Monday, 12 February 2018

From Copycat to Global Innovation Driver: Rethinking Technology Transfer with China

From Copycat to Global Innovation Driver: Rethinking Technology Transfer with China, by Thomas Bonschab*

Technology transfer with China seems to have only one direction: Western industrialized countries supply, and China takes whatever it needs. This process does not enjoy a good reputation. Public media are constantly coming up with reports that Chinese companies are blatantly stealing Western technology as part of industrial espionage or breaches of contract. Because many of these stories are well-documented, they have largely sapped the mood towards China.
More heavily weighs the accusation that China operates on a distorted legal framework in order to acquire the desired technology. In fact, Western companies are still being forced into joint ventures with minority share in almost all key sectors, if they want to gain market access in China. Public tenders tend to be designed to grant approvals only when relevant technology is deployed and produced locally with Chinese partners (often assigned by the local administration). In addition, many international investors complain that they are compelled to transfer construction plans to Chinese institutes, thereby giving away their intellectual property. Similar charges comprise the requirement to provide training programs for local employees. And most notably, Chinese authorities are promoting, more or less transparently, M & A processes in the countries of origin of high technology. In Germany, the cases KUKA and Aixtron were widely and critically discussed.
Hence, Western governments are becoming increasingly nervous and trying to strengthen their position on China. Current messages from the US spur concerns for a new trade war. But even the more moderate EU and Germany are trying to impede market access for Chinese players with new foreign trade regulations. It is openly discussed whether China should be granted the status of a market economy due to its industrial policy.

Towards another realignment against China
No doubt, there are good reasons to take action and realign Western policy towards China. However, the approach adopted by most Western countries is problematic. Sure, it may be intuitively reasonable to look at China from today’s perspective or from the perspective of the past 10 years. But there is an inherent flaw in this view. From this perspective, China may appear as a new economic superpower, but still as a technology-developing country that can only acquire knowledge and innovation through unfair ways. From this point of view, the established Western self-understanding of technological superiority is not shaken at all.
This attitude will soon have to be corrected. The real momentum of China’s development is not only to be found in its impressive growth rates of its gross national product. It is rather in its ability to transform itself into a modern knowledge society and thereby to develop so-called indigenous technologies. China may still enter the international stage as a copycat, but not for long. Soon, technology transfer from China to the West is likely to be as common as the other way around. At least in selected sectors of the economy.

Here's a set of common sense considerations that make this trend visible.
Example 1: China as a Land of Inventions: In 1996, the share of research and development in gross national product was just over 0.5%. Although this was above the average of the least developed countries (LDC) of 0.2%, it was far from modern industrialized nations. Since then, annual spending has been growing at an average rate of 22%.

Source: Compiled from United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics.

The catching-up process is unmistakable. In 2015, China has already invested 2.07% of gross national product in research and development. Germany in comparison: 2.87%. As early as 2006, the State Council announced in its "Outline of National Medium and Long Term Science and Technology Development Plan (2006 - 2020)" the target of 2.5% of gross national product for 2020. Since China does not understand such publications as a poem to the people, but instead as a tough promise, one must assume that in the next 10 years, the level of Germany and the United States will be reached. Only the special cases of technology countries such as South Korea (4.2% in 2015), Israel (4.3% in 2015) or Japan (3.3% in 2015) will then stand out.
It is noticeable that we only talk about aggregated data. In key sectors, defined by the Chinese government as part of its China Made in 2015 innovation program, the numbers are likely to be even more significant. New information technologies - notably artificial intelligence and aerospace sectors or biomedicine and the development of high-end medical devices - are investing heavily in achieving rapid independence from Western technologies. The true story is that China will most likely develop indigenous technologies in key sectors, beyond the picture visible when looking at aggregate data.
Example 2: China in patent fever: According to a recent survey by the World Intellectual Property Organization (WIPO), no country registers more patents than China. In fact, as many as the US, Japan, South Korea and the EU taken together.

