Era of Digitalization and Industrial Development of Developing Countries

Need for a Real Sector-Oriented Approach
Izumi Ohno
Adjunct Professor, National Graduate Institute for Policy Studies (GRIPS)
February 2020
The conventional theory of development economics assumes a structural transformationof the economy from the primary (agriculture), through the secondary (industry), to the tertiary(service) sector. Furthermore, the East Asian "Flying Geese Pattern" of development, basedon regional production networks among economies with different levels of industrialization
ranging from labor-intensive to capital or knowledge-intensive manufacturing, has been
traditionally regarded as a successful development model. Now, the digital revolution, bypromoting labor-saving technologies, is bringing new challenges and opportunities fordevelopment paths. What impact will digitalization have on the future of industrialization indeveloping countries? Here is a discussion by Izumi Ohno, our editorialist.

A Warning against "Premature Deindustrialization"
The recent years have seen active debates on the industrialization prospects of developing
countries in the era of digitalization. For example, Professor Dani Rodrik of Harvard
University has warned of a risk of "premature deindustrialization"—characterized by theshrinking shares of manufacturing in total output and employment and by the shift towards
the service sector without a proper experience of industrialization—that has been observedin many parts of the developing world, including Latin America and Sub-Saharan Africancountries since around the 1990s. While recognizing the historical importance ofindustrialization in "creating modern states and democratic politics," Professor Rodrik argues
that manufacturing is no longer "the quintessential escalator for developing economies" inthe 21st century. He also discusses that service industries, like information and technology(IT) and finance, are less likely than manufacturing to create jobs for unskilled labor incountries in the early stages of development because they require more advanced skills.
By contrast, Professor Jeffrey D. Sachs of Columbia University has a more optimistic view.
In the future, labor-intensive work, such as sewing and assembly line work, will be replacedby robot and artificial intelligence (AI) operations, leading to reduced demand for unskilledlabor and an adverse impact on employment in developing countries. At the same time, thischange has the potential to create new growth sectors. The digital revolution will make themajor sectors of the economy more capital intensive—such as agriculture, mining, renewal
energy, tourism, telecommunications services, medicine, education and art—and will
increase their productivity. As a result, it will contribute to further development and improved
standards of living in developing countries in the medium to longer run. From this point ofview, Professor Sachs argues that the international community and private sector should
proactively finance and transfer digital skills and technologies to developing countries so thatthey could build the digital-based industries, skills, and jobs of the future.
Need for Region- and Country-specific Industrialization Strategies
In this way, both pessimism and optimism coexist over risks and chances of a digitalrevolution. On the one hand, it may accelerate deindustrialization while creating IT-service
based, new industries and jobs on the other. One common trait, however, is that thesedebates remain general, lacking region/country-specific details. They also assume that theEast Asian development experiences are no longer useful.
Contrary to them, Professor Joseph E. Stiglitz of Columbia University makes an interesting
point in his recent book resulting from his joint research project with the Japan International
Cooperation Agency (JICA) Research Institute, entitled The Quality of Growth in Africa. While
recognizing that if AI and other labor-replacing technologies evolve in Africa in the future,
there will be less chances of creating jobs in labor-intensive manufacturing industries as East
Asia experienced, Professor Stiglitz poses the following questions:"Whether the increasing population in Africa will be a 'demographic bonus' or 'demographic
onus' depends on employment. Since a high unemployment rate among young people could
lead to political instability, it is vital to create productive jobs through structural transformation.
There is a need to consider new development strategies that meet the realities of Africa, suchas industrializing agriculture and taking wider-reaching measures to promote industries,
including the service and resource-related sectors. In doing this, it is important to review theroles and functions performed by East Asian governments—such as pragmatism, thepromotion of exports, manufacturing and agriculture, as well as domestic investment—fromtoday's point of view, rather than dismissing the East Asian experiences altogether. Thereshould be East Asian experiences from which Africans can learn something even now."
My opinion is close to this. As discussed below, Asia and Africa are markedly different interms of their demographic transition and stages of industrial development. Therefore, it isnecessary to formulate concrete industrial development strategies in the era of digitalization,
taking into account the realities of different countries and regions, irrespective of traditionalor new industries. Furthermore, it should be noted that this kind of real-sector orientation isthe approach adopted by Japan and other East Asian countries.

