|United Nations University - Work in Progress Newsletter - Volume 15, Number 1, 1998 (UNU, 1998, 12 pages)|
By Paulo Rodrigues Pereira
So great are the changes promised by advances in information technology that we run the risk of seeing some sort of New Jerusalem - offering a better life to all in a world vision of human solidarity. Better products, lower costs, more jobs, more creative ways to handle our money, lower energy consumption, smarter farming. Even, some would argue, an improvement in international relations!
The list is long and enticing. But as Paulo Rodrigues Pereira points out here, there are also many perils lurking - chiefly economic ones for the Third World planner. The very thing that has made the developing countries appealing to international business - a inexpensive labour supply - may come to work against it in the information age. Offshore production could drop sharply as the onshore electronic devices that manage foreign assembly lines grows ever more sophisticated and costly. Investment funds may stay home where the know-how (and the value) is. More and more, firms in industrialized countries may find that the kind of worker they need most is right there at home, not thousands of miles across the world in a politically unstable climate, and well out of the market "loop." Mainly missing in the developing countries is the ability to handle sophisticated information systems that introduce efficiencies up and down the line, from the factory floor to the showroom model.
Some argue that this may be the moment for the less developed to participate in the fashioning of the new skills and technologies, jumping in while others are still learning. But Professor Rodrigues Pereira, a former Assistant Director for Scientific and Technological Cooperation at Digibras, the Brazilian state enterprise for computer science development, is not sanguine on this - many levels of education and skill still need to be added for the developing countries to participate fully in the information revolution. The excerpt is taken from his chapter, "New technologies: opportunities and threats," in the UNU volume, The Uncertain Quest: Science, Technology, and Development, published in 1994. - Editor
Information technology - defined as the convergence of electronics, computing, and telecommunications - has unleashed a tidal wave of technological innovation in the collecting, storing, processing, transmission and presentation of information. This has not only transformed the sector itself into a highly dynamic and expanding field of activity, creating new markets and generating new investment, income, and jobs. It has also provided other sectors in the economy with more rapid and efficient mechanisms for responding to shifts in demand patterns and changes in international comparative advantages, through more efficient production processes and new and improved products and services.
The improvements range across industries: replacing mechanical and electromechanical components, upgrading traditional products by creating new product functions, incorporating skills and functions into equipment, automating routine work, and making technical, professional or financial services more transportable. Due to scientific and technological breakthroughs in transistors, semiconductors, and integrated circuits or "chips," micro-electronics is affecting every other branch of the economy - in terms of both its present and future employment and skill requirements and in future market prospects.
Its introduction has resulted in a drastic fall in costs as well as dramatically improved technical performance both within the electronics industry and outside it. The continuous rise in the number of features on a single micro-electronic chip has led to a number of benefits: lower assembly costs for electronic equipment, as each chip replaces many discrete components; faster switching speeds and thus faster and more powerful computers; and more reliable, smaller, and lighter equipment, with fewer interconnections, less power and material.
All sectors of the economy have been influenced by this. Information technology opens up greater opportunities for the exploitation of economies of scale and scope, and it allows more flexible production and use of labour and equipment. It promotes the internationalization of production and markets, offers greater mobility and flexibility in capital and financial flows and services, and is frequently the precondition for the creation of innovative financial instruments
Information system developments are constantly being applied to increase the productivity, quality and efficiency of finance, banking, business management and public administration. In manufacturing, and to some extent in agriculture, many processes have been automated, some requiring highly flexible, self-regulating machines, or robots. The engineering industry has been transformed by computer-aided design and three-dimensional computerized screen displays.
The pace of technological change in information technology will most likely accelerate the already observable growth in the interdependence of international relations - not just economic or financial, but also political and cultural. National economies have become more susceptible to the effects of policy decisions taken at the international level, and domestic economic measures are having increased impacts on economic policies of other countries. World markets for the consumption of similar goods are growing, and so are common lifestyles across national borders.
The advance of telecommunications and computerization has recently enabled large companies to use information systems to transmit technical and economic information among numerous computer systems at different geographical locations, subjecting widely dispersed industrial plants to direct managerial control from a central location. This affects the international division of labour and production and international trade, changing the patterns of industrial ownership and control, altering the competitive standing of individual countries, and creating new trading partners.
It is the integration of functions that confers on information technology its ability to integrate previously separate production functions. This is more than simply the substitution of new technologies for old. Information technology offers the opportunity for completely new ways of working through systems integration. It is not a matter of simply applying one item of new technology to each of the production functions now performed at distinct stages of the production process. The new technology offers rather the possibility of creating whole new "loops": linking, for example, design to production, planning to marketing, and production to distribution. Manufacturing equipment can respond to design codes, computer aids and databases, sensing and collecting changing market trends, orders and commissions. These all can be automatically incorporated into the production process.
Implications for the Third World
Thus, far-reaching changes in the trajectories of electronic, computer, and telecommunication technologies are converging and offering a range of new technological options to virtually all branches of the economy. This has significant implications for the way it will affect the societies and economies of developing countries. The potential impacts - both positive and negative - is a matter of great controversy among economists and politicians.
The main short-term issues usually discussed are the potential erosion of the comparative advantages of low labour costs, particularly in relation to assembly facilities, and the effects of automation, particularly on internal markets and international competitiveness.
