All Financial Wisdom
The Disruptive Forces of Globalization and Automation
Although it seems as if it’s only been an economic trend last decade, the fact is that this multifaceted globalization has followed a long process that begun decades ago (if not centuries).
The fact is that there are certain aspects of globalization that are unstoppable. These aspects, still to come, will continue to bring profound changes to our socioeconomies, and, even if they try to resist, as the saying goes “Resistance is futile,” at least in regards to technological progress.
The phases of globalization developed so far
Richard Baldwin gave a great interview in Quartz and I’d like to summarize a few of his key points. Baldwin argues that globalization has taken shape in three clearly differentiated phases: the ability to move goods, the ability to move ideas, and finally the ability to move people. Since the early nineteenth century, the cost of the first two has plummeted, underpinning the spectacular growth of international trade that has characterized the modern global economy.
Baldwin explains how, when there was no mass-scale international trade, every city, every town … had its own butcher, baker, and so on. For a millennium, the economy remained with this local focus. It was around 1820 when mankind began to be able to generalize the transport of goods quickly and efficiently over long distances, at which time large factories and industrial complexes emerged. But it was still expensive and complex to move ideas across distances, which is why they remained in the North.
Technology: The third phase of globalization
In the author’s words, this process culminated in the early 1990s, when there was a great imbalance between the know-how per worker in the rich countries and the developing countries. Then came the technological and telecommunications revolution, which allowed companies to start moving knowledge across borders. This has led to the de-industrialization of the more developed countries, and in parallel, rapid economic and employment growth in emerging countries. With the addition that workers from developed countries are struggling to compete with workers from other countries with a labor cost of even more than one order of magnitude, but at the same time are competing with robots in their own country.
And the heart of the matter is that Baldwin says that the third and most disruptive phase of globalization is coming. According to his thesis, technology will eventually bring globalization to the service sector, which is very labor intensive. I don’t need to tell you that this tertiary sector is also the main source of employment in developed countries. With this, the conclusion is clear: with this third phase, in developed countries, globalization will remove even more jobs than it it did with the manufacturing sector in the last decades. And the disruption of this last phase will not come from trans-boundary movements of workers, but rather from technology.
Brian Chesky, CEO of Air BnB made the same point on Bloomerg the other day, stressing how it is automation, rather than globalization that will lead to job displacement. It’s an interesting clip, you should really check it out.
Baldwin advocates protecting workers, not jobs
Baldwin says that we should not try to protect the jobs themselves because, however much we try, we can only hope to temporarily hold some jobs that will end up going away eventually, either because they will be replaced by robots, and/or because they will be relocated to third world countries. Baldwin predicts that if a US manufacturer is forced to manufacture on US soil, that manufacturer will be more inefficient than the competition, leading to the elimination of the company, and by default, the job as well.
Faced with the inevitability of the coming future, and the fact that progress can’t be stopped in any way, Baldwin on the contrary is in favor of protecting the workers, not the jobs. And this idea acts as a link to the last part of this analysis. Indeed, since it’s impossible to retain jobs no matter how much you protect them, let’s change the focus, and come to value protecting the only thing we actually can protect: our citizens.
Technology will irrevocably bring this future of the third phase of globalization, and its effects on labor markets will be not only disruptive, but profoundly transformative. You can not slow progress, there will always be someone somewhere on the planet who will undertake it, applying the technology to your business model and its products, thus taking a competitive advantage that will force other competitors to take the path of technological progress as well.
Progress is Inevitable
As many people have pointed out, technology has always brought more work (so far) in the long run, but it leaves a great open uncertainty for the short and medium term. This great uncertainty (or even real economic hardship as the case may be) can end up translating into a dangerous instability of the system, as indeed has happened at various moments in history. It’s also happening today, with masses of unemployed voters who choose what they simply see a halo of hope.
On the flip side, just as in the stock market, “past returns do not predict future performance.”Technology and the labor market, which benefitted from past technological revolutions, may not necessarily benefit from upcoming ones. To be fair, we can not really predict exactly each and every one of the technological advances that will eventually be imposed. We Should not fear technological progress, but rather embrace the future. Just as programmatic technology in advertising still required humans to operate and optimize campaigns, robots will still need humans to program them, and to conduct higher level cognitive functions that cannot be automated.