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The three Ws of automation

  • Published at 10:06 pm January 14th, 2020
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Policy-makers and investors must invest adequate time and effort to prepare the economy

Automation has an innate tradeoff for any developing economy like Bangladesh due to its two opposite effects -- productivity and capitalization. While the productivity effect refers to the increased productivity of any production process leading to reduced labour demand and wage due to automation, the capitalization effect results in more investments in the highly productive sectors leading to increased labour supply and wages. 

Apart from these two short run effects, there is a long run effect of automation, which is the income effect which entails the long run positive effect on real income of the consumers due to the process of automation, which leads to substantial reduction in production cost as well as price of the final product. 

While the short run effects of automation have to do with the labour market dynamics of any economy, the long run effect is more about the income dynamics. However, the interplay among these short run and long run effects pose some interesting challenges for the Bangladesh economy when it comes to adopting automation. 

Before going into specifying these distinct challenges, it is better to consider the backdrop in terms of the economic composition of Bangladesh. The economy of Bangladesh appears to be largely labour-abundant, with a significant dominance of the informal sector. 

While the agricultural sector contributes roughly 13% in GDP, it sources 40% of the total employment. On the other hand, the industrial sector contributes around 31.3% to the GDP, while comprising 20.4% of the total employment pie. The rest of the GDP as well as employment share are absorbed by the service sector.  

Considering the economic context, policy-makers have to answer three Ws before entering into the automation era. 

What are the sectors to automate?

In answering the first W there can be two approaches to assess the prospect of the sectors in the face of automation. One is to automate the sectors which have potential while the other is to automate the sectors which are left behind. 

From the vantage point of sectoral potential, it is not surprising that the manufacturing sector of Bangladesh has been under the pressure of automation for the last couple of years. As the economy transformed structurally, it was more dependent on the productive industrial sector. Through automation, the sector will be on a new height of productivity. 

This will, on one hand, attract new investments in the sector and create more jobs. On the other hand, it will increase the competitiveness of the sector across the globalized world. In this case, it is more likely for us to see employment loss in the short run, but in the medium to long run we may expect to see the manifestation of the popular conjecture regarding the positive effects of automation across the economy. 

However, if we consider the left behind perspective, then the sector that lacks considerable productivity and competitiveness is the agricultural sector -- being the employment source of a mentionable chunk of the labour force. 

Given this sector lacks considerable investment, the government can consider incentivizing investors in automation of cash crop cultivation or providing automation tools to cash crop cultivators at a subsidized price. 

This will increase the productivity as well as competitiveness of the prospective cash crops of the economy in the global market. While this will attract further investment and enhance export earnings in the sector, the increased labour demand might result in labour diversion from the less productive crop cultivation to more productive cash crop cultivation. 

What are the ways to avoid employment adversities?

The second W poses a question about the ways of automation to avoid the adversities. For a labour abundant economy like Bangladesh, the problem statement reduces to: How can we leap-frog this short run employment loss in the manufacturing sector? 

The answer might lie in the areas of automation. Automation can happen in broadly two areas of production. It can happen through process innovation, which is mostly labour substituting and it can also happen through product innovation which is labour augmenting. 

If the government incentivizes its investors to materialize its automation strategies by means of product innovation rather than through process innovation, it can bypass the employment loss of the automation process to a large extent.

What are the strategies to automate?

The third W poses a question about the overall preparedness of the Bangladesh economy for automation. Given that, automation associated with appropriate policies can generate jobs and bring competitive edge for the economy, policy-makers have to realize it all depends on the net effect of the above-mentioned three effects. 

However, through appropriate policy measures undertaken by corporations as well as government, the net effect of automation can be made good for all. The government and the corporations need to understand that, adopting automation in absence of adequate buffer for the labour market may result in significant rise in long term unemployment and inequality. 

In this regard, policy-makers should not consider basic social safety net policies like unemployment benefits as adequate to contain the immediate employment repercussion of automation. Rather, they should consider streamlining the economy by identifying the automation-intensive industries and automation independent industries. 

While the government should undertake policies to help the automation independent sectors to flourish so that those sectors can compensate the employment loss of the automation intensive sectors, it should also facilitate required skill enhancement training for the labour force to cope with the occupational transition they might go through due to automation. 

Furthermore, the government should also consider necessary reforms in the educational curriculum to prepare its future generation to reap the benefits of automation. 

In short, policy-makers and investors must invest adequate time and effort to prepare the economy for automation rather than springing into it.

Kazi Golam Tashfiq is a Research Associate at The Institute for Policy, Advocacy and Governance (IPAG) and he can be reached at [email protected]