For decades, mature economies have seen their jobs being off-shored to newly industrialising countries. To stop the bleeding, they are working hard to unleash the digital and renewable energy revolutions. The aggressive push to regain competitiveness by digital automation has been widely noted. What is less understood is the logic behind the energy transformation. In manufacturing economies, the cost of energy has long surpassed the cost of labour. Decoupling productivity from the use of energy and resources is therefore a crucial step to regain competitiveness.
To understand this dramatic turnaround, one needs to look at a couple of game-changers. First, in many markets, the cost of electricity generation from solar has fallen below that from fossil fuels. Second, new technologies finally make it possible to store intermittent energies like solar and wind. Third, a growing number of governments have started to legislate their gradual exit from the carbon economy.
No matter how serious these announcements, they are enough to raise questions about the political viability of the $5.3 trillion in annual subsidies for fossil fuels. Consequently, the Bank of England and the German government recently issued a public warning about the “carbon bubble”. The overvaluation of fossil assets by an estimated $28 trillion could trigger another financial crisis. Many institutional investors like pension funds are bound by law to only invest in secure assets. Given the sheer amount of capital represented, this could mean that in financial terms, “peak oil” has already happened.
In its ambitious Energiewende, Germany targets to cover 45 per cent of its energy demand from renewables by 2025, and 55-60 per cent by 2035. Major industry players have begun to overhaul their business models. The biggest utilities of Germany and Italy have decided to sell off their entire fleet of conventional power plants. Naturally, there has been a political backlash against energy price hikes. The German model, however, was always based on the disciplinary incentives of hard currency and high wages, catapulting its manufacturing base into the export powerhouse it is today. Shifting the tax burden from labour to energy is seen as the right incentive to accelerate the decoupling of mobility, housing and manufacturing from the use of resources.
In the long run, technological innovation and higher efficiency are set to bring down energy costs. In addition to these economic considerations, the political crises in eastern Europe, northern Africa and the Middle East fuelled concerns over energy security. Greening the economy is thus seen as the best way to curb geopolitical risks and improve energy security.
Germany is not the only country striking a green new deal between the needs to mitigate climate change, improve energy security and competitiveness, and create new, green jobs. Together with the disruptive innovations of the digital transformation, all advanced economies hope to unleash the third Industrial Revolution.
What does this mean for India? Many in India hope to finally cash in on the demographic dividend when manufacturing jobs start to leave China. Out-competing Southeast Asia, which just got an additional boost through the Trans-Pacific Partnership Agreement, will not be easy. In the short run, India will enjoy a sweet spot between cheap labour and modest energy and commodity costs. Skyrocketing FDI numbers show investors are betting on an Indian economic miracle.
In the long run, India’s comparative advantages are under pressure. In many emerging economies, manufacturing costs have almost reached US levels, shifting investors’ focus to factors like quality, supply chains, shipping times and local governance. Digital automation will further erode the comparative advantage of cheap labour. Consequently, manufacturers are starting to re-shore — shifting production back to the old industrial centres. If giants like India and China fuel their growth with resources, rising commodity costs might price them out of the market. Stuck in the fossil regime, volatile commodity markets, geopolitical risks and insufficient energy efficiency are bound to become a major liability to sustainable development. This means the window of opportunity for export-led manufacturing growth is closing, turning industrialisation into a gigantic race against time. If India hopes to prevail in this race, it must not miss the bus of green growth.
The writer is resident representative of Friedrich-Ebert-Stiftung in New Delhi and coordinator of the Asia-Europe Economy of Tomorrow project