The Future of Low-Skilled Manufacturing Labor in Industry 4.0

By: Nazla Mariza, Humphrey Fellow 2017-2018, Maxwell School of Citizenship and Public Affairs, Syracuse University; Visiting Researcher (Summer 2018), Center for Strategic and International Studies

Since the era of industrial revolution (IR), the manufacturing sector relied heavily on low-skilled physical labor, making it one of the largest job producers. Developing countries with large populations took advantage by offering abundant numbers of low-wage workers. China, as a country with the largest population in the world, has been benefitting from this situation. Their economy has been growing by hosting major manufacturing industries from foreign investment since early 1990s.

Technological advancement, or industry 4.0, has been influencing different aspects of human life including manufacturing. With investment in R&D, AI and robots are more efficient than human power and will eventually replace labor; its cost will no longer be the main consideration in manufacturing. This commentary will look at technology wave in manufacturing, its move toward a capital-intensive model, and the future of labor-intensive industry in developing countries.

The contribution of manufacturing to development

Historically, manufacturing has had significant contributions to economic development through dual function productivity gains and job-creation for low-skilled workers. Countries at the forefront of the industrial revolution now earn higher incomes on average. During the first IR, the manufacturing sector relied heavily on low-skilled physical labor, making it one of the largest job producers. Some economists believe that investing in manufacturing will effectively reduce poverty as it provides a steady income to the poor—at least initially—before boosting productivity. In the era of globalization, manufacturing processes often span several countries to produce a commodity. High-Income Countries (HICs) outsource some of their production processes to cost-effective locations. Countries with a large pool of low-wage laborers attract foreign companies and often gain the dual benefit of developing their manufacturing industry.

The Rise of China’s Manufacturing Sector

Shifting manufacturing to developing countries helps boost the economy. China is now a powerful emerging economy with the second largest gross domestic product (GDP) in the world after the U.S. Manufacturing is the foundation of China’s economic growth, which has prospered because of outsourced manufacturing activity, accounting for almost half of its GDP.

China has successfully expanded its manufacturing industry by changing and harnessing its comparative advantages in the 1980s and 1990s through privatization and opening markets to international trade. China has also been successful in maximizing its large pool of low-skilled laborers by using low wage/labor cost ratio in developed countries. Additionally, there are other benefits that China offers to companies, such as competitive product prices along with flexible minimum quantity supply chain systems. These reforms helped China engage in the international market and become a successful breeding ground for manufacturing, receiving an overflow of outsourcing from various companies.

Foreign investment has supported the manufacturing industry and economic growth has increased dramatically by 9 to 14 percent from 1992 to 2011. This growth has been sustained for over 20 years, making China the single largest producer of manufactured goods in the world and accounting for 10 percent of total global exports ($2.1 trillion). It is not surprising that China’s export of goods and services has increased by 43 times in under three decades. The poverty level has decreased from 6.6 percent in 1990 to 1.4 percent in 2014, although inequality remains high at 42.2 percent in 2012.

In the era of digitalization, technology innovation has affected the manufacturing industry. This change presents opportunities and challenges, but how can major players such as China capitalize on the opportunities of forthcoming technological advancement?

China’s rise to power in the international economy was successful, in part, because it had the right set of conditions. However, countries that aim to mimic China’s pathway to development face an obstruction to growth that China did not have – the Fourth IR (4IR). Manufacturing is transforming with the introduction of new technologies such as AI, robotics, 3D printing, and automation. The manufacturing sector will soon likely implement the use of innovative technologies that could eventually replace some manufacturing jobs – displacing existing human labor. For example, robots can build cars, but no one has yet made a robot that can sew a shirt, at least at a cost that would allow the producer to sell the shirt at a competitive price. As a result, productivity and revenues are predicted to spike— at the cost of downsizing of up to 25 percent.

Manufacturing new advanced goods such as autonomous vehicles, biochips and biosensors, autonomous medical devices, and control systems could also affect labor demand. Consequently, innovative technology in manufacturing will demand higher level skills (e.g. programming and IT). Currently, labor skill in manufacturing— mostly located in developing countries—is relatively low and will create skills gaps, so training and education programs should be more adaptive to shifted operations in manufacturing.

