As we enter the fourth industrial revolution, we have to necessarily ‘reboot’ our models if we have to deliver jobs with growth
Jobs has become the ‘hottest’ political battle as the Lok Sabha elections approaches, as media reports on jobs data from the NSSO survey, and earlier in 2017 from the labour ministry survey of establishments, point towards job-less growth. While the government has raised questions on the accuracy of data, the opposition has questioned government policies. To me, this is shooting down the messenger for the message. I believe that this data raises a different question of whether it is time to rethink the paradigm for job creation? To answer this question, we have to first de-average the India growth data to draw any conclusions, and, secondly, understand the structural shifts in global supply chains which impact every country.
Let us start with an important global trend. Since the industrial revolution in the mid 19th century, countries have followed the twin strategies of manufacturing growth and merchandise exports to create millions of new jobs. China is the latest example of the success of this strategy. However, this strategy is being disrupted by the emergence of the ‘Industry 4.0’ technologies in an era of growing economic nationalism as global supply chains morph into more of local/regional ones. Falling costs of robots erode the advantage of low labour cost-based global plants, making it more economic for global companies to set up smaller, automated plants closer to markets. At the same time, growth in consumption in emerging markets means that many of them can support full supply chains rather than depend on imports. This reduces merchandise trade flows, especially of intermediate goods and calls into question the future efficacy of manufacturing export-led economic (and jobs) growth strategies followed by developing countries.
Let us now turn to India. When we decompose the growth and employment data for India from the 1970s into its three components—total labour hours, capital stock and total factor productivity (TFP)—we find that, while most of the growth between 1970 and 1990 came from growth in labour hours, from the early 1990s (using the same data series) the capital usage started increasing sharply, compared to the increase in net labour hours.
This resulted in a phenomenon called ‘capital deepening’ and India’s economy became significantly more capital-intensive. This conclusion is supported by the slower growth of labour intensive sectors like textile/apparel, food and leather compared to capital-intensive sectors like chemicals/rubber, metals, metal products and machinery. Even in services, the less labour-intensive financial services sector has added more value than more labour intensive sectors like tourism, health, and education. Employment elasticity of manufacturing growth had started dropping, not in the last few years, but much before that.
This analysis leads to two critical conclusions. The first is the one which many experts have been pointing to for many years: reforming our labour laws which seems to incentivise the use of capital over labour. This becomes more critical as falling costs of automation and its increasing benefits makes this trade-off in manufacturing (and even services sectors) even more attractive. The second conclusion is perhaps more controversial—we need a new paradigm to think about jobs which is more aligned to the new realities of the 21st century with its structural shifts in global supply chains and the increasing economic attraction of automation.
In this first of a two-part article, I want to focus on the second conclusion and present some specific ideas for a new paradigm on growth and jobs (and develop these ideas further in the second article). Let me first summarise the three important elements of the old paradigm, especially for developing countries. The first was the primary role of manufacturing and merchandise exports as the basis of growth and job creation. The second concerned the type of jobs—formal jobs, both blue and white collar, were highly desirable and formed the basis of a growing middle class. The third was on the type of companies: large companies were seen as more competitive and productive due to their greater scale and thus were seen as the big drivers of formal jobs growth.
Today, each one of these elements is getting radically disrupted. If we look at global trends, merchandise trade has been slowing down while services trade, and especially digital services trade, is growing several times faster as digitisation and cross-border data flows explode. If we look at growth patterns of industrial companies, we find that, while the growth of their physical products like plants and machines is slowing down, the ‘servitisation’ of their business has been accelerating. Finally, if we look at the type of start-ups, the fastest globalising companies today, or companies with the highest market caps, we find that they are all digital or digitally-enabled services companies. So the first element for the new paradigm is an increased focus on developing ‘mass services’ as the driver of growth and jobs in the 21st century, similar to the role played by mass manufacturing in the 20th century.
Secondly, we see dramatic shifts in the type of jobs which are emerging, with the growth of freelancers or the gig economy, as opposed to formal jobs. These type of jobs were virtually unknown when mass manufacturing took off as everyone wanted formal employment and are more difficult to measure (and perhaps partially explains the data challenges we face in India). Today, in the US, it is estimated that one in three workers are freelancers and many of them are supplementing their formal jobs. Estimates vary but some experts believe that this job category will cover more than 25% of all jobs in the next few years. There are many reasons for this growth, ranging from changing attitudes to full-time work to emergence of digital platforms that has helped build the e-marketplace for freelancers. Unfortunately, many policymakers and politicians sarcastically call this trend as undesirable ‘uberisation’ and point out its dangers compared to the safety of formal jobs. But should we not leverage this important global trend and make it much easier for such jobs to emerge if they are the natural development of the social and digital revolution taking place? Of course we will have to think how to make it win-win for all by re-thinking labour classifications, protecting freelancers from exploitation in an unequal power equation without destroying the economics, and setting standards for new cost-effective social security programmes for them.
The third pillar of the new paradigm is the significant shift from big to small companies that will drive growth and jobs in the future. In the era of mass manufacturing, we have grown up with the economic logic that size and scale drives competitiveness. Hence, most of the ‘mind-space’ of policymakers was taken up by large organised sector players. Digital technologies (digital platforms, e-markets, falling bandwidth costs, cloud storage, etc) have brought about fundamental changes in this economic equation favouring size/scale as they dramatically bring down transaction costs, increase access to global markets and customers, allow ‘asset-light’ business models to flourish and increase the importance of IP and talent for future value creation over physical assets. A small player offering a popular digital game downloaded from the internet can build a billion dollar global business in months rather than decades as Niantic, a small company on the west coast of US, did with its game PokemonGo. The present government has rightly emphasised the importance of start-ups and small/medium enterprises and launched a series of policy initiatives but there remain many challenges these firms face from access to funds to excessive regulatory burden.
Let me end this first part of the two-part article on jobs by emphasising that the three pillars of the old paradigm—manufacturing and merchandise trade, large scale formal jobs and large companies—are not suddenly redundant. They will continue to be important but, as we enter the fourth industrial revolution, we have to necessarily ‘reboot’ our mental models if we have to deliver jobs with growth. Otherwise, we will continue to shoot down the messenger for the message!
-The author is Senior partner and director of the BCG Henderson Institute. Views are personal