Trend of patent applications in the five main WIPO offices
Source: WIPO 2016: World Intellectual Property Indicators 2016, Economic and Statistics Series, p. 23

It may well be objected that many of the registered patents are destined solely for the Chinese market, so that not all patens have the high quality to be found in technology driven countries like Germany. Nonetheless, this shows how much China is now presenting itself as a land of inventions and ideas.
The dynamics also suggest the direction in which the currently very critical debate with China on the protection of intellectual property rights (IPR) will develop. A country with so many patents will want to protect them, otherwise they are no value. The according laws in China already exist. Only their consistent implementation by the authorities is still a major challenge. Over the years, this is likely to be remedied. Ironically, in the long run China could become a global protagonist of IPR. Historically, that would follow the example of Japan, South Korea and other countries.

Example 3: "Speed ​​to Market" - from invention to product development: In this core competency for a successful technology transfer, China has already achieved world leadership. Hardly any population has more affinity for new technologies than Chinese. Customers demand constant product adaptation, using social media and the Internet. Successful entrepreneurs have to listen to that voice, or else they disappear quickly from the market. No doubt, poor product quality and product safety are commonplace in China, but are also rigorously punished by customers.
The speed and mentality of Chinese entrepreneurs are set accordingly. Lengthy strategy processes and consultant assignments are not part of Chinese business life. Innovation pressure also comes from the many government programs that operate either through regulations (such as environmental regulations) or market incentives. Market opportunities in the context of "Made in China 2025" or the "One Belt, One Road" program call for maximum flexibility and risk-taking even from the large state-owned enterprises.

Example 4: Incentives for returning intelligence: About 80% of overseas students return to China. That was not always the case. At the beginning of the 2000s, studying abroad, primarily in the USA, was seen as a perspective for a better life. Qualifying Chinese students was very beneficial for the hosting countries, both in terms of financing academic institutions and in terms of developing new technologies, using some of the most gifted minds. This trend has reversed dramatically in recent years.

Source: National Bureau of Statistics of China

Arguably, this development may be caused by a tightening of visa requirements in some countries. The decisive factor, however, is that China offers a more attractive working environment than in the past, especially in key industries. One of the most striking developments is the emergence of the many start-up centers, which were built especially for returning students. At the end of 2016, there were 347 of these centers, with more than 27,000 companies. A technology pool for the future. A perhaps a role model for Western industrial countries.
These are just a few examples of the dynamism with which China is currently developing into a global innovation driver, stripping off its role as a copycat of Western technology. It is apparent that the country will set the tone in future, at least in some sectors. Not just because of its market size or its political chutzpah, but because of its technological superiority. China builds up the necessary resources for this change at a historically breathtaking speed. The days are counted for Western countries to simply blame China as a technology thief.
In the future, therefore, the issue of technology transfer will probably be rated differently. For example, many German “hidden champions” and research institutions in the fields of automation, digitization and Industry 4.0 will step up their development in China in order to be able to sail hard on the wind. It is not only the internal market of China that is exciting, as hitherto. It is also the Asian and global programs along the Silk Road that are perceived as business opportunities. More fundamentally, however, China is above all a new, global competitor in the high-tech sector.
So where is the journey going?
The good news is that German and other Western technology companies are still in high demand in China. Many Western private sector companies are already underway in developing new business models in dealing with China. Re-engineering of technologies should soon go both ways. In fact, there is a lot to learn from China. WeChat, for example, has become a more powerful tool than WhatsApp, Alibaba and other companies have set similar signals. Looking at the Chinese Mittelstand to enter global markets, it is likely to get used to such cases.
At the political level, one can only hope that the approach of co-operation on equal terms and mutual learning curves will not remain a simple rhetoric. European and German advocacy for more fairness in international competition is justified and necessary. The foreclosure of their own markets by means of new foreign trade regulations, however, is rather a step backwards.


*Thomas Bonschab has worked many years for the Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH in Beijing on bilateral projects between German and Chinese ministries. In 2014, he founded the company TiNC International GmbH together with his Chinese business partner. His company deals with industrial projects in the fields of automation, digitization and industry 4.0, as well as educational cooperations between China and Germany. Thomas Bonschab runs the blog Weltneuvermessung (https://weltneuvermessung.wordpress.com), joint with Robert Kappel and Helmut Reisen, where this post appeared first in German.