Given that HICs have established R&D facilities and high-skilled laborers (i.e. scientists, computer technology specialist, innovative product designers), they will likely benefit from digitalization and engage more with it. Potentially, HICs may move global production back to their own countries, as low labor cost becomes less relevant in determining production location.

Low- and middle-income countries (LMICs) will feel the biggest impact as they can no longer rely on labor cost for their comparative advantage. A critical question will be whether new technology trends will impede on manufacturing activities across LMICs or create new opportunities. Do LMICs need to focus on improving their competitiveness in producing traditional goods?

It is interesting to see how the transformation will affect the kings of manufacturing. China has been preparing itself to adapt to this emerging technology trend, realizing the need to be flexible. In 2015, China launched “Made in China 2025” (MC2025) intending to prepare itself to enter the age of smart manufacturing. China also aspires to be the biggest technological power by 2050. The MC2025 document outlines China’s response to Germany’s “Industry 4.0” and the “Industrial Internet” in the U.S. by developing ten industries, namely next-generation IT. This includes high-end numerical control machinery and robotics; aerospace and aviation equipment; high-tech maritime engineering equipment  and biopharmaceuticals. This big leap marks a shift in China’s manufacturing industry toward a more capital-intensive industry.

This ambitious plan will position China as the world’s manufacturing superpower, enabling it to reach HIC status. To do so, China realizes it can no longer rely on producing cheap goods. The Chinese government aims to move up the value chain to produce more advanced products and establish its domestic technology, removing foreign dependency.

To support all these ambitions, China has been committed to R&D activities, whose budget has been increasing every year to levels much higher than its competitors. In 2015, according to UNESCO Institute for Statistics, Germany allocated $110 billion to R&D, South Korea issued $73 billion, and Japan allocated $170 billion. China surpassed these countries’ budgets combined, with $370 billion that same year.

Despite high R&D investment, the use of robotics in manufacturing is still relatively low in China. In 2016, China developed on average 19 industrial robots per 10,000 industry employees, much less than Germany, which produced 301, and South Korea’s 531. This demonstrates that HICs may still play a key role in manufacturing if they can maintain their competitiveness in high innovative technology. Notwithstanding, China may soon catch up given its aggressive technological development. Recently, China opened new institutes for robotics and AI that aim to facilitate the transformation of traditional industries.

Above all, this new trend creates fear for developing countries that depend on a large pool of low-skilled labor to remain competitive. Manufacturing is not a feasible industry to provide the same dual benefits of productivity and job-creation for unskilled labor. How will developing countries fare in manufacturing, as China shifts its focus?

Despite the rise of automation, it won’t replace sectors that require human emotions, creativity, and instinctive decision-making (e.g. service industry, tourism, hospitality and nursing).China will be less competitive in producing labor-intensive goods such as car parts, electronic products, garments, textiles, shoes and toys with its declining work-age population expected to continue decreasing to 830 million in 2030. This affects the increase of labor costs ($9,907 annual labor wage in 2017).

In 2014, Chinese exports from labor-intensive manufacturing reached $1.5 trillion. Shifting away the labor-intensive manufacturing may open a window of opportunity for other countries to enter the manufacturing space. A study by Gustav Papanek from Boston Institute for Development Economics shows that moving half of China labor-intensive manufacturing to other countries would gain them up to $750 billion, a big opportunity for those with comparative advantages (labor, costs, proximity to raw materials).

However, there are concerns. Moving operations out of China to other countries is difficult. Some hindering factors include low productivity, inadequate supply and engineering, logistic costs and poor infrastructure. Thus, paying higher labor wages in China remains more competitive. If other developing countries want to take up the spill-over share from China, nothing is more essential for them than to seriously rebuild their comparative advantage. Developing effective macroeconomic policies and a robust financial sector is a must.

If developing countries with big population and fast economic growth such as India and Indonesia fail to seize the chance from China, new players will possibly take over. There are new frontier markets in Asia such as Sri Lanka, Bangladesh, and Vietnam, while Nepal, Cambodia and Laos have been preparing for economic growth.

What will happen in the future?

