Avoiding Allentown

Posted on Friday, February 08, 2019

On Wednesday (February 7 2019), the Colombian government introduced its 2018 – 2019 Development Plan. Its third objective is Increase direct support to companies for productive modernization and Industry 4.0 appears as a significant part of this objective and in many other parts of the plan.

The TV news report I saw on the night of the launch highlighted the “Fourth Industrial Revolution” but news reports the next day spent less time on this. However, the Industry 4.0 concept does get a lot of space in the 1364-page description of the plan.

In the Colombian political system, the Development Plan is the key strategy document for a presidential term (hence it starts in 2018 when current President Iván Duque was elected and ends in 2022 when his constitutional mandate finishes even though, today, we are in 2019). Written by the Planning Department which is part of the Finance Ministry, it is debated and (eventually) approved by the Congress. The document then becomes the framework for budgeting, legislative agendas, and ‘performance appraisal’ of Ministers. Real money gets spent based on this plan.

At the highest level, the number two principle is a Pact for Entrepreneurship, Formalization and Productivity and the second sub-bullet is Enterprise Transformation: productive development, innovation and adoption of technology for productivity. The number 7 principle is a Pact for the Digital Transformation of Colombia: Government, Companies and Homes Connected to the Knowledge Era and this section’s second bullet point is Make a digital society and Industry 4.0: for a more efficient and transparent relationship between markets, citizens and the State.

The term ‘Industry 4.0’ appears 20 times in the document and in sections beyond the ones mentioned above. The last one is around page 1100. (No, I have not read the whole document. That is what the ‘Find’ function in Adobe Reader is for.)

What the government means by ‘industry 4.0’ appears on page 17 (under Objective 3) where the text reads:

MinCIT (Ministry of Commerce, Industry and Tourism), through iNNpulsa (a government thinktank) and in alliance with MinTIC (Ministry of Communications and Information Technology), SENA (the national training institute) and Colciencias (which manages the country’s science and technology programs), will lead an advanced manufacturing program that seeks to develop the technologies associated with Industry 4.0  (industrial internet of things IIoT, big data, artificial intelligence, robotics, additive manufacturing – 3D printing – , nanotechnology, advanced materials and compounds and virtual and augmented reality) and that it will provide services to companies of all the sectors.

Implementation plans include training but also funding for important projects in individual companies. To repeat, real money will be spent.

This may not seem like much to Europeans (and may seem like a waste of tax payers’ dollars to Americans) but for a country that has just joined the OECD and struggles with achieving middle-income status, this is a major commitment.

They’re closing all the factories down

Like many developing countries, Colombia spent much of its two hundred-year existence behind high tariff walls that protected domestic manufacturing. Those came down in the early nineties as the world embraced globalization. (Thirty years later, we all seem to be retreating behind our castle walls once again to lob balls of burning pitch at our neighbors, but I digress.)

While some industries were immediately affected by competition from far more cost-efficient manufacturing (like electronics), many factories survived, especially in what Montrealers (and maybe others) call ‘the needle trade’ – i.e. the garment business. The differentiator that saved parts of Colombian manufacturing was low wages. This advantage lasted until this decade when it was killed by the perfect storm of the rise of lower wage countries like Vietnam and a revaluation of the Colombian currency that made all exports more expensive.

What made things worse is that many local manufacturers preferred not to invest in making their factories more efficient. Accustomed to collecting rents from protected industries, they simply rode the low wage benefit until that came to an end. Then they closed.

Global economic growth, especially in Asia Pacific, and some timely Free Trade Agreements (FTAs) have helped but without industrial transformation, FTAs merely exacerbate the productivity problem. This graph from the Federal Reserve Bank of St. Louis (huh?) shows that Total Factor Productivity has been stagnant in Colombia since the 1970s although the trend this century has been positive.