Monday, 5 February 2018

China´s Development Finance – A Boon for Africa

Large emerging countries have become important development partners in recent decades. They are outside the old donor cartel of countries in the Development Assistance Committee (DAC) at the OECD. Countries that provide development partnerships but do not belong to the DAC are Brazil, China, the Gulf States, India, Malaysia, the Russian Federation and Thailand. These countries now spend billions of dollars throughout the developing world to build roads, dams, bridges, railways, airports, seaports, and electricity grids. These projects, often in countries left orphan by Western donors because of alleged governance problems (which is little reason of concern when the country is a Western ally), have been greeted with suspicion (´rogue aid´): Sour grapes for Western donors - who from the 1980s tended to spend money more on conferences, consultants and governance rhetoric – to see new emerging partners in their former ´chasse gardée´. The rise of emerging partners could also explain the increasing support of the DAC for blended finance, in order to lever meagre ODA resources with private finance, which won´t work for low-income Africa[1].

Western donors and lenders are generally skeptical about China’s efforts to assume a leadership role in providing global infrastructure, and point to the benefits international competitive bidding rules and environmental and social safeguards provide to ensure responsible and sustainable implementation of infrastructure projects. And Western politicians and media have warned African counterparts that China may be motivated not by a desire to improve the lives of ordinary Africans but more by a desire to gain access to the continent’s natural resources.


Table 1. Recipients of Chinese Official Finance, 2000 - 2014
World Region
Total, $bn
 ODA Terms, %

No. of Projects

Africa
118.1
58

2345

Eastern Europe
56.7
3

171

Latin America
53.4
12

317

South Asia
48.8
10

423

Southeast Asia
39.2
7

507

Other Asia
28.5
6

183

Middle East
3.1
1

93

Pacific
2.8
3

265

Total/Average
350.6
24.5

4304

Source: Aid Data (Dreher et al., 2017); my calculations.

China, in particular, has positioned itself as a leading global financier of the “hardware” of economic development. Unfortunately, China does not disclose comprehensive or detailed information about its international development finance activities. However, Aid Data (Dreher et al., 2017)[2] have recently constructed a dataset with a new methodology for tracking underreported financial flows. This paper introduces a new dataset of official financing—including foreign aid and other forms of concessional and non-concessional state financing—from China to 138 countries between 2000 and 2014.
According to these new data, the scale and scope of China´s overseas infrastructure activities now rival or exceed that of other major donors and lenders. Between 2000 and 2014, the Chinese government committed more than $350 billion in official finance to countries and territories in Africa, Asia and the Pacific, Latin America and the Caribbean, the Middle East, and Central and Eastern Europe. Transport and power generation are the two main sectors financed. Chinese cooperation also invests significantly in health, education, water and sanitation, agriculture, and other social and productive sectors.
Chinese official finance consists of Official Development Assistance (ODA), which is the strictest definition of aid used by OECD-DAC members, and Other Official Flows (OOF). China provides relatively little aid in the strictest sense of the term (development projects with a grant element of 25 percent or higher). A large proportion of the financial support that China provides to other countries comes in the form of export credits and market or close-to-market rate loans. Table 1 provides a calculation of the weighted average of China´s development finance that was extended at concessional ODA terms: 24.5 percent for the period 2000 – 2014.
Table 1 shows that Africa received most from Chinese development finance during the period 2000-14 – in terms of amounts, degree of concessionality (percentage share at ODA terms) and number of projects. More than a third of overall Chinese official finance went to Africa during 2000 and 2014. Zimbabwe, Angola, Sudan, Tanzania, Ghana, Kenya and Ethiopia headed the ranking of Africa´s recipients in number of projects. Africa has received more Chinese ODA-like finance than all other developing regions in the world combined, almost 80% of Chinese aid.
But did Africa benefit from Chinese aid? Dreher & Co. show that Chinese official development assistance (ODA) boosts economic growth in recipient countries. The popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders is clearly rejected. The Aid data paper also benchmarks the effectiveness of Chinese aid vis-á-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). The results indicate that Chinese, U.S., and OECD-DAC ODA have positive effects on economic growth, but no robust evidence is found that World Bank aid promotes growth. The Aid Data research suggests that ODA compatible aid helps growth, despite the many (populist?) claims to the contrary from the likes of Dambisa Moyo.