The future of economic growth in this region will depend on a variety of factors. Many of these are uncertain, but one: the competition among China, HICs and LMICs will continue. Countries still have a chance to enhance their unique competitiveness if they act strategically. The division of roles is possible if each can provide value in the chain of manufacturing process. Some could supply raw materials, while others focus on production or logistics. Failure to diversify will pave the way for China to be the single manufacturing superpower in the world. Support from HICs to LMICs in increasing LICs capacity in global value chain can help.

Challenges are not merely about automation, but also about the reallocation of resources to growing sectors such as the services industry. The growing pace of manufacturing will likely require greater services, whether as inputs, activities within firms or as output sold bundled with goods. This is known as “servification”, which means manufacturing sectors increasingly rely on services. Services account for about one third of value-added in manufacturing sales and exports, creating opportunities for LMICs and HICs to play a role as service suppliers.

The growing population in developing countries and ageing population in developed countries, create demand for the service sector. So, the problem is not a lack of need but one of effectively addressing the demand. The people who need healthcare, transportation, and education cannot afford it, and the government must step in to address the future shift of labor and service demands and adjust to changing needs.

John Sanbrailo – Rest in Peace

John Sanbrailo

This photo was taken on May 15, 2016 and features John Sanbrailo (left), Luis Almagro (OAS Secretary General-center), and Luis Ubinas (President of Board of PADF-right).

By Daniel Runde

I knew John Sanbrailo professionally and personally for more than 15 years. He had been having health struggles for the last 5 years. We’ve been on a committee together recently providing a sounding board to an author who is writing a history of U.S. Agency for International Development (USAID).

John dedicated his life to political and economic progress in the Western Hemisphere and believed the United States and the rest of the hemisphere had a shared future. He was driven partially by a strong sense of history and was the first person to show me that the U.S. had engaged in enlightened self-interest through acts of foreign aid, even in the 18th century. He wrote a paper, published in the American Foreign Service Association, about the first “aid packages” the U.S. sent in the Western Hemisphere. As early as 1792, the U.S. was accepting thousands of refugees from Haiti during the Haitian Revolution. The U.S. supported Haiti’s independence from France and provided aid to Haiti through the establishment of a relief fund. In 1812, Congress appropriated $50,000 in support to Venezuelan victims after an earthquake which took place at the start of the Venezuelan War of Independence. The U.S. supported Venezuela at this time not only for humanitarian purposes, but to help Venezuelans regain their footing against the Spanish and prevent further European influence in the region.

John joined USAID in the 1960s at the height of the Alliance for Progress. The Alliance for Progress was started by President Kennedy in 1961 alongside USAID; it was a part of President Kennedy’s goal to improve U.S. relations with Latin America and promote democracy and economic cooperation in a time that was threatened by communist insurgents. The Alliance for Progress was not only the right thing to do, but it was also a response to the Cuban Revolution in 1959 and our fear that other countries in the region would be tempted to go the way of Cuba. An entire generation of Latin Americanists, international development professionals, and business leaders were inspired by Kennedy’s foreign policy initiative through the Alliance for Progress and John was one of them.

John was particularly quick to note that the Alliance for Progress was not a Democratic party project but had strong support from the Republican party, in particular Nelson Rockefeller who had huge interest in Latin America. Rockefeller also worked in the Office of Inter-American Affairs and was the first Assistant Secretary for Latin American affairs in the early 1940s. He went on to establish two organizations in the mid-1940s focused on economic development in Latin America. Nelson Rockefeller (former Vice President under President Gerald Ford and former Governor of New York) heavily influenced his brother, David Rockefeller. David was interested in doing business in Latin America in the 1950s and 1960s. During his time at Chase National Bank, David significantly expanded the bank’s international operations. In the 1950s and 1960s, a series of organizations were established to support relations between the U.S. and the rest of the Western Hemisphere. In 1959, the Inter-American Development Bank was established. In 1963, David Rockefeller founded the Council of the Americas. Nelson influenced David who helped encourage American business interests in the Americas. John was a part of this renaissance between Latin America and the U.S.

John Sanbrailo was born in a generation that was familiar with the influential book, the Ugly American (published in 1958 with almost 4 million copies sold) which described our incompetence and cultural insensitivity while trying to engage with others in the outside world. The Ugly American had a profound impact on President Kennedy too.

