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The challenge of the Fourth Industrial Revolution in Latin America

 

The gap between Latin America countries of the OECD (Organisation for Economic Co-operation and Development) in terms of Gross Product is growing. Although Gross Domestic Product (GDP) per capita in Latin America increased by 48%[1] between 2003 and 2016, the gap between the region and the OECD countries grew from US $23.117 in 2003 to $28.553 in 2016. The key to accelerating the region's economic growth lies in the increase in productivity, whose growth is stagnating. The analysis of the contribution of productivity to economic growth in Latin America for the last 14 years shows that, although labour productivity is defined as the production divided by the number of hours worked, it has contributed to the gross product, the impact of multifactor productivity growth[2] has been negative (-0.48). An extrapolate of the current situation indicates that the postponement of Latin America tends to continue. Projecting into the future (2018-2027), the World Bank estimates that GDP growth in the region will reach a rate of 2.35% per year[3], which represents a 0.72% increase in the workforce, 1.46% of the capital increase, and only 0.18% of multifactor productivity.

 

Two young men talking about fourth industrial revolution in latin america

 

The digitalisation of production processes and adoption of advanced digital technologies involved in the Fourth Industrial Revolution, contributes to the growth of multifactor and labour productivity. An increase in the digitalisation index of 1% is an increase of 0.32% in the Gross Domestic Product, 0.26% in productivity, 0.23% in multifactor productivity and 0.09% in the contribution of ICT to productivity[4]. That is why the acceleration in the development of digitalisation, both in terms of digital infrastructure and the growth of digital industries and the corresponding digitalisation of production, represents the fundamental lever for increased multifactor productivity and the corresponding alignment of the gap in Latin America with the OECD countries.

If we share the premise that establishes the need to accelerate the digitalisation of production to stimulate Latin American economic growth, we must first define what is understood as the digitalisation of production, and then measure where Latin America is in terms of this process, and finally identify the key points of a strategy.

 

The revolution of productive models

The modes of production of goods and services are being transformed from the assimilation of digital technologies. The analysis of technological innovation since the mid-twentieth century allows us to identify three different cycles[5]:

  • The development of computing, broadband and mobile telecommunications
  • The deployment of Internet platforms
  • Innovation around the development of advanced technologies such as robotics, Big Data and analytics, the Internet of Things, Blockchain and Artificial Intelligence, among others.

Each cycle has an increasing impact on production processes. The first cycle allowed the automation of discrete functions such as inventory management and production line management. At the same time, the development of broadband facilitated the delocalization of functions, allowing the optimization of access to production factors. As a result, the company could locate functions in those regions where resources such as raw materials and workforce are best accessed, while continuing to maintain, in a virtual way, a centralised structure. The second cycle - based on the introduction of the Internet - allowed us to begin to reconfigure productive processes end-to-end. Internet-based platforms allowed to optimise the cost of access to raw materials as they reduced the costs of searching for goods and services at the best price. At the same time, the Internet allowed the deployment of electronic distribution channels to reach the consumer, thus increasing the scope and coverage of the markets. Finally, the third cycle - made up of a set of so-called advanced technologies, including the Internet of things, Artificial Intelligence, 3D printing and Blockchain, among others, allow to address a reform of the traditional company based on the generation of new business models.

That's how each cycle has a growing impact on the productive structure. The digitalisation of production results in a combined impact, both in the structure of costs (improved efficiency) and the scope and coverage of markets (deployment of distribution channels). In fact, the digitalisation of production processes does not imply the mere adoption of digital technologies to automate processes and reduce labour costs. We conceive the digitalisation of production as a technological discontinuity that affects the competitive environment and restructure the organisation of industries. The disruptive impact of digitalisation can also manifest itself through fundamental changes in industrial production chains. These changes can be the result of the virtualization of certain processes of the supply chain, allowing certain leading companies to integrate vertically throughout the supply chain and assume positions that allow a strategic control of the customer base or capture new revenue.

 

The current situation in Latin America

The Latin American productive structure is progressing in terms of the adoption of digital technologies corresponding to the first and second innovative cycles described above. According to a recent study by the author[6], 94% of the Colombian establishments use computers, 96% use the Internet and 55% have a website. However, this large-scale adoption, does not necessarily translate into the assimilation of technology in production processes. For example, in the same country, only 37% of the productive units issued orders for the purchase of supplies and 28% deliver products online. Although this laggard assimilation in production processes is low, the rates indicate sustained progress in the last three years.

Two young people talking about fourth industrial revolution in Latin America

On the other hand, the incorporation of advanced digital technologies is just beginning. Once again, in the case of Colombia - the only country in the region which has reliable statistics-, 0.5% of manufacturing establishments have adopted robotic systems, and 3.0% have incorporated 3D printing into their production processes. In other words, if we assimilate the Fourth Industrial Revolution the adoption of advanced technologies in the reform of productive models, we can conclude that the region is just beginning to walk this path.