By contrast, it is found that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Too bad DAC donors are becoming so stingy. DAC Country Programmable Aid (CPA), the (most valuable) portion of aid that recipients´ budgets can really count on (because it excludes OECD-based spending for conferences, consultants, migrants, etc), has declined from 2014[3].


[1] Kappel, R. & H. Reisen (2017), The G20 »Compact with Africa«: Unsuitable for African Low-Income Countries, Friedrich-Ebert-Stiftung, Berlin.
[2] Dreher, A. et al (2017),  Aid, China, and Growth: Evidence from a New Global Development Finance Dataset, Aid Data Working Paper No. 46, William & Mary, October.
[3] https://stats.oecd.org/Index.aspx?DataSetCode=CPA

Tuesday, 16 January 2018

Shifting Wealth and Global Wealth Inequality


Piketty’s (2014) celebrated analysis has focused on wealth inequality within countries[1].  But world wealth inequality also depends on the rise or fall of wealth in different countries and regions. An important element in the current evolution of wealth inequality is the role played by the fast growing developing economies. The table below will show that Shifting Wealth seems to have contributed – as it did for global income equality – to slightly more global wealth equality. Since 2010, the Credit Suisse Research Institute’s Global Wealth Report has been the leading reference on global household wealth[2]. A wealth of data on household wealth throughout the world is available in the annual issues of the Credit Suisse Global Wealth Databook. It offers detailed country and regional information not available at present on http://wid.world/.

Net household wealth is defined as the marketable value of financial assets plus non-financial assets (principally housing and land) less debts. World total net household wealth has risen from $ 117 trillion end 2000 (a mean of $31,415 and a median of $1,867 for the 3.7 billion adults[3] alive then) to $ 280.3 trillion by mid-2017 (a mean $ 56,541 and a median of $ 3,582 for 5.0 billion adults).

Table 1: Net Household Wealth, % of world total

2000
2010
2017
Africa
0.9
1.2
0.9
Asia-Pacific (ex Japan)
7.3
11.1
11.2
China
4.1
7.5
10.3
India
1.0
1.7
1.8
Latin America
3.0
3.7
2.9
Total South
16.3
25.2
27.1
Europe
29.6
33.7
28.4
Japan
17.0
10.7
8.4
North America
37.1
30.4
36.0
Total North
83.7
74.8
72.8

Over the period 2000-2017, net household wealth has indeed shifted South (actually more East than South). In relative terms, the group of rich countries has lost more than ten percentage points of the world household wealth. Consequently, global wealth inequality has been reduced during the 2000s as median levels of net household wealth are much higher in rich than in developing countries. Most of the shift toward the South occurred during the first decade when income convergence was rapid, not least due to booming raw materials. In the 2010s, by contrast, gains in the percentage share of world household wealth were given back by Africa and Latin America; only China kept on gaining a higher relative share in world wealth.


Table 2: Median Net Wealth per Adult, in constant $

2000
2010
2017
Africa
499
939
438
Asia-Pacific*
1,322
3,400
2,997
China
2,349
4,628
6,689
India
704
1,301
1,295
LAC
3,099
6,388
5,159
World
1,867
3,709
3,582
Note: Asia-Pacific including Japan


For lack of data on standard deviation underlying the various data on household wealth, Table 2 does not provide evidence on skewness nor on Asia-Pacific excluding Japan. Still, Table 2 reveals that the first decade of the 21st century did not only lower global wealth inequality but also went along with remarkable gains in median wealth. Broadly, median net household wealth doubled in all non-OECD regions listed in Table 2 during the period 2000-2010. Since then (post the Great Financial Crisis; GFC), however, median household wealth only kept rising in China while it dropped sharply in Africa. Despite being shown in constant US dollar, the numbers may indicate that sharp real currency depreciation of local currencies in countries with net raw material exports have dented mean household wealth since the GFC and as a result of lower commodity demand by China, including by inflating household debt.

