by Dr. Adrian B L Soh
29 January 2018
The world is increasingly more and more cost competitive. Ever since the 1970s, governments have cut tariffs and deregulated goods markets by gradually taking away import quotas, which has led to increasing competition to reduce both prices and costs. However, the world has increasingly also become automated in this era of globalisation in terms of production methods.
The International Federation of Robotics (IFR) estimates that by 2020, 1.7 million robots will be installed in factories around the world. The IFR estimated that by 2020, China will install 950,300 robots compared to 611,700 installations in the whole of Europe. Chinese manufacturers are relying on automation of production as the country wishes control its labour costs that have been steadily rising over the last decade.
The implication of this increasing automation of production is that governments will face new challenges in the form of finding new jobs for younger workers and tax revenues for governments. There will be difficult situations for all governments in terms of controlling the costs of doing business and competing internationally. They face the dual challenge of reducing wages for high skilled tasks by investing in education and technical institutions, reducing transport and communication costs through investing in various modes of infrastructure. However, all this costs money. Furthermore, governments will also have to be flexible with grants of money to citizens who lose work due to increasing automation of industry as well as the restructure of industries as a result of increasing global competition to assist them in retraining or entrepreneurship. The ageing workforce will opening some vacancies for younger workers, however, it will also increase the need for government assistance to pensioners too adding to budget constraints. Meanwhile the ability to raise taxes will be limited due to the increasing international competition for their domestic businesses and a shrinking tax base (or people still in work).
Automation and increasing international competition will bring the economic benefits of lower prices, increased production and better product quality in many circumstances. However, wealth will potentially become more concentrated in the hands that have the ability to own these new technologies.
The other thing that governments will have to invest in, to deal with increasing global competition in manufacturing, is research and development. However, again the technologies that are developed will not benefit the majority of the population due to research and development taking a long time to flourish and it is expensive, not only in terms of the basic research required, but also the commercialisation of the technologies too.
So what is the solution to all of this? A national bank to commercialise research and development will obviously not be the only solution to the complex problems we face, however, it will be the start. There are arguments against establishing such a bank, such as the problem of asymmetric information: governments not having the right information to choose effective investments, and the risk of bank failure. However, there are numerous examples where governments have successfully managed finances on behalf of the people and have been able to fund public services, increase national savings, while taking the fiscal burden of taxes. The Clean Energy Finance Corporation in Australia and the Norwegian sovereign wealth fund are just a few examples. These government bodies hire financial experts and independent auditors in the operation of these funds to overcome the asymmetric information problem of choosing the right investments. They also subject these funds to investment restrictions, such as only allowing a certain amount of their investment portfolios to be one asset class or industry at a time, which will ensure that failure in one investment will not lead to liquidity problems for the whole fund.
In the case of the Norwegian sovereign wealth fund, it was reported that the fund earned a profit of nearly US$30 billion in 2016 and $53 billion in 2017. The Obama-era Department of Energy guaranteed loans programme for renewable energy and electric cars generated a profit for the American taxpayer of roughly US$250 million. Profits like these could be used to provide limited grants to citizens to plan their income streams, start businesses (obviously after being trained in management) or retrain when hit with economic uncertainty, without raising taxes as well as reducing the financial burdens of retraining. The reason why this is important is because in many cases there would be a fear of the unemployed worker being indebted or lacking the funds for retraining. That means there could be surplus workers in an “old “ industry while there was a shortage of workers in a newly emerging sector. Governments would also assist firms in generating wealth before extracting some those resources to taking care of the welfare of people displaced by technological development. It would also allow for citizens to profit from the basic research that they funded through their taxes. Grants from the profits of a national bank for the commercialisation of technology for basic research shall ensure that scientists will be stably employed. This is important, because unstable funding of research and development and job losses of scientists would ensure that human capital in research and development would be hard to retrieve once discarded despite being important for the wealth of nations in an increasingly competitive environment.
Therefore, there is a first step to investing in research and development and restoring the competitiveness of nations, while funding a basic income or grant to citizens to allow them to better cope with increasing automation of production and international cost competitiveness.
Dr Adrian BL Soh has a PhD in economics. His thesis topic was the economic policies of the Chavez Government in Venezuela. He is a tutor and lecturer at Monash College in Melbourne Australia.