Letter IEDI n. 854–Industry 4.0: World Bank Policy Recommendations
New challenges to economic development are emerging with the advance of new manufacturing technologies. Faced with this process, it is up to countries to reposition themselves to not only deal with the implications of likely technological and productive changes but also take advantage of potential opportunities.
The sixth chapter of the book "Trouble in the Making? The Future of Manufacturing-Led Development", written by Mary Hallward-Driemeier and Gaurav Nayyar and published by the World Bank, deals precisely with policy recommendations for future industry-led economic development considering the coming changes in technological standards. Today's Letter IEDI, which is part of a series of IEDI works on Industry 4.0, synthesizes the main arguments and conclusions of this World Bank study.
Other publications on the subject, with emphasis on the detailed industrial strategies adopted by the major world powers, include Letters IEDI: n. 803 of Sep 1, 2017; n. 807, Sep 29, 2017; n. 820, Dec 11, 2017; n. 823, Dec 29, 2017; n. 827, Jan 26, 2018; n. 831, Feb 16, 2018; n. 841, March 29, 2018; n. 847, May 11, 2018 and n. 849 of May 25, 2018, among other works.
According to the World Bank researchers, there are three key dimensions to a modern development policy agenda, called the "3Cs": competitiveness, capabilities and connectedness.
1. Competitiveness encompasses the business environment in an expanded way, with low wages’ relevance to determine lower labor costs giving way to broader demands on the business environment (agglomeration and scale effects, for example).
2. Capabilities comprise workers’ and firm’s ability to adopt and use the new technologies along with the new regulations required.
3. Connectedness refers not only to international trade integration, but also to the growing synergies among various sectors to achieve success in industrial development.
Thus, in order to build competitive exporting industries that support a path of economic development, it is necessary to implement reforms that respond to the new demands of heightened global competition.
By considering these three dimensions of the policy agenda, it is possible to map how the different countries are currently positioned and the different policy priorities facing the productive arrangements they may wish to foster. For most low- and middle-income countries, the growing demands for the "3Cs" brought by the ongoing transformations will be particularly challenging
Few countries, including Brazil, have relatively high capabilities but low connectedness to other markets. A much larger number, including regions such as Latin America, South Asia and Sub-Saharan Africa, show the opposite, i.e. greater connectedness but a relatively lower degree of capabilities. As the competitiveness factor is more related to the development of capabilities than to the degree of connectedness, countries with higher skills tend to have higher competitiveness.
Each country's performance on the "3Cs" should be considered together with the types of changes they are likely to face, since each one has a specific industrial structure and the impacts of the new technologies associated with Industry 4.0 will differ across sectors. Some sectors should require more training, while others may need greater connectedness. Thus, countries producing a given good, or intending to enter certain sectors, should prioritize reforming those sectors with increasing requirements in one of the "Cs".
Given the need for countries to reposition themselves to take advantage of the opportunities opened by new industrial technologies, the authors of the study make some recommendations for a reform agenda that strengthens their competitiveness, capabilities and connectedness:
• The priorities of reforms to foster competitiveness include: (i) business environment; (ii) competition policy; and (iii) support to new business models.
• Capabilities reform priorities encompass: (i) skills-oriented education and training policies; (ii) strengthening the capabilities of firms; and (iii) technological infrastructure reforms.
• The priorities of reforms for connectedness include: (i) basic principles of trade cooperation and new technologies; (ii) new rules on international data flows; and (iii) regional and bilateral trade agreements.
In addition, it should be noted that industrial policy actions should not be based on the dichotomy between horizontal and sectoral policies, but should rather seek possible combinations between them, in order to identify challenges and opportunities in the context of each economy. If, on the one hand, meeting the requirements of the "3Cs" is more feasible through specific policies in terms of location and sectors than reforms and programs of a general nature for the country as a whole, on the other hand betting on a specific sector can be extremely risky, given the still uncertain nature of technological changes. In this sense, the impact of increasing interactions among sectors, companies, markets and governments on the process of technology diffusion and incorporation should be considered in policy formulation.