To sum up, the 2000-2010 episode of rapid income convergence of low- and middle-income convergence in the wake of China´s commodity-hungry growth spurt has not only lowered global income inequality. It also helped lower global wealth inequality, despite higher within-country income and wealth inequality. Median household wealth rose in all developing regions while it dropped or stagnated in Japan and North America. During the present decade, alas, Africa and Latin America have seen median household wealth levels drop again.




[1] Th. Piketty (2014), Capital in the Twenty-First Century, Harvard University Press.
[2] J. B. Davies, R. Lluberas and A. Shorrocks (2010):  Global Wealth Databook, Credit Suisse Research Institute. The same authors explain the estimation methodology and draw lessons learned about trends in the level and distribution of global wealth up to 2014 in “Estimating the level and distribution of global wealth, 2000–14”, WIDER Working Paper 2016/3, UNU-Wider.
[3] Defined as individuals aged 20 or above. 

Sunday, 7 January 2018

Potential Headwinds for Shifting Wealth

The sustained growth that large emerging countries have experienced over the last two decades has conferred on them a considerable growth delta over the OECD average. Combined with very large populations, these growth differences are translating into a new world economy.  For the first time in history, the countries with the largest economic mass are not also the richest countries. The shorthand for this complex event is what we call “Shifting Wealth – the recalibration of the world economy toward the East and the South –, well documented since 2010 in the OECD Perspectives on Global Development. The last post on this blog had discussed potential tailwinds for Shifting Wealth that may arise from the twin-turbo China cum India. Today, I want to reflect on four potential headwinds going forward:

·         Slower speed of GDP convergence as the distance to the advanced countries is shrinking;
·         The middle-income trap in emerging countries;
·         Technological innovations that might reduce labor demand in emerging countries;
·         Global trade, notably normalisation and protectionism.

To be sure, there is no mechanical necessity about these risks. But policymakers, notably in middle-income emerging countries must be aware of them. Whether economists´ almost Pavlovian responses to these trends - better education, redistribution, activist industrial policy - can deal with these trands in a welfare improving way is beyond the scope of this paper, which is busy looking at trends.

Convergence Speed
China´s growth has been the engine of Shifting Wealth since the 2000s. After almost four decades of sustained growth, the Chinese economy has grown from an average GDP_PPP/capita of 313 US dollar in 1980 to 15,417 US dollar in 2016. Its GDP per capita is currently equivalent to 55 percent of the world's average. China, initially capital poor, has saved and invested a large part of its annual GDP over the past 40 years. The neoclassical Solow-Swan growth model postulates diminishing returns to capital. This has led Krugman (1994)[1] to make one of the most blatant errors in the history of economic prognosis:
”If growth in East Asia runs into diminishing returns, however,  the conventional wisdom about an Asian-centered world economy needs some rethinking”…”From the perspective of the year 2010 (sic!), current projections of Asian supremacy  … may well look as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years”.
The hypothesis that poor economies tend to grow faster per capita than rich ones— without conditioning on any other characteristics of economies—is referred to as absolute convergence. However, it has held in the past only for a fairly homogenous group of countries, such as the OECD, or for incomes across US states (Barro and Sala-i-Martin, 2004)[2]. The key proposition of endogenous-growth models is the absence of diminishing returns to capital. The simplest version of a production function without diminishing returns is the AK function Y = AK, where A is a positive constant that reflects the level of the technology. The global absence of diminishing returns may seem unrealistic, but the idea becomes more plausible if we think of K in a broad sense to include human capital.
Acemoglu, Aghion and Zilibotti (2006)[3] produced a stochastic growth model in which a country‟s “distance to the frontier” matters for the selection of appropriate growth strategies. Countries at early stages of development (optimally) pursue an investment-based strategy, which relies on existing firms and managers to maximize investment under the guidance of the government; at this stage, local entrepreneurship and home-made innovation matter relatively less, a condition that carries implications in shaping appropriate institutions. The three authors show that relatively backward economies risk shifting out of the investment-based strategy too soon. Policies that encourage the investment-based strategy, such as limits on product market competition or investment subsidies, may be beneficial for a lengthy period in terms of facilitating economic convergence and poverty reduction.
Table 1: BRIICS Innovation Ranking
Country
China
Russia
S Africa
India
Brazil
Indon´ia
Total
2017
22
45
57
60
69
87
127
2007
29
54
38
23
40
48
107
Source: World Intellectual Property Organization, Global Innovation Index 2017 and 2007.