As an illustration of what I would call the ‘Allentown’ phenomenon, when I arrived in Colombia in the late 90’s, the area along the river in Medellín, Colombia’s second city, was all industrial, dominated by the country’s biggest steel mill. It was ugly but productive and busy with workers. Today, the area has all been cleared and it is dominated by the modern headquarters of the country’s biggest bank. There is smart new housing, a former machine shop is now an excellent modern art museum and traffic is heavy at noontime with business people rushing to lunch.

Medellín remains important in the needle trade but specialized in design. The garments themselves are made in Asia. Many Colombian shoppers look at the labels of local brands and joke “Mah-de in Cheena”.

This is an important transition, but millions of manufacturing workers got ‘left behind’. Official unemployment hovers around 10% (low for Europe, high for the United States) and informal employment is around 50%.

They never told us what was real

As an amateur – ok somewhat trained – economist, I have a niggling feeling that an economy that was 100% based on services would find it hard to grow. Maybe not necessarily “Iron and coke / And chromium steel” but what economists call ‘the real economy’ has to be strong and exporting for there to be long-term growth. But I have no proof, Singapore is probably a counter-example and I am digressing again.

Colombia’s other challenge in reviving its manufacturing is its abysmal transport infrastructure. Lobbying by the trucking industry tore up the country’s rail system decades ago and the not-really-a-joke is that it costs more to ship a container from the center of the country (where much manufacturing is) to the Caribbean coast (where the ports are) than it does to ship the same container from the Caribbean coast to China.

Not surprisingly, another major part of the Development Plan concerns transportation. The last government started a major infrastructure investment program which has had well-publicized problems with corruption and incompetence but which has to go on regardless.

But in the meantime, the cost of transport means that Colombia must focus on high-value add manufacturing if it is going to compete. Only high-value-added products have sufficient margin to compensate for the country’s lousy roads. But these also need sophisticated manufacturing techniques: low wages are not a differentiator. Helpful perhaps, but not a differentiator.

That’s why Industry 4.0 is such an important initiative. With fortuitous timing, a few weeks ago, the World Economic Forum announced it was opening its fourth Industry 4.0 Affiliate Center in Medellín, the first in the region. The others are in San Francisco, Beijing and Tokyo.

Bottom-Line: There is still much to be done. The Development Plan has yet to be approved by Congress and political processes have their ways to divert funds away from the ‘best laid plans’. (Always the right moment for Robbie Burns.) Government programs (in all countries) have (often deservedly) poor reputations for their ability to deliver transformational results.

But this is a very good start and the details of the plan are mostly based on getting companies to adopt these technologies and very little or nothing is said about the technologies themselves. There is no talk, for example, of setting up R&D labs for AI or AR/VR. Instead the Development Plan text talks about implementation using ‘Fab Labs’, an MIT invention supported by the European Union, that shares innovation and facilitates access to new technologies. There are already 10 in the country; the government presumably plans to strengthen them and add more.

As I concluded in my blog, IoT, Digital Transformation and faster cat videos:

Governments err when they overly focus on access to technology. (They also err when they don’t facilitate access to technology.) But Digital Transformation is not just about technology. It is about using technology with the intention to transform the way you do business.

Every child has a pretty good shot / To get at least as far as their old man got

That is everyone’s responsibility but government has a big role to play.

Title Reference: Like many Billy Joel songs, Allentown does not get much critical respect but it has an undeniably catchy tune, a strong beat (to the rhythm of steel hammers) and a strong message that concert crowds love. It only got to number 17 in the US and is not on any ‘Greatest of All Time’ lists but proof of its broader appeal was that it hit number 1 in New Zealand and was a hit in Russia. Released in 1982, it captures the down side of the industrial cycle perfectly. Nearly 40 years ago, US manufacturing was in a steep decline as lower wage countries took over the market for “iron and coke and chromium steel” as well as consumer electronics, autos, and just about everything else. The US survived because of high-value-added manufacturing (like computers), software and services but, unfortunately, many young residents of Allentown and other so-called ‘Rust Belt’ towns did not ‘get as far as their old man got’, a problem that advanced economies are still dealing with today. But I digress yet again.

Allentown lyrics by Billy Joel © Universal Music Publishing Group

 

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