What are the effects of disruptive technologies on global trade?
To help us understand the economics in the tech revolution, we interviewed Otaviano Canuto, a Brazilian economist and Executive Director at the Executive Board of Directors of the World Bank Group and its Affiliates. Experienced in multilateral affairs, relationships with governments and institutional relations, he was also a Professor at Brazilian Universities USP and UNICAMP and held positions at organizations such as the International Monetary Fund (IMF), the Inter-American Development Bank, and the Brazilian Ministry of Finance.
BayBrazil: Some countries improved their participation in the global trade because of lower labor costs. Can manufacturing technology improvement end this workforce advantage and change the global trade map?
Otaviano: Indeed, ongoing technological changes reducing the weight of labor costs are threatening to unwind some of the motivation for transferring manufacturing to non-advanced economies. They are not leading to an across-the-board reversal of previous transfers, as the pace and extent of transformation varies within and among sectors, but the historic recent experience of using manufacturing exports based on lower labor costs as a platform for high growth will likely become harder to expand, sustain or obtain in the case of latecomers. At the very least, one may say that the bar in terms of requisites of infrastructure, business environment, local availability of skilled workers and other competitiveness factors is going up.
BayBrazil: How will the digital transformation of industrial markets (the smart factories) impact Brazil’s competitiveness? Is it an opportunity or can it harm the traditional manufacturing?
Otaviano: The digital transformation will offer both opportunities and challenges to Brazil. On the one hand, it will open a chance to leapfrog technologically in some activities/sectors, particularly in those where Brazil’s prevailing wage aspirations and standards make it currently hard to compete with lower-wage countries. It may also help Brazil face the problem of anemic productivity increases of the last decades. On the other, that will only happen if infrastructure investments, improvements in the business environment and higher quality of education take place.
BayBrazil: What strategies can you recommend for developing countries to be part of the new tech global economy?
Otaviano: First and foremost, to make sure that the business environments remains – or becomes – friendly to private sector investments, which means re-assuring confidence on a responsible macroeconomic management, predictable regulatory frameworks for long-term investments in infrastructure, good standards of governance, as well as a business environment that does not lead to high and value-less transaction costs. Additionally, while keeping it easy to trade and receive investment across borders to facilitate technology transfer from abroad, a developing country must build domestic capabilities to adapt/create innovations.
BayBrazil: The World Bank provides financial and technical assistance to developing countries, partnering not only with the government but also with the private sector, via IFC – International Financial Corporation. How engaged is the private sector in this mission?
Otaviano: The World Bank Group has increasingly searched for what we call “maximizing finance for development”: to avoid allocating resources on projects/activities where the private sector can and wants to perform, and dedicate those resources to segments – subsectors, lines of product – that make possible the crowding-in of private investments. Policy advice to countries in that direction has also been part of the package. We believe that is the way to get the “biggest bang for the (little) buck” of development finance.
BayBrazil: Brazil has constraints in many areas that are being challenged by technology and startups, like transport, finance/banks, communication, and so on. Many of these sectors are highly regulated or have a market concentration. Can these companies be an alternative to improve Brazil’s market and services?
Otaviano: Definitely. They offer technological avenues along which current market structures can become more contestable and the quality of supply can be improved. For example, FinTech may reduce transaction costs and increase competition in the provision of financial intermediation services.
BayBrazil: What areas do you think Brazil most needs private investments?
Otaviano: Infrastructure and other areas where public-private partnerships can be built or strengthened, by fine-tuning of regulation and establishing a clear division of labor and responsibilities. In fact, reinforcing and widening the window of opportunity opened by the recent disruption of previous patterns in governance in those segments where there is an interface – procurement, concession rules etc. – between private and public sectors may improve the cost-effectiveness of public expenditures and increase the market contestability in the provision of private services to the public sector functions.
BayBrazil: What are your thoughts on the impact of big tech companies in the world, considering the socio-economic differences of the West and China?
Otaviano: Big tech companies are bringing new regulatory challenges everywhere in the world. They are shifting dramatically the shape of market power structures within the private sector, in both the West and China. The major challenge will be to find the balance between regulating and maintaining the private sector ethos that has underlined the technological progress brought in by those companies.
BayBrazil: The trade balance focuses on the production of goods, but services are getting a higher weight in foreign trade. Can it lead to a mistake in analysis, policy, and investment?
Otaviano: Yes, it can. Services are increasingly relevant not only as final products but also as embodied components in manufacturing and agriculture products. They have risen either as inputs (design, production, marketing, distribution costs, etc.) or trade enablers (logistics services or e-commerce platforms). Furthermore, services are also increasing embedding services that come bundled with or added to manufactured products. Therefore, constraining trade in services may be harmful to productivity and competitiveness throughout the economy at large.
BayBrazil: How is globalization connected with poverty reduction?
Otaviano: Globalization – defined as trade integration and higher cross-border investment – facilitated a process of growth-cum-structural- transformation with substantial total factor productivity increases in most developing countries incorporated. Foreign trade was instrumental for the substantial movement of population from low-value, low-productivity activities to the production of modern tradable goods.
BayBrazil: You recently traveled on a mission to Austria, Belarus, Georgia, and Ukraine. Could you tell us about this experience? Any similarities to Brazil you would like to highlight?
Otaviano: I would highlight their interest in the way by which Brazil’s public sector governance has started to be revamped by the recent anti-corruption legal investigations and convictions – in more than one case reflecting a desire to emulate Brazil’s experience. I was impressed by recent developments in “artificial intelligence” in parts of their economies – e.g. the use of distributed ledgers (blockchains) to reduce transaction costs of land registry in Georgia or export of software and other high-tech services to companies abroad in the three cases of eastern Europe. Like Brazil, the three of them face the challenge of searching a global insertion in production segments with high value-added while still having to deal with remaining poverty in their countries.