Investment-based development strategies may also have significant long-run costs, if the country holds on too long, failing to reach the world technology frontier and finding itself devoid of domestic entrepreneurs and innovation capacity. Reassuringly, China has managed to reach the world technology frontier and is blessed with millions of highly innovative entrepreneurs. The Global Innovation Index 2017 (published annually since 2007 at the World Intellectual Property Organization) provides detailed metrics about the innovation performance of 127 countries and economies around the world, with 81 indicators. China ranked at 22, the only middle-income country among the top 25 innovative countries. Note that, China and Russia aside, no other BRIICS country was able to move up the WIPO innovation ranking over the past decade (Table 1).

The Middle Income Trap
Closely related is the concern that middle-income countries can be ´trapped´ in growth slowdowns.  Gill and Kharas (2015)[4] had coined the term ´middle-income trap´ in 2005, because they had found growth theory wanting for the group of middle-income countries (which the World Bank in 2018 classifies as the large group of countries with GNI per capita between $1,005 and $12,235): endogenous growth theories addressed the problem in high-income economies, and the Solow growth model was still the work-horse for understanding the growth problem in low-income countries, but neither were satisfactory for understanding what to do in countries where 5 billion (out of 7billion) people in the world live.
The middle-income trap, whereby GDP per capita growth slows down once a country approaches an intermediate level of development, is particularly persistent in Latin America[5]. Although average per capita income in the region was relatively high in the mid-20th century, most Latin American countries have been unable to reduce significantly the income gap with advanced economies and reach high-income status. The few regional exceptions are Chile, Uruguay and some Caribbean countries. These trends contrast with European and Asian countries, much more effective in joining the high-income group during the last half of the 20th century. Even though ´Emerging Asia´ has made remarkable progress over the past four decades in raising income levels, it will take from several years (Malaysia, China) to decades (Indonesia, India) to join in the ranks of the advanced high-income countries, according to OECD (2014)[6] estimates (Fig. 1). The jury is still out as to whether middle-income ASEAN countries like Indonesia, Malaysia, the Philippines, Thailand or Vietnam can expect to replicate the growth experience of the Asian Tigers, or whether they will follow the trajectories of Latin America.

Figure 1: Estimated years required to become high-income country, 2014

To be sure, there is nothing mechanical about the development transition from middle-income to high-income country, not even in Asia. Since 2000 (tiny island economies aside), six European and two Latin American countries have joined the ranks of high-income economies as classified by the World Bank, but no Asian country.

Technological Innovations and Labor Demand
Especially the 1990s opening phase of Shifting Wealth had been rooted in the abundance of labor with basic skills in poor countries that got connected to demand in advanced countries via trade and investment, resulting initially in manufacturing job creation in China above all. The world entered a new phase of globalisation: Information and communication technology, trade liberalisation and lower transport costs have enabled firms and countries to fragment the production process into global value chains (GVCs). However, the current proliferation of artificial intelligence, such as industrial robots, and other forms of worker-replacing technological progress have the potential to disrupt global labor markets (Korinek and Stiglitz, 2017)[7]. Technology innovation, such as 3D printing, may facilitate reshoring and would deepen the domestic (rather than global) division of labor for major economies, including China. Policymakers in middle-income countries have started to worry about the “end of global value chains” (Arbache, 2016)[8].
Robots could alter the global pattern of comparative advantage, for example in shoe production, which would shift from skill-scarce to skill-abundant countries if skilled workers with robots could make shoes more efficiently than unskilled workers[9]. The familiar benefits of industrialization as a development strategy might be eroded if robot-based automation makes industrialization more difficult or causes it to yield substantially less manufacturing employment than in the past (Mayer, 2017[10]). To be sure, technical feasibility of workplace automation does not imply economic profitability, especially in developing countries with low wage levels. And Central European countries, it has been argued recently by Professor Dalia Marin (LMU Munich) at a globalisation conference run by the Hans-Boeckler Foundation (https://www.boeckler.de/veranstaltung_107484.htm), have been able to advance to high-income status despite sharply rising wage cost thanks to relatively massive robotisation. Robotisation as a way to beat the middle-income trap?



