that of climate change and environmental policy. The White House under the Democrats has elected to shelve its proposed cap-and-trade scheme in favor of greater powers for its Environmental Protection Authority to promote greater air quality for the health of its citizens.

The increased restrictions on the carbon emissions of power generators is causing a shift away from carbon intensive coal fire plants in favor of gas fired stations. The adjustment into a low carbon economy is creating just about as many jobs as it destroys according to economists.

Whether or not regulation encourages or discourages jobs however is beside the point, as one Stanford policy expert was quoted by the Washington Post as saying. The adoption of regulation should be based on whether it benefits society, he says. I couldn't agree more.

Fallacies

Which among the following pairs of countries would you consider to have a larger share of their exports in high-tech manufactures:

a. Korea or Japan 

b. Philippines or Singapore 

c. China or the United States 

d. Mexico or Germany 

The answers are found below: a. Korea b. Philippines c. China d. Mexico 

Surprised? Certainly these facts run counter to the commonly held beliefs about rich and poor countries. The most intriguing insight in all this is that the Philippines, the poorest of the four emerging countries just cited, long considered a laggard in its region as far as exports and investments are concerned, has emerged as a world leader in this regard, edging out Singapore, the former front-runner since 1996. See for yourself here. 

Other interesting observations are: (1) China has been ahead of the US since 2005, (2) Korea has led Japan since 1997, and (3) Mexico has edged out Germany since 1994. Safe to say, the strong performance of these emerging economies over their richer peers cannot be considered a fluke or the result of luck. In economic terms, a "structural shift" has occurred in these economies which have traditionally been exporters of cheap, basic commodities. 

What accounts for this increasing specialization in high-tech manufactures by emerging economies? More importantly, what does it say about their future prospects for growth? Is it a healthy sign or is too much specialization counter-productive? 

Let us first define what high technology means in this context. According to the World Bank definition, these manufactures include "products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery" or in other words, products with a high innovation component. 

In the Philippines, electronics is the biggest contributor to exports accounting for about 60%. They consist of a wide variety of products with different applications from consumer, auto, office, computer related, to telecommunication, medical and industrial uses. Data from the National Statistics Office for 2008 and 2009 show the value of electronics exports exceeding $20 billion per year, while imports are roughly 68-70% of their totals. This runs counter to the common perception that these domestic industries belong to the low value adding category. 

According to Ricardo Hausmann from the Center for International Development at Harvard University, a professor of the Kennedy School of Government, the complexity of products made by a nation is a reflection of the capabilities that exist within it. Nations that produce highly elaborate products have exhibited the ability to grow and develop due to the fact that very few countries are able to replicate the same conditions required by such activities (here he is explaining his theory of development based on this notion). 

It is more than a question of incomes or wealth. Sri Lankans have an average income slightly above Filipinos, yet their major exports are in textiles and garments. The lack of infrastructure, rule of law and good governance does not seem to deter the presence of high-technology industries in the Philippines. The abundance of engineers and highly skilled, flexible workers appears to be the main driving force.