John Sanbrailo loved working at USAID; he started working there in 1969 and left reluctantly in 1999. He served in a number of important places at critical times. He served as USAID Mission Director in Ecuador, Peru, Honduras, and El Salvador. In Peru, John was an early supporter of Hernando de Soto who established his think tank, the Institute for Liberty and Democracy (ILD) in Peru with major support from USAID. It is ironic that the ILD was supported by USAID because many of my conservative Republican colleague’s dislike USAID but really like Hernando de Soto and the ILD without realizing that USAID helped stand it up and supported it for decades.

In 1999, John joined PADF which was started in 1962 as a nonprofit arm with ties to the Organization of American States (OAS). John was always quick to remind you that PADF’s original charter talked about partnerships with the private sector. During his time as Executive Director, John took PADF from less than $10 million in annual operations in 1998 to $95 million in 2017. The organization was, by all accounts, not in a great place when he started, but he recruited a new board, reformulated the mission, recruited new people, and leveraged his relationships around the hemisphere, leading PADF to become one of the premier social enterprises in the Western Hemisphere with major partners including Haiti, Colombia, and the Dominican Republic. John was always very active in Colombia and the Northern Triangle. He had a special place in his heart for Ecuador, where his wife–Cecilia del Pozo–was from.

Over the course of John’s career, things changed dramatically in Latin America and he helped. The United States developed a different kind of relationship with countries in the region barring Nicaragua, Venezuela, and Cuba. In 1970, the adjusted net national income per capita was approximately $450 in Latin America and the Caribbean. According to the Freedom House Index, 11 countries in the Western Hemisphere were labeled as “free” and 4 countries were considered “not free” in 1972. When John retired from the Pan-American Development Foundation (PADF) in 2016, the average national income per capita is $6,407 in Latin America and the Caribbean. According to the Freedom House Index, 23 countries in the Western Hemisphere were labeled as “free” and one was considered “not free” in 2016.

John’s legacy can been seen in the strengthen relationship between the U.S. and the rest of the Western Hemisphere. He also left behind a strong and relevant PADF. As we face challenges in Venezuela and the Northern Triangle and as we embrace opportunities in Argentina, Brazil, and Colombia, we will miss John’s sense of history and his decades of experience.

 

Roads to Prosperity: Fixing Argentina’s Crooked Infrastructure

Nicolas Blog Post

Hello There by Flickr user mzagerp under an Attribution 2.0 Generic license.

By Nicolas Berlinski

The province of Jujuy, located in Argentina’s most northwestern corner, is heavily reliant on the cultivation of sugar cane and its exportation to the domestic Argentine market. Regardless, it takes 22 days to move that sugar to the national capital, Buenos Aires— the same amount of time it would take to move the sugar from Jujuy across the Atlantic to Hamburg, Germany.

Jujuy is no anomaly as poor transportation networks and connectivity have restricted long-term economic growth throughout Argentina for some time now. Subpar infrastructure has hampered the efficiency of Argentina’s supply chains and significantly increased the transportation costs of goods – Argentina’s shipping costs are twice the OECD average for example. Furthermore, the country ranked 81st out of 137 in the World Economic Forum’s 2017-2018 infrastructure index, mainly due to the lackluster quality of its roads, ports, and notably electricity supply (ranked 113th out of the 137 economies surveyed). Buenos Aires regularly faces summertime power blackouts as air conditioning in the city’s buildings strain the local power grids past their breaking point, shutting off traffic lights, office computers, and everything in between. Poor infrastructure is a threat to public health too as 22% of the country isn’t connected to public water networks and around 40% are not connected to sewage, making many Argentines, particularly children, vulnerable to parasites.

