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Labors Decline and Filling the Void

Everyone grows old and slows down. Global growth is no different. As the developed world struggles to achieve growth rates that it enjoyed before the Great Recession, the emperors of economics talk of secular stagnation arriving with the three horsemen of our economic apocalypse: low productivity, excess debt, and demographics. In a time of technological change and debt service at generational lows, the first two are not apparent inhibitors of growth. Economics provides a simple answer that supports demographics as a primary factor: demand. More people working brings more people spending. As past leaders becomes laggards, workforce growth is slowing or is negative in the leading economies of the world and foretells a future different from the past.

A closer look reveals that growth was slowing before the financial crisis in 2008. In America, speculative construction in housing augmented growth, emerging economies elevated American exports, and commodities prices rose in their recurring cycle. Europe also enjoyed (and suffered) similar outcomes, while commodity exporters enjoyed their return to the spotlight and subsequent banishment from the stage. With the passing of the demographic dividend, the growth will need to find another location or this time will, indeed, need to be different for technology.

Trading places. Over the last fifteen years, the growth of emerging country workforces, particularly from China, offset slowing workforce growth in developed countries. Investment in manufacturing and infrastructure pulled the rural workers into the city and lifted untold millions out of poverty. The entry of China into the World Trade Organization enabled this mass of humanity to toil as the manufacturing base for the world. In doing so, their consumption expanded. More capital investment, more exports, more workers, more consumption.

The world is now overburdened with excess capacity in many industries as China's industrial build-out has created capacity that lacks domestic demand. As investment slows, so does the need to pull more workers into the fold. Slowing growth in China's principal export markets magnified this outcome. Europe is heading down the same path as Japan, where growth slows, and technology enables excess supply to pressure prices lower. The American workforce is not in as precarious a position as Europe and will not reach Japan's desperate outcome; however, workforce growth will eventually reach zero before rebounding. Thus, the prospects for increased investment or export demand are not high.

Most significant is the change occurring in China's workforce. This year China will join Europe and Japan with a shrinking workforce. While China is following a similar path as Japan, the difference is the sheer scale of the change: China has a population nearly ten times larger. The workforce growth will go from adding over twelve million to subtracting two million people each year. Without the tailwind of workforce growth, productivity will carry an increasing burden to lift growth, unless someone can fill the void.

Filling the void. The world is not without the potential for workforce growth. India provides a literate workforce that speaks the lingua franca, while African workforce growth could generate enough people to fill the void of both Europe and China combined. The opportunity certainly exists: their GDP per capita is materially lower than the rest of the world and thus provides a great avenue for economic growth that would help achieve the UN's goals of eradicating poverty. Unfortunately, most of the reduction in poverty in the last decades occurred in China, while India and Africa languished. In fact, China did not join the UN resolution of poverty reduction and instead moved ahead with its internal agenda to the benefit of the UN's goals. Whether India and Africa can achieve a similar outcome is vital to future world growth.

India is certainly enjoying growth at a similar rate that China experienced. Following China's lead, it has invested heavily in fixed capital to support growth. One material difference from Chain's experience is that Indian inflation is more than double that of China over the last 15 years. Since the gap in imports is negligible, the inflation difference is most likely the result of the differing currency regimes where China has supported a soft fix while India's currency has freely floated, thus driving up their costs of goods. The price stability helped to enable a debt expansion in China at a lower cost than is the case in India that has a lower level of external debt. These actions, in turn, led to vastly different outcomes in their incomes levels over the last couple of decades.

Africa, in particular, sub-Sahara Africa, has not experienced the same levels of growth as China or India even though it started at a similar development level. In reality, there is two Africa's: North Africa and sub-Sahara Africa that have different development and populations levels. Growth potential resides primarily in sub-Sahara Africa where the workforce growth can expand, expand primary education enrollment rates, and complete primary education. Of course, to sustain growth they may need to address the resources provided to the students, particularly teachers, and their infrastructure.

In the face of a growing workforce that should bid up prices as demand increases, prices have moved downward and maintained relatively benign levels over the last few decades. While imports relative to GDP maintain a high level across Africa, their exports are materially different: North Africa has enjoyed the commodity cycle while sub-Sahara Africa exports faded. While endowed with significant natural resources that dominate their GDP, neither has made the jump up the value chain: North Africa remains critically dependent upon crude oil. As the commodity cycle passes, it may be increasingly difficult to liberate those who remain in subsistence living, unless technology can elevate them.

Liberating Technology. The world appears awash in technological change. Social networks dominate the internet landscape, virtual reality is the leisurely diversion of the day, manufacturing is going 3D, and big data may revolutionize health. All these are necessary changes to how we interact with our world; however, these technologies share one common trait of decreasing the time and resources required to acquire a product or service. The implication is that fewer people are needed to produce goods and deliver services. Foreshadowing this future, China has begun replacing workers with robots.

This outcome is no different from the displacement that power, in particular, electricity delivered with its widespread introduction. Energy consumption is a significant indicator of wealth development across countries. Electricity is the ultimate enabler for mechanical processes such as robots. As battery development continues apace in size reduction and capacity, deploying power reaches increasingly new frontiers that were previously inaccessible. For all its application in the developed world, electricity consumption still has a way to go in sub-Sahara Africa and India, as a map of the electricity usage vividly highlights.

The developing countries have leveraged new technologies. Africa skipped the land line and went straight to mobile technology. Africa is starting to go off the grid to deliver electricity to isolated places. Mobile phones are taking over payments between people, although mobile penetration is still a little uneven across Africa. India may even enter a cashless society as mobile payments become ubiquitous. Herein lies the hope for the future: the merging workforces show the potential and the ability to adapt to technology.

Strategy Risk. The future is a battle between the demand from the number people in the workforce and the increasing efficiency of supply brought by technological change. It not hard to see the world where the production of goods requires very few people as production and transportation are automated. In the 1930´s, Keynes foresaw that technology would liberate people to enjoy more free time as production efficiency improved. Indeed we could already live in a world of abundance; however, as the recent events in the United Kingdom and the United States show, people do not want to be left behind.

Growing demand in the Africa and South Asian countries will require stable institutions for them to deliver on the promise of their burgeoning workforce. These institutions will need to give some of the necessary requirements in health and living standard, including water before they can leverage the advantages of the electricity and the internet. Unlike China, the United States, and Europe to a lesser extent, the regions are highly fragmented without a joint government or institution to focus development. It is one thing to build the interstate highway system, agree on a standard economic framework, or pour more concrete in history when there is a shared institution coordinating.

These regions may not be able to follow the same export-led development path as China, and the other Asian Tigers did as technology makes the labor forces increasingly redundant for the production of goods. In this environment, services growth is required to ensure engagement of the workforce, and even then, it may require a radical rethinking of how people engage with employment. As delivering services tends towards local markets, the emerging countries excess labor will have to serve itself, not the world.

The next stage of global growth has many challenges: slowing workforce growth in the developed countries, declining workforces in China and Japan, and workforces in emerging economies that will need to develop at a faster pace than the speed of technological change. Overcoming these challenges is possible, especially during a time of easy proliferation of knowledge. There are risks to labor from the continued development of technology; however, people choose their fate. As in the past, if the balance heads too far towards capital, labor can always demand a larger share of the spoils.

This is part three in a series on the Future: Labor, Land, and Capital.

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