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Future economic system to collapse developing nations: Future of the economy P4

David Tal, Publisher, Futurist
@DavidTalWrites
LinkedIn

Wed, 09/16/2020 - 05:56

An economic storm is brewing over the coming two decades that could leave the developing world in shambles.

Throughout our Future of the Economy series, we’ve explored how tomorrow’s technologies will upend the global business as usual. And while our examples focused on the developed world, it’s the developing world that will feel the brunt of the coming economic disruption. This is also why we’re using this chapter to focus entirely on the developing world’s economic prospects.

To zero in on this theme, we’ll focus on Africa. But while doing so, note that everything we’re about to outline applies equally to nations across the Middle East, Southeast Asia, the former Soviet Bloc, and South America.

The developing world’s demographic bomb

By 2040, the world’s population will swell to over nine billion people. As explained in our Future of the Human Population series, this demographic growth won't be shared evenly. While the developed world will see a significant decrease and graying of their population, the developing world will see the opposite.

Nowhere is this truer than in Africa, a continent that's forecasted to add another 800 million people over the next 20 years, reaching slightly over two billion by 2040. Nigeria alone will see its population grow from 190 million in 2017 to 327 million by 2040. Overall, Africa is set to absorb the largest and fastest population boom in human history.

All this growth, of course, doesn't come without its challenges. Twice the workforce also means twice the mouths to feed, house, and employ, not to mention twice the number of voters. And yet this doubling of Africa's future workforce creates a potential opportunity for African states to mimic China's economic miracle of the 1980s to 2010s—that is assuming our future economic system will play out much as it did during the last half century.

Hint: It won’t.

Automation to choke the developing world’s industrialization

In the past, the path poorer nations used to transform into economic powerhouses was to attract investment from foreign governments and corporations in exchange for their relatively cheap labor. Look at Germany, Japan, Korea, China, all of these countries emerged from the devastation of war by luring manufacturers to set up shop in their countries and make use of their cheap labor. America did the exact same thing two centuries earlier by offering cheap labor to British crown corporations.

Over time, this continued foreign investment allows the developing nation to better educate and train its workforce, collect much-needed revenue, and then reinvest said revenue into new infrastructure and manufacturing centers that allow the country to gradually attract even more foreign investment that involves producing more sophisticated and higher earning goods and services. Basically, this is the story of transitioning from a low- to high-skilled workforce economy.

This industrialization strategy has worked time and time and again for centuries now, but could be disrupted for the first time by the growing automation trend discussed in chapter three of this Future of the Economy series.

Think about it this way: The whole industrialization strategy described above hinges of foreign investors looking outside their home country borders for cheap labor to produce goods and services that they can then import back home for a high margin profit. But if these investors can simply invest in robots and artificial intelligence (AI) to produce their goods and services, the need to go overseas melts away.

On average, a factory robot producing goods 24/7 can pay for itself over 24 months. After that, all future labor is free. Moreover, should the company build its factory on home soil, it can entirely avoid expensive international shipping fees, as well as frustrating dealings with middlemen importers and exporters. Companies will also have better control over their products, can develop new products faster, and can protect their intellectual property more effectively.

By the mid-2030s, it will no longer make economic sense to manufacture goods overseas if you have the means to own your own robots.

And that’s where the other shoe drops. Those nations that already have a head start in robotics and AI (like the US, China, Japan, Germany) will snowball their technological advantage exponentially. Just as income inequality is worsening among individuals throughout the world, industrial inequality will also worsen over the next two decades.

Developing nations will simply not have the funds to compete in the race to develop next-generation robotics and AI. This means foreign investment will begin concentrating towards those nations that feature the fastest, most efficient robotic factories. Meanwhile, developing countries will begin experiencing what some are calling "premature deindustrialisation" where these countries begin seeing their factories fall into disuse and their economic progress stall and even reverse.

Put another way, robots will allow rich, developed countries to have more cheap labor than developing countries, even as their populations explode. And as you might expect, having hundreds of millions of young people with no employment prospects is a recipe for serious social instability.

Climate change dragging down the developing world

If automation wasn't worse enough, the effects of climate change will become even more pronounced over the coming next two decades. And while extreme climate change is a national security issue for all countries, it is especially dangerous for developing nations that don't have the infrastructure to defend against it.

We go into great detail about this topic in our Future of Climate Change series, but for the sake of our discussion here, let’s just say that worsening climate change will mean greater freshwater shortages and impaired crop yields in developing nations.

So on top of automation, we can also expect food and water shortages in regions with ballooning demographics. But it gets worse.

Crash in oil markets

First mentioned in chapter two of this series, 2022 will see a tipping point for solar power and electric vehicles where their cost will drop so low that they will become the preferred energy and transportation options for nations and individuals to invest in. From there, the next two decades will see a terminal decline in the price of oil as fewer vehicles and power plants use gasoline for energy.

This is great news for the environment. This is also horrible news for the dozens of developed and developing nations in Africa, the Middle East, and Russia whose economies overwhelmingly depend on oil revenue to stay afloat.

And with shrinking oil revenue, these countries won’t have the necessary resources to compete against economies whose use of robotics and AI are on the rise. Worse, this shrinking revenue will diminish the ability of these nations’ autocratic leaders to pay off their military and key cronies, and as you’re about to read, this isn’t always a good thing.

Poor governance, conflict, and the great northern migration

Finally, perhaps the saddest factor in this list so far is that a sizeable majority of the developing countries we’re referring to suffer from poor and unrepresentative governance.

Dictators. Authoritarian regimes. Many of these leaders and governing systems purposefully underinvest in their people (both in education and in infrastructure) to better enrich themselves and maintain control.