Figure 2: Vulnerability to robot-based automation in manufacturing

Source: UNCTAD (2017), "Robots, industrialization and inclusive growth", chapter 3 in Trade and Development Report 2017


Figure 2 suggests “that on current technological and economic indicators, developed countries and developing countries other than least-developed countries (LDCs) are exposed to robot-based automation in manufacturing to a larger extent than LDCs. It should be noted that this evidence only refers to exposure to robot-based automation and does not take account of the risks to employment from other forms of automation. But it suggests that robot-based automation per se does not invalidate the traditional role of industrialisation as a development strategy for lower income countries. Yet, the dominance of robot use in sectors higher up on the skill ladder implies greater difficulty for latecomers in attaining sectoral upgrading and may limit their scope for industrialisation to low-wage and less dynamic (in terms of productivity growth) manufacturing sectors. This could seriously stifle these countries’ economic catch-up and leave them with stagnant productivity and per capita income growth” (Wood, 2017).
For the past decade, 3D printing has become popular due to availability of low-cost 3D printers such Fab@Home and better software. The brand name Fab@Home is suggestive of the technological possibilities to move production closer to the consumer, which may impact on trade, global value chains and shifting Wealth. Ishengoma and Mtaho (2014)[11] discuss 3D printing from a developing-country perspective, both challenges and opportunities. In developing countries, 3D printers are increasingly used in fabrication laboratories and engineering faculties, for example to produce 3D-printed prosthetic limbs. Major (economic) challenges are the lack of 3D experts and losses in manufacturing employment substituted for home platforms. Opportunities are lie in moving developing countries close to world supply chains For example, developing countries can use 3DP technology to manufacture local equipment such as farming tools and goods such as clothing.

Slowdown of Global Trade
Policymakers in low- and middle-income countries worry about the slowdown of the most important vehicle of Shifting Wealth, global trade. World trade growth was rapid in the two decades prior to the global financial crisis but has halved subsequently. There are both structural and cyclical reasons for the slowdown. A deceleration in the rate of trade liberalisation post 2000 was initially obscured by the ongoing expansion of global value chains and associated rapid emergence of China in the world economy. Post the financial crisis global value chains started to unwind and Chinese weakened markedly (Haugh et al., 2016)[12].


Figure 3: Drop in China’s export openness since 2007

Source: Banque de France (2017)“The role of China in the trade slowdown”, Rue de la Banque #30, September.

In recent years, global trade and global production have grown at similar rates, whereas before 2008, global trade grew at twice the rate. Apart from increasing protectionism (see Evenett and Fritz, 2016[13]), this slowdown in global trade was initially (2008-2010) largely due to China’s rebalancing towards its domestic demand and its services sector (Banque de France, 2016[14]). In the 2010s, however, the near-parallel growth for global trade and production seems to have been caused by changes in the supply chain (Los and Timmer, 2016[15]).
Degain, Meng, and Wang (2017) find that there has been a reduction in cross-country production sharing in complex global value chains (GVC) during the current economic recovery, contrary to the rapid production globalization driven by the growth of complex GVC activities in previous periods[16]. Decomposing four types of value-added creation activities (pure domestic production, traditional trade production, simple GVC, and complex GVC) unveils the structure of value-added creation during the economic recovery since 2011. That structure is found quite different from that during the three previous economic growth periods in the last 20 years. Unlike the rapid production globalization driven by the growth of complex GVC activities in previous periods, during the current economic recovery the pattern was reversed, with less cross-border production-sharing activities in complex GVCs. This may also mean that the China centric growth of middle- and low-income countries observed during the 2000s has been lower since 2011.
Protectionism is clearly another concern for the future of Shifting Wealth. The Economist (2016)[17] asked YouGov, a polling outfit, to survey 19 countries to gauge people's attitudes towards immigration, trade and globalisation. The data revealed a split between emerging markets and the West. Unsurprisingly, the countries that are the biggest enthusiasts of globalisation are the ones that have benefitted most from it – the poorer nations of East and South East Asia. In Asia, belief that globalisation is a force for good reaches at least 70% in all countries surveyed, and as high as 91% in Vietnam. In France, the US, the UK, Australia and Norway, less than 50 per cent thought that globalization had been a “force for good”. From disillusionment with globalisation to populist protectionism is a short distance.

