A socio-technological contract for Latin America

22 June 2018
  • The fourth industrial revolution is transforming the productive matrix around the world: accelerated automation will affect integration and trade in Latin America.
  • Latin America is one of the most unequal regions on the planet: next-generation smartphone users coexist with a third of the population who live on one meal per day.
  • Public and private efforts need to align towards an innovative and inclusive institutional architecture that channels the benefits of technological change to enhanced social equality.

 

The fourth industrial revolution – and the related disruptive technologies – has created new markets out of thin air. The International Federation of Robotics estimates that more than 1.3 million industrial robots operated in factories around the world in 2017. Around 75% of these robots are concentrated in five developed countries, with South Korea, Germany, and Japan having the highest concentrations of robots per industrial worker. 

Many goods and professions have become obsolete in consequence, incentivising firms to design strategies to satisfy new needs. Educational systems have also sought ways to keep up with the often frenetic pace of new skill requirements.

In Latin America, the number of robots is still small – 27,700, mostly in Mexico and Brazil. Nevertheless, trends observed in other regions invite us to think about the future. Does Latin America have anything to say about these disruptive technological transformations? Can we bring a fresh perspective to the table, approaching the issue with a humanistic approach?

In fact, we have yet to organise anticipatory, proactive strategies that harness technological developments to change the course of poverty and inequality in the region. More fundamentally, we should forge a socio-technological contract for Latin America, combining advanced knowledge, science, and a proper set of principles.

Automation and economic organisation

When it comes to trade and integration, the automation of jobs will transform global value chains. The phenomenon may encourage the “reshoring” of factories, leading to the replacement of workers with robots. Likewise, the growing supply of freelance workers who are able to work remotely creates new possibilities for the organisation of value chains.

Combined with disenchantment with some of the outcomes of globalisation, this process may mark the beginning of the end of decentralised production and global value chains that connect diverse portions of the world. Martin Ford estimates that at least half of all US companies with annual sales of over US$10 billion are considering bringing their factories back home.

By reshoring their production centres, firms would bring down their transportation costs by remaining closer to consumers. These new schemes may allow firms to manufacture made-to-measure designs for each client that can be delivered in a matter of days – or even hours.

Other opportunities derive from automation, such as the reduction of accidents, the improvement of working conditions, higher levels of productivity, and lower costs. Trade in key sectors may also benefit from this process, as the addition of robots appears to be associated with a growth in exports during the early stages of the automation process.

How will this process affect Latin America?

Of course, the new trends have created new economic opportunities in the region. Knowledge-based services and newer or less established areas – for example FinTech, biotech, cyber security, only payment systems, service robotics and e-commerce – have benefitted from automation. The same applies to “green” jobs intensive in technology, such as those related to renewable energies, forest management, and recycling.

The flipside is that automation is threatening to take technological unemployment to unprecedented levels. A substantial share of exports and employment in Latin America and the Caribbean are concentrated in activities that run the risk of being automated, such as labour-intensive manufacturing, natural resource extraction, and medium-skill services such as accounting, legal, or management services.

Highly educated workers are not immune to these changes either. In the last 10 years, librarians, translators, and travel agents have seen employment drop by more than 20 percent. Engineers, mathematicians, lawyers, and accountants, along with other office workers in the public and private sectors, might also be affected.  

Tackling the challenges ahead

If the digital economy is the future, how should Latin American countries respond to the new economic trends?

Latin America and the Caribbean needs to rethink its long-term development strategy. The main advantage of the digital economy is the proliferation of services at a marginal cost of close to zero. Given the current economic structure of the region, this also represents a challenge. The hopes that were invested in commodities have not paid off and local economies continue to suffer due to their vulnerability to the price cycles of traditional export goods.

Diversifying exports through processes that add value to commodities and implementing new development strategies in which innovation is the driver for growth are fundamental ingredients in the formula for success. 

Integration policies may play a role in creating innovation clusters and fostering creativity through regional government procurement policies. Moreover, trade agreements need to adapt to the consequences of the fourth industrial revolution – negotiations have lagged behind the extremely fast process of technological change. The institutional and regulatory architecture of trade agreements is currently out of sync with innovation, a gap that needs to be addressed. For example, trade in telerobotics and telepresence-based services will require multilateral efforts to harmonise outdated regulations and standards.

An important precedent for action exists: as Santiago Chelala and Inmaculada Martínez-Zarzoso show, trade agreements have helped to close the technological divide between signatory countries. This outcome derives from the knowledge spillovers that come with a greater movement of goods, services, and people and with more business-to-business technology transfers.