The first direct effect of the micro-electronics revolution was the location of production for export in third world countries. While production of mainframe computers continued to be located largely in industrial countries, production of smaller computers and of microelectronic devices, more subject to price competition, was shifted to low-wage locations, mainly in East Asia, where countries presented low wage costs as well as political stability, a docile labour force, and government incentives.
Now, however, the automation of production is beginning to decrease the relative importance of labour-intensive manufacturing and cost of labour, thereby eroding the competitiveness of low labour costs. For example, automation led to a sharp decrease in the difference between manufacturing costs of electronic devices in the United States and Hong Kong. In manual processes, manufacturing costs were three times higher in the United States. The introduction of semi-automatic processes made the difference practically disappear. Equally, the expansion of automation in Japan has contributed to a reduction of Japanese investments in the Asia/Pacific region in firms in electronics, assembly parts and textiles.
The trend to increasing systems optimization and integration is most likely to induce large producers in industrialized countries to bring back a significant share of their production located in developing countries - so-called "offshore production." This movement has been called "comparative advantage reversal."
As integration increases, with functions previously obtained by assembling pieces being incorporated in the electronic components themselves, value-added is pushed out of assembly processes into the components themselves and upwards toward servicing. In addition, the growing technological complexity of electronic devices increases the value of the parts manufactured by firms located in industrialized countries. The amount of value-added obtained in offshore assembly has thus been constantly decreasing.
Global factories constructed in locations of least cost, often at a considerable distance from final markets, were economically worthwhile because labour was one of the major determinants of cost. Technology and rapid responsiveness to volatile local markets, however, are becoming more important components of competitiveness. Machines and equipment can now be programmed to adapt to obsolescence. All this has led to a concentration of manufacturing investment in capital-intensive flexible manufacturing, further adding to the erosion of the comparative advantages of developing countries.
The assembly of systems will probably continue in some developing countries that have adopted protective legislation for local production targeted at particular market segments - as, for instance, in Brazil. This is changing very rapidly, however. The kinds of equipment produced Under these circumstances are used largely in internal markets, and hardly competitive on the international level. Such equipment tends to be far more expensive than comparable equipment available abroad, and more costly to use due to expensive auxiliary installations, under-use and lack of management skills. Nevertheless, it may at least provide the country with the capacity to follow the development of information technologies more closely.
The introduction of micro-electronics requires certain new skills of design, maintenance, and management, as well as complementary infrastructural facilities - such as reliable telephone systems and power supplies. Deficiencies here prevent the widespread adoption of information technology in developing countries.
The more advanced developing countries, with a wider base of skills and infrastructure, and a more flexible labour force, may be in a better position to adopt information technology and to increase their productivity and their international competitiveness. But the less developed countries, with inadequate skills and infrastructure, low labour productivity, and lack of capital resources, will find it difficult to adopt the new technologies; they are likely to suffer a deterioration in international competitiveness, vis-à-vis both industrialized and the more advanced developing countries.
Systems and Innovation: Key to Profit
Quality, too, requires an adequate level of skills, infrastructure and managerial know-how that is generally lacking in developing countries. This greatly reduces the synergies, number of options, faster responses, and more informed decisions that can be implemented in the firm by the optimization of the systems performance. In turn, the composition of the labour force existing within industrialized country firm will further improve their systems performance, and further reinforce the advantage derived from automation. The proportion of the labour force employed in production is constantly decreasing in the industrialized countries, implying that performances at the systems level and innovation, not manufacturing, are becoming the keys to profit, growth and survival.
Like biotechnology, information technology is a proprietary technology. Vital technical information on design engineering specification, process know-how, testing procedures, etc. are covered by patents or copyrights or are as closely held as trade secrets within various electronic firms from industrialized countries. Many companies in the software area do not patent or copyright their products because it entails disclosing valuable information. Firms are generally reluctant to license the more recent and advanced technologies.
This means that technology transfer takes place mainly among established or important producers, hindering the access to developing countries. Moreover, the main issue is not so much access to a particular technology as it is to the process of technological change, because of the dynamism of this process. Recent trends in inter-firm relationships seem to indicate that this access takes place essentially through the participation in the equity of the company holding the technology. The possibility of firms from developing countries doing this is small.
The general tendency thus points to a widening of the information technology gap, both between industrialized and developing countries and within developing countries. From a purely quantitative standpoint, there remain large gaps in the access to information in the world, showing that the diffusion of information technology in developing countries is still in an embryonic stage.
Only a small proportion of the world's computers are located in developing countries. The Third World so far has mainly used computers for more standard functions, such as inventory control, accounting, and payroll. The situation is not very different from the qualitative standpoint. The process of "information" of society is one in which greater amounts of knowledge and information are incorporated into goods and services. Knowledge and information are sources of wealth creation and value-added in their own right: as their amount increases, the amount of energy, materials, labour, and capital decreases. The concentration of knowledge and information-intensive in the industrialized countries is per se a further barrier to efforts to reduce the information technology gap between industrialized and developing countries.
There is, to be sure, an alternative "reading" of this evidence. Some commentators see information technology as a powerful new opportunity for at least some developing countries to improve their competitive position in certain fields and to foster their development precisely because of their relative lack of established industrial infrastructure. They have fewer institutional barriers to the adoption of advanced systems based on information technology. But this school of thought, in my view, minimizes the fact that in practice, information technology is still a "black box" technology for most users in developing countries, requiring new skills to operate, to repair, and even to purchase. This is particularly so in its integrated form, where its fullest benefits emerge.