But as the foreign investment and oil money dry up over the decades ahead, it will become increasingly difficult for these dictators to pay off their militaries and other influentials. And with no bribe money to pay for loyalty, their grip on power will ultimately fall by way of a military coup or popular revolt. Now while it may be tempting to believe that mature democracies will rise in their place, more often than not, autocrats are either replaced by other autocrats or outright lawlessness.

Taken together—automation, worsening access to water and food, falling oil revenue, poor governance—the long term forecast for developing countries is dire, to say the least.

And let’s not assume that the developed world is insulated from the fates of these poorer nations. When nations crumble, the people that comprise them don’t necessarily crumble with them. Instead, these people migrate toward greener pastures.

This means we could potentially see many millions of climate, economic, and war refugees/migrants escaping from South America into North America and from Africa and the Middle East into Europe. We need only recall the social, political, and economic impact one million Syrian refugees had on the European continent to get a taste of the dangers all out migration may bring.

Yet in spite of all these fears, hope remains.

A way out of the death spiral

The trends discussed above will happen and are largely unavoidable, but to what extent they will happen remains up for debate. The good news is that if managed effectively, the threat of mass famine, unemployment, and conflict can be significantly minimized. Consider these counterpoints to the doom and gloom above.

Internet penetration. By late-2020s, Internet penetration will reach over 80 per cent worldwide. That means an extra three billion people (mostly in the developing world) will gain access to the Internet and all of the economic benefits it has already brought to the developed world. This newfound digital access to the developing world will spur significant, new economic activity, as explained in chapter one of our Future of the Internet series.

Improving governance. The decrease in oil revenues will happen gradually over two decades. While unfortunate for authoritarian regimes, it does give them time to adapt by better investing their current capital into new industries, liberalizing their economy, and gradually giving their people more freedoms—an example being Saudi Arabia with their Vision 2030 initiative.

Selling natural resources. While access to labor will fall in value in our future global economic system, access to resources will only increase in value, especially as populations grow and start demand better living standards. Luckily, developing countries have an abundance of natural resources beyond just oil. Similar to China's dealings with African states, these developing nations can trade their resources for new infrastructure and favorable access to overseas markets.

Universal Basic Income. This is a topic we cover in detail in the next chapter of this series. But for the sake of our discussion here. The Universal Basic Income (UBI) is essentially free money that the government gives you each month, similar to the old age pension. While expensive to implement in developed nations, in developing nations where the standard of living is considerably cheaper, a UBI is very much possible—regardless of whether it’s funded domestically or via foreign donors. Such a program would effectively end poverty in the developing world and create enough disposable income among the general population to sustain a new economy.

Birth control. The promotion of family planning and provision of free contraceptives can limit unsustainable population growth over the long term. Such programs are cheap to fund, but difficult to implement given the conservative and religious leanings of certain leaders.

Closed trade zone. In response to the overwhelming industrial advantage the industrial world will develop over the coming decades, developing nations will be incentivized to create trade embargos or high tariffs on imports from the developed world in an effort to build up their domestic industry and protect human jobs, all to avoid social upheaval. In Africa, for example, we could see a closed economic trade zone that favors continental trade over international trade. This kind of aggressive protectionist policy could incentivize foreign investment from developed nations to gain access to this closed continental market.

Migrant blackmail. As of 2017, Turkey has actively enforced its borders and protected the European Union from a flood of new Syrian refugees. Turkey did so not out of a love for European stability, but in exchange for billions of dollars and a number of future political concessions. Should things deteriorate in the future, it's not unreasonable to imagine that developing nations will demand similar subsidies and concessions from the developed world to protect it from millions of migrants looking to escape famine, unemployment or conflict.

Infrastructure jobs. Just as in the developed world, the developing world can see the creation of an entire generation’s worth of jobs by investing in national and urban infrastructure and green energy projects.

Service jobs. Similar to the point above, just as service jobs are replacing manufacturing jobs in the developed world, so to can service jobs (potentially) replace manufacturing jobs in the developing world. These are good paying, local jobs that can't be easily automated. For example, jobs in education, health care and nursing, entertainment, these are jobs that will multiply significantly, especially as Internet penetration and civic freedoms expand.

Can developing nations leapfrog to the future?

The previous two points need special attention. Over the last two to three hundred years, the time-tested recipe for economic development was to nurture an industrial economy centered around low-skilled manufacturing, then use the profits to build out the nation's infrastructure and later transition to a consumption-based economy dominated by high-skilled, service sector jobs. This is more or less the approach taken by the UK, then the US, Germany, and Japan after WWII, and most recently China (obviously, we're glossing over many other nations, but you get the point).

However, with many parts of Africa, the Middle East, and some nations within South America and Asia, this recipe for economic development may no longer be available to them. The developed nations that master AI-powered robotics will soon build out a massive manufacturing base that will produce an abundance of goods without the need of costly human labor.

This means that developing nations will be faced with two options. Allow their economies to stall and be forever dependent on aid from developed nations. Or they can innovate by leapfrogging over the industrial economy stage altogether and building out an economy that supports itself entirely upon infrastructure and service sector jobs.

Such a leap forward will depend greatly upon effective governance and new disruptive technologies (e.g. Internet penetration, green energy, GMOs, etc.), but those developing nations that have the innovative wherewithal to make this leap will likely remain competitive in the global market.

On the whole, how quickly and how effectively the governments or regimes of these developing nations apply one or more of these abovementioned reforms and strategies depends on their competence and how well they see the dangers ahead. But as a general rule, the next 20 years won't be in any way easy for the developing world.