Considering the long distances between the country’s cities and resources, the energy needs of its largely urban population to function in daily life, and its economic status relative to most countries with similar infrastructure woes, Argentina’s long-term growth prospects largely rest on an infrastructure overhaul. There is little debate that Argentina must boost domestic investment in infrastructure from the insufficient current rates of 3% of GDP to 6% in order to match the needs of its society. President Mauricio Macri and his electoral coalition, Cambiemos, pledged to address the issue in his 2015 presidential campaign with the announcement of sweeping infrastructure plans across the country and the much-anticipated Plan Belgrano, an infrastructure plan for Argentina’s 10 Northern provinces. Marcos Peña, President Macri’s cabinet chief, described Plan Belgrano as “the most ambitious [infrastructure project] in Argentina’s history.”  Infrastructure projects were conceived without a specific budget. Instead, the Macri administration sought to facilitate contracts mostly through a range of Public Private Partnerships (PPPs) since Argentina has regained access to international capital markets following the resolution of a standoff between the country and holdout funds due to previous debt defaults and the elimination of harsh capital and import controls imposed by former president, Cristina Fernandez de Kirchner.

Unfortunately, like in so many other Latin American countries, Argentina’s infrastructure plans have struggled to live up to expectations and have an uncertain future, hindered by macroeconomic woes, a corruption scandal, and the possibility of a new president in October’s election. The lessons Argentina has learned thus far are demonstrating the challenges of financing infrastructure in the developing world. The importance of institutional strength and transparency, stable finances, and both the benefits and pitfalls of PPPs to build the infrastructure that the developing world needs have come to light in Argentina.

In 2018, the Argentine peso lost half of its value, its interest rates reached world highs, inflation creeped up on 50 percent, and the IMF had to grant Macri’s government a record-breaking $57.4 billion bailout, portending harsh austerity. The public purse is being gripped tight and private investors are obviously hesitant to engage in new projects. Fitch Solutions, a consultancy arm of Fitch Ratings, forecasts weak progress in 2019 for Argentina’s PPP infrastructure projects with multiple projects that were approved in 2018 struggling to attract investors.

Argentina was able to attract funding for 1325 km of road construction with the help of the Overseas Private Investment Corporation (OPIC) and China’s State Construction Engineering Corp-subsidiary China Construction America (CCA). However, another 2,028 km of road projects that were awarded in 2018 appear in jeopardy as private finance has become hard to find during these turbulent times. It is unlikely that the government will issue new PPP tenders for previously planned projects like a large-scale passenger tunneling project in Buenos Aires, the construction of a freight rail line between Neuquén and the port of Bahia Blanca, and another seven road corridors, among others. For now, the end of the construction slowdown is hardly in sight. Lending rates are unlikely to ease up soon as Argentina’s central bank battles to maintain tight monetary control.

Argentina’s high public debt is another hurdle – it’s back on the rise after it peaked during the country’s 2003 sovereign debt crisis. PPPs seem to be Argentina’s only option. On the one hand, publicly financing large projects at this moment in time seems impossible considering the country’s historic current account deficits and the conditions of the IMF bailout. Likewise, the country’s infrastructure needs are as immediate as the job of balancing the books.

Unfortunately, as President Macri is beginning to learn, PPP agreements aren’t a panacea. They still require assets from the government and are costly when something inevitably goes wrong. Although PPP agreements and their liabilities can be written off the books, project costs must be paid off to the private sector down the line and extra costs end up on the government books eventually. All may seem fine today, but Argentina is taking on potential debt, whether or not it’s on the books, as an infrastructure project of this scale is bound to have complications along the way that will need government financial intervention. To ignore this fact would be foolish, especially considering the country’s fiscal history and knack for volatility.

Whether Argentina will be able to tackle the costs that will likely appear down the line is unclear to say the least. Argentines have been consuming at high rates and saving very little. National domestic savings and investment have tumbled since 2008 and the country faces a deeper current accounts deficit than ever before. Gross savings in the country as a share of GDP in 2017 were 13.5%, among the lowest in Latin America, let alone the rest of the world where developing countries like India, Indonesia, the Philippines, and Thailand have saving rates between 30-40%. Argentina’s infrastructure needs are immediate but so are its fiscal issues.

With little available investment capital, high public debt, and a challenging investor environment, it is no wonder that infrastructure projects have moved along at a fraction of the pace President Macri’s campaign seemed to promise.