Figure 4: Global Trade Liberalisation Index

 Source: Haugh et al (2016), OECD Economic Policy Papers No.18


Research has confirmed that the slowdown of trade liberalisation and rising protectionism is taking its toll on trade flows (Evenett and Fritz, 2015, op.cit.). Less international fragmentation of production processes than in recent decades cannot be excluded with labour saving innovations, increasing domestic capabilities to substitute for imported intermediate goods, and subsequent reshoring. And while support for globalization has dropped in some advanced countries below the 50 percent threshold, resort to protectionism and retreat from multilateralism, notably in advanced countries, are a potential threat for Shifting Wealth present and future.




[1] Paul Krugman (1994), “The Myth of Asia´s Miracle”, Foreign Affairs 73.6, pp. 62-78.
[2] Robert Barro and Xavier Sala-i-Martin (2004), Economic Growth, 2nd edition, MIT Press: Cambridge, Mass.
[3] Daron Acemoglu, Philippe Aghion and Fabrizio Zilibotti (2006), “Distance to Frontier, Selection and Economic
Growth.” Journal of the European Economic Association 4.3, pp. 37–74.
[4] Indermit Gill and Homi Kharas (2015), “The Middle-Income Trap Turns Ten”, World Bank Policy Research Working Paper No. 7403, August.
[5] Angel Melguizo, Sebastián Nieto-Parra, José Perea and Jaime Perez (2017), “No sympathy for the devil!
Policy priorities to overcome the middle-income trap in Latin America”, OECD Development Centre Working Paper No. 340, September.
[7] Anton Korinek and Joseph Stiglitz (2017), “Artificial Intelligence and Its Implications for Income Distribution and Unemployment”, NBER Working Paper No. 24174, December.
[8] Jorge Arbache (2016), “The end of the global value chains”, Valor Econômico, June.
[9] Adrian Wood (2017), “Variation in structural change around the world, 1985–2015: Patterns, causes, and implications”, UNU-WIDER: WIDER Working Paper 2017/34, February.
[10] Jörg Mayer (2017), “Industrial robots and inclusive growth”, Vox, October.
[11] Fredrick Ishengoma and Adam Mtaho (2014), “3D Printing: Developing Countries Perspectives”, International Journal of Computer Applications, 104 .11, pp. 30-34.
[12] David Haugh, Alexandre Kopoin, Elena Rusticelli, David Turner, Richard Dutu (2016), “Cardiac Arrest or Dizzy Spell: Why is World Trade So Weak and What can Policy Do About It?”, OECD Economic Policy Papers No.18, September.
[13] Simon Evenett and Johannes Fritz (2016), “Global Trade Plateaus”, Vox, July.
[14] Guillaume Gaulier, Walter Steingress & Soledad Zignago (2016), “The role of China in the trade slowdown”, Rue de la Banque #30, Banque de France, September.
[15] Bart Los and Marcel Timmer (2016), “Peak trade? An Anatomy of the Recent Global Trade Slowdown”, University of Groningen, May.
[16] Christophe Degain, Bo Meng, and Zhi Wang (2017), Global Value Chain Development Report 2017, Chapter 2.
[17] The Economist (2016), What the world thinks about globalisation, 18th November.