The best line of defence against Chinese competition is ... more automation.

Productivity doesn’t rise meaningfully that often, but it does happen every now and then. It is therefore fair to ask the question – is there anything in the pipeline that could cause productivity to grow to new heights and save developed economies from looking into an extended period of abysmal economic growth?

Bank of America (BofAML) recently released a monster of a research report which argues that robots will take over nearly 50% of all manufacturing jobs and shave $9 trillion off labour costs within a decade. 

Take the car manufacturing industry. A spot welder is paid on average $25 per hour. A robot can do the same job for $8 an hour (all in). Those countries that don’t embrace the new technology will simply be left behind, such are the advantages.   

Developed economies have a massive advantage over China in this respect. "China (because of the sheer number of people) cannot allow robots to replace hundreds of millions of workers. There are simply too many mouths to feed every day," says economist, Niels Jensen. 

The old world has exactly the opposite problem. "A shrinking workforce will force robots to be installed if we want to keep industry alive, partly because we won’t have enough people to fill the manufacturing floors, and partly because those who are left will be too expensive," adds Jensen. "The best line of defence against Chinese competition is therefore likely to be more automation."

On the point of labour costs - the significant gap in hourly earnings between DM and EM countries is likely to foster two very different approaches to automation. 

Whereas robots are almost always the most cost effective solution in DM countries, labour costs in most EM countries are still sufficiently low to warrant a different approach. Germany tops the chart with hourly manufacturing wages of approx. $50 per hour, whereas most EM countries do not exceed $5 per hour.

A likely side effect of increased automation is even lower inflation, at least in DM countries. Not only do manufacturers save considerable amounts of money by replacing human beings with robots as already mentioned, but robots are also getting cheaper to install. BofAML reckons that whilst robots have on average become 27% cheaper over the last ten years, they will fall a further 20%+ over the next ten years. "All this has the potential to boost productivity whilst keeping inflation low, and could be the saving grace for otherwise doomed DM economies," Jensen concludes.

The consensus appears to be that this is largely a manufacturing issue and that relatively few jobs have been lost elsewhere. Nothing could be further from the truth. Take the financial industry, where many transactional jobs are lost every day, or take education - as Ambrose Evans-Pritchard of the Daily Telegraph pointed out in November (here): “A single professor can teach a course to 150,000 students through digital technology.”