As it is expected, the situation is even more worrying, when these statistics are disaggregated between big companies and the SMEs (small and medium-sized enterprises). The large Colombian companies are already progressing in this way: 18% operate the Internet of Things, 8% have incorporated robots, 6% have done 3D printing and 4.4% use Artificial Intelligence systems / Machine Learning. Obviously, these indicators of adoption are practically null in the case of SMEs.

As is known, the latter represent the bulk of the production system in all Latin American countries. In Colombia, only 0.5% of the 1,141,000 formal companies have more than 100 employees[7], while in Mexico 0.1% of the 5,654,000 industrial establishments operate with more than 250 employees[8]. This indicates the challenge facing Latin America: if it is based on the premise, based on the experience of both the continent and the developed countries, that the large company faces the digital transformation of its production model independently without requiring encouragement, incentives or subsidies, the big issue is how we are going to make SMEs access the Fourth Industrial Revolution.

 

A change of the productive model strategy: a factor that is essential to speed up the Fourth Industrial Revolution in Latin America

Let's start with affirm that the challenge of the digitalisation of SMEs is not only to the emerging world. In fact, much of the strategies for change in productive models from countries such as Japan, Korea, France, Spain, Italy and Colombia have assumed small and medium-sized enterprises as a priority axis[9]. The experience of these countries raises the need to develop a single national strategy, driven from the highest levels of the State.

Analysis of the Latin American experience shows that, with different levels of development, certain countries are progressing in the formulation of aspects or components which represents a strategy of change in the production model. Mexico is already gradually implementing elements of industry 4.0, Brazil has an Internet of Things strategy and Colombia has created a Vice Ministry for the Digital Economy focused on the transformation of the productive model within the ICT Ministry. But, even in these cases, the level of institutional coordination for the development and implementation of strategies is still limited. It is common to see a multiplicity of governmental bodies involved in this type of initiative in the region, which generates a lack of definition of priorities and multi-institutional initiatives, while a limited recognition of the ecosystem implicit in the changes of the new productive models is observed. Finally, with the clear exception of Colombia that has progressed in the development of a Digital Economy Centre, the lack of updated information that allows a detailed analysis to understand where the bottlenecks in the digital transformation are[10].

 

The need for public-private collaboration

The second point to consider if you want to speed up this digital transformation process is the need to enter multi-sectoral collaboration: government, private sector and academia. The experience of developed countries shows that this is an essential factor to move forward in the Fourth Industrial Revolution. The private sector (particularly the large company but also some innovative SMEs) know what it means to face the digital transformation. The state has access to resources and infrastructure to address initiatives to support SMEs and the academic sector has the capacity to carry out research in support of the transformative process within the framework of our specific realities.

 

Sign contract Latin america fourth industrial revolution

 

Although there are some experiences in this regard in the region, such as the efforts made by the Ministry of Science, Technology and Productive Innovation, the Ministry of Production and the National Institute for Industrial Technology in Argentina, or Industrial Innovation Centres driven by the Ministry of Economy in Mexico, or Digital Transformation Centres in Colombia, the problem is the lack of critical mass of these efforts. We have already mentioned above, the dimension of the sector SMEs in Latin America. If we do not raise the level of investment in this effort, we cannot achieve a significant degree of impact. Japan alone has deployed 180 Kohsetsushi centres focusing on SME training, Spain has 32 centres and 5,500 professionals operating in the Spanish Federation of Technological Centres, the United States has deployed 600 centres under the Manufacturing Extension Program. All these efforts combine public and private resources to support the digital transformation of SMEs.

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The challenge implicit in the Fourth Industrial Revolution for Latin America is clear. In order to face it, it is necessary to define unified public and policies strategies, driven as State policies that transcend electoral cycles. This must be combined with a greater investment effort to reach the small and medium sized enterprises. Multi-sectoral collaboration in this regard is critica

 


[1] Source: The World Bank

[2] In its basic calculation, productivity is measured in terms of labour productivity (production divided by the number of hours worked). The productivity of the factors (or model) is measured in terms of the inputs of capital, labour and raw materials. This measure provides a better guide to the efficiency of an economy given controlling by changes in supplies.

[3] In the short term, the World Bank projected 2.00% (2018), 2.60% (2019), and 2.70% (2020), while the International Monetary Fund estimated 1.90% (2018) and 2.60% (2019).

[6] Katz, R.; Duarte, m; Callorda, F.; Duran, D.; Meisl, C. (2018). Annual Report of the Digital Economy in Colombia. Bogotá: Ministry of Technology of Information and Communication and Bogotá Chamber of Commerce.

[7] Source: DANE; Commercial Record of the Chamber of Commerce of Bogotá

[8] Source: INEGI: Economic Census 2014 and 2016 National Accounts.

[9] Katz, R. (2018). International experience in fostering the digital transformation of the supply chain. Report submitted to the Inter-American Development Bank and the World Economic Forum.

[10] In this case, it is important to mention the efforts of the Economic Commission for Latin America and the Caribbean in assisting in the development of an empirical basis that will help to define policies public in this field.

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