Asia Should Make Aging a "Silver Dividend"
Asian Economic Integration Report 2019/2020: Demographic Change, Productivity, andthe Role of Technology issued by the Asian Development Bank (ADB) in November 2019
deserves attention because it analyzes the role of digital technologies in helping aging Asian
populations to resolve two major challenges—namely, industrial upgrading and establishinga welfare society. The populations of Asian countries, most notably Japan, are aging at anaccelerated pace. East Asia has 235 million elderly people aged 65 or over right now and thenumber is projected to have doubled by 2050. Population is aging even in Vietnam andIndonesia, let alone South Korea, China and Thailand.
Deindustrialization may not cause any serious impact on middle-income countries in Asia,
which already have a certain level of industrial accumulations. Nevertheless, as suggested
by economic policies and visions, such as "China Manufacturing 2025," "Thailand 4.0" and"Indonesia 4.0," industrial upgrading using digital technologies is a pressing task for each ofthese countries. They are now faced with a two-fold challenge: firstly, to overcome the "middle
income trap" and secondly to establish effective social welfare systems (for pensions,medical care, elderly nursing care, etc.). Even Japan, which was already a developed country
when its birthrate began to fall, resulting in a rapidly aging population, is now struggling toallocate necessary financial resources for, and improve, its social security services. Thisindicates that even Asian countries which enjoy their demographic bonus now are required
to start planning immediately how they should deal with their aging populations in the future.
Under such circumstances, the above ADB report prescribes five types of technologies
that could contribute to improved productivity and quality of life from the perspective of taking
advantage of the "silver dividend" (the potential positive effects of an aging society). These

are technologies that: 1) substitute for labor and skills, 2) complement labor and skills, 3) aid
education, skills development, and lifelong learning, 4) better match workers with jobs andtasks, and 5) extend healthy life and overall life expectancy.

Africa Should Make the Most of Its "Youth Dividend"
In the African context, by contrast, it is the "youth dividend" (potential positive effects of ayounger society with many young people) that the region should take advantage of. The
African population, which is about 1.2 billion now, is expected to have doubled to 2.5 billion
by 2050, accounting for one-fourth of the total population of the world. It is projected that 60%of the African population will be young people aged 25 or under and that 10–12 million youth
will join the labor market every year in the region. Therefore, it is a critically important policy
challenge to create opportunities for productive employment for African youth and implement
necessary measures for industrial development, skill and human resource development toachieve the objective. If digitalization gets rid of labor-intensive jobs and accelerates Africa's
de-industrialization, the region will face serious consequences.
Importance of a Local Perspective
The introduction of smartphone- and tablet-based educational, medical, agricultural,
financial and other services has brought radical innovation to the approaches to solving social
problems faced by developing countries. Nevertheless, people in developing countries being
able to benefit from such services as users is one thing, but respective countries being able
to sustainably produce high value-added industries and productive employment opportunities
is totally another.
How digitalization impacts industrial development depends on the region- and countryspecific conditions such as the level of industrial accumulation, demographics, laborproductivity and skill development. Competition between "robots and AI versus humans"
would be an oversimplification. Digital technologies have different roles to play in respective
industries and types of business, and even in different tasks within the same types ofbusiness. In my opinion, it is important to strengthen local perspectives and formulate
country-specific industrial development strategies, while paying attention to the generaltrends of global development. There is ample scope for the Japanese public and private
sectors, which are good at a real-sector approach, to contribute to make a difference.

Izumi Ohno is Adjunct Professor of the National Graduate
Institute for Policy Studies (GRIPS). She also serves as
Director of the Japan International Cooperation Agency (JICA)
Research Institute (from October 2018). Previously, she wasProfessor of GRIPS and also worked at JICA, the World Bank,and the Japan Bank for International Cooperation (JBIC).

[Translated from the author’s article in Japanese, which appeared in The International
Development Journal, February 2020, No. 758, pp.8-9]