Our mission is to reconfigure Latin America, improving its connection to the world and its access to new markets while increasing trade within the region and with the rest of the world. This new convergence will inevitably be hybrid in nature – part digital and part physical. The “container trade” and the slow and complex borders of the past have given way to more instant forms of trade. E-books are a good example of this trend, which also includes services such as online banking and new forms of payment that blend digital platforms with bank branches that provide increasingly personalised services.  

The digital economy can also bring more efficiency to traditional economic sectors. Worldwide, 33 percent of the food annually produced is wasted due to shortcomings and failures in logistics management. Technological advances are excellent news in this context.

Take the case of the Internet of Things. According to Karthikeyan Natarajan and Fred Yentz it can reduce customer service response times by 30 percent and storage costs by 15 percent. Likewise, the Internet of Things can help predict future demand with an accuracy of 90 percent. Not surprisingly, 96 percent of transformation and freight companies claim that the Internet of Things has been the most important innovation since 2005.

Another interesting example is found in recent advances in the area of precision agriculture. The European Union has incentivised two projects that aim to expand the technological frontier of robot agriculture: Clever Robots for Crops (CROPS) and Sweet Pepper Harvesting Robot (Sweeper), which uses nanotechnology and new materials to automate primary production.

The EU’s goal is to introduce the first robotic harvester for greenhouses into the market by 2020. Latin America cannot be left behind as these advances – which blur the boundaries between industry and agriculture and between goods and services – take form.

Indeed, we are witnessing new synergies and associations that transcend the borders between companies and their core businesses, creating new connections and complementarities that were unthinkable until recently.

Examples include the recent partnership between Uber and Embraer to manufacture flying taxis by 2020, or that between Google and Ford to produce driverless cars. “Winners” and “losers” will result from these structural transformations. How should we address the social tensions that come with accelerated automation?

A socio-technological contract for Latin America and the Caribbean

We are living through paradoxical times. Never in history has so much wealth been created, yet we have been unable to guarantee a life of dignity for all. The economists Robert Solow and Dani Rodrik agree that the success or failure of globalisation will depend on ensuring that digital dividends are distributed equitably. It is thus essential to rethink the classic welfare state.

In the era of automation, we cannot just wait for individual social interests to autonomously define the direction or priorities for social cohesion. Instead, we need clear rules of the game.

What precludes, first of all, the introduction of innovations to collective bargaining processes that pave the way for a long-term modernisation plan based on a socio-technological contract that brings workers, business owners, and the state together? Multi-sector agreements have already been implemented in France, Germany, Spain, and the United Kingdom, and have given rise to national industry 4.0 policies.

As the economist Robert Aumann points out, education should be the main priority of public policy. The challenges of technological change demand high-quality education that focuses on the skills that will be needed in the future. The key is building workers’ technological capacities, so they can interact with machines and robots at work on a daily basis.

For example, we need to promote big data literacy in Latin America, using tools such as massive online open courses to democratise access to knowledge. We also need to set up legal frameworks that guarantee remote freelance workers their legal rights and anticipate the difficulties that new forms of employment imply for financing social security.  

The education revolution needs to focus on soft skills, such as emotional intelligence, empathy, and creativity. Although problem-solving skills are a fundamental attribute, the ability to raise new questions is a key aspect in the coming economic world. These soft skills will be important for doctors, nurses, psychologists, social workers, and teachers – as they are at the heart of tasks that cannot be robotised.

At the same time, we need to create support networks and a social security coverage that help people transition effectively to the digital economy. We need to redesign social policies and implement creative new conditional cash transfer programmes that include training in technological skills. Likewise, we need to discuss seriously palliative measures such as universal basic income or taxation on robots.

In the same spirit, we need to promote investment in research and development (R&D), relying not only on the public sector, but also on public-private schemes and partnerships with academic institutions. Current figures on R&D are alarming: the countries of Latin America and the Caribbean invest just 0.7 percent of their total GDP in R&D activities, while in North America and Europe the average rate is of 2.5 percent and, in the Asia-Pacific 2.1 percent. 

A complete recipe for buffering the impact of technological change would also include several other ingredients: diversifying exports; promoting small and medium-sized enterprises; incentivising the orange economy and creative industries; creating incentives for international cooperation; scaling up redistributive policies; and improving environmental and food safety standards.

There is no time to lose given the magnitude of the challenge that lies ahead. It is our duty to be prepared and to create the right conditions for technological transition to lead towards smarter states and more solid, inclusive economies.

 

This article is adapted from a foreword to the IDB Integration and Trade Journal 21 (42) entitled Robotlution: The Future of Work in Latin American Integration 4.0. 

Gustavo Béliz is Director, Institute for the Integration of Latin America and the Caribbean (INTAL) of the Inter-American Development Bank.