As if Argentina’s economic situation wasn’t complicated enough for infrastructure development, a wave of corruption allegations leveraged on the Kirchner administration have rocked the boat and fueled distrust of PPP agreements. The Lava Jato investigations which revealed continent-wide political graft by Brazilian construction conglomerate, Odebrecht, in public works projects led to around $35 million in bribes being paid to Argentine government officials. These investigations also prompted the publication of journals documenting bribery by many Argentine firms of government officials between 2005 and 2015, which has led to drawn out court dealings, political infighting, and skepticism about ongoing public works projects. Owners of some of the country’s largest construction firms have been implicated, including President Macri’s cousin and ally, Angelo Calcaterra, the former owner of construction company, Iecsa, which has been recently accused of receiving unfair preferential treatment on the “Ruta Nacional 8” project, linking Buenos Aires to the provinces of Santa Fe, Cordoba, and San Luis.

Fitch Solutions argue that public wariness and skepticism as a result of the scandals, have made elected officials hesitant of pushing PPP infrastructure too hard, exacerbating the challenges caused by the macroeconomic situation in the country. President Macri’s administration is currently trying to strengthen laws and regulations so that only individuals that are involved in corruption are penalized while companies must simply pay fines in order to avoid cancelling already awarded projects and to avoid blanket bans on PPPs. “The government is adopting regulations to save the companies, while executives and shareholders face the consequences of their actions,” Marcelo Etchebarne, country head for consultancy DLA Piper Argentina, said.

Corruption is an institutional blight to infrastructure development and has made infrastructure projects in Argentina costlier and more inefficient for as long as it has permeated the country’s public institutions. When unfair competition for government contracts arises through corruption and bribery for government officials, the public good is compromised by personal gain. A recent study by researchers at the University College of London and Central European University sought to quantify the average cost of corruption by looking at a large dataset of public procurement announcements from 2009 to 2014 of 27 European Union countries. The researchers measured corruption with an index of a country’s corruption risk and estimated that a one unit increase in the corruption index, equivalent to the difference between Hungary and Sweden, was associated with a 35% increase in road costs when controlling for other factors.

A final cause for concern for the future of Argentina’s infrastructure efforts, is the possibility of a new president being elected in this year’s election. President Macri’s approval ratings have been low and volatile amidst the economic crisis of 2018 and haven’t cracked the 40 percent mark in a while. The nightmare scenario for President Macri would be former president Kirchner, or a similar firebrand candidate, winning the presidency. That could mean a re-implementation of the capital controls that Kirchner put in place prior to 2015, once again constricting Argentina’s access to foreign capital and investments for infrastructure.

Argentina’s stuttering efforts to improve infrastructure resemble similar narratives throughout the world and Latin America, where public and private infrastructure investment is lower than every other region in the world except Sub-Saharan Africa and the share of paved roads is lower than anywhere else. Argentina is emphasizing important lessons of infrastructure development. On the one hand, the balance book must be in check. Stability is the key to an investor’s heart and, with a global financing gap for infrastructure projects, private investors will be key. A country’s institutions must be fortified to weather the temptations of bribery too, and they must be staffed by public servants who have the public good in mind. In the face of high public debts, harsh investment environments, widespread graft, and political uncertainty, many developing country’s infrastructure ambitions are falling short of reality.

So where does the country go from here? Any serious discussion about infrastructure in the country must revolve around normalizing the country’s fiscal troubles. Obviously, that is part of Argentina’s larger economic picture. Macroeconomic policy needs to be directed both towards short-term sustainability while also addressing the immediate needs of Argentines, especially the most vulnerable. When the books are in order, then large-scale infrastructure projects will be easier to manage, and investors will be more willing to engage in Public Private Partnerships.

Tackling corruption is another challenge that can be addressed in the immediate future. Laws that demand greater transparency regarding the bidding and approval process of PPPs will help but the broader issue at play is restoring the justice system that has become highly politicized and ineffectual – only 2% of the indictments filed by state attorneys in the past decade have resulted in concrete penalties. Moreover, PPPs require private investment and private investment yearns for stability and rule of law. Tackling political graft will ease the concerns of investors in the short run, at least slightly, reduce costs of infrastructure development, and improve the final product.

Longer paved roads, vast railways, and modern airports can provide a structural boost to Argentina’s economy to provide for long-term growth while providing plentiful employment. In order to achieve this though, the economic ship must be steadied, and corrupt leaders from the public and private sector banished from power.

 

 

Developing Countries Should Invest in Prisoners, Not Prisons

Prisons

Prison fence by Flick user Brad.K under an Attribution 2.0 Generic license.

By Carmen Garcia Gallego

Prisons are an essential element of a functioning justice system, but detention facilities often focus on punishing rather than rehabilitating convicts. This can lead to high rates of recidivism and be so expensive that issues with overcapacity, inadequate health services, and violence seem almost inevitable. There are 10 million people incarcerated worldwide, and overcrowding in prisons is an issue in 120 countries. These issues are particularly prevalent in developing countries like Brazil and Indonesia, which have large prison populations and insufficient means to maintain them.

Amidst these challenges, new models of detention focused on convict rehabilitation, vocational training, and greater inmate freedom have been successfully developed. New ideas on prison reform are essential to address the overwhelming issues that strain prison systems worldwide, and increased attention on mass incarceration presents a great opportunity for reform. Now is the time to look at existing prison models and enact change in a way that can both improve inmates’ well-being and advance countries’ development priorities in a cost-effective and sustainable manner.

The APAC Prison Model in Brazil

Brazil has the third-highest prison population in the world, behind the United States and China, with over 690,000 prisoners. Prisons are a big issue in Brazil, where overcrowding, security, violence, and poor conditions are regularly featured on news headlines. In the first week of 2017, almost 100 people were killed in gang-related violence in prisons in Manaus and Roraima. In the same week, 184 inmates escaped. Yet Brazilian prisons are also making the headlines for a different reason: treating some convicts humanely.

The Association for the Protection and Assistance to Convicts (APAC) opened its first prison in Brazil in 1972 and now runs 50 facilities. APAC is overseen by the faith-based non-profit Brazilian Fraternity of Assistance to the Convicted (FBAC). Unlike public and private prisons, APAC prisons give inmates – called recuperandos, “recovering people” – freedom, work, and study opportunities. Prisoners hold the key to their own cells, wash their own clothes, cook their own meals, study, and attend group therapy sessions. There are currently 3,500 recuperandos in APAC facilities, roughly 0.5 percent of the entire Brazilian prison population. To be incarcerated at an APAC facility, inmates must first pass through the national penitentiary system and show remorse, willingness to work and study, and commitment to the APAC philosophy. If they pass and meet certain requirements – for example, they must not be serving a lifelong sentence and they must have family living in the solicited region – they may be transferred by a judge to an APAC prison.

Transfer can be extremely beneficial to inmates. One inmate, who was serving a sentence for drug trafficking, was transferred to an APAC prison after four months in a conventional correctional facility. Now, she is the head of a prison council and works to reduce her 8-year sentence. Inmates can receive drug rehabilitation courses in partnership with local universities on how to prevent drug use, and they are taught that they are co-responsible for their own recovery. Another recuperando was given jail time for theft and, upon entry into the APAC system, took a training course on civil construction and landed a job in the field after serving his sentence. Prisoners do not escape, partly because a failed escape attempt will land them back in a conventional prison, but also because being in an APAC facility gives inmates a sense of community and responsibility. This is reflected in impressive recidivism rates: 7 to 20 percent of APAC prisoners go back to jail at some point, well below the national average of 70 percent.

APAC prisons have not only benefited inmates; they have also helped Brazil save money, manage overcapacity, and fill skills gaps. Maintaining a prisoner in an APAC facility costs one third of maintaining one in a state prison: the Brazilian state pays 3000 reais (nearly $800) on average per prisoner in a state prison versus 950 reais (around $250) for an APAC recuperando. The enormous difference is due to the lack of paid prison guards and weapons and the costs saved by allowing prisoners to farm, cook, clean facilities, and perform maintenance tasks as needed.

If, hypothetically, half of Brazil’s 690,000 prisoners were transferred from a federal prison to an APAC facility, Brazil could save nearly 1.5 billion reais (over $400 million) and invest this money in education, health, or infrastructure. These investments are much more likely to create jobs and better provide for the people, which will decrease incentives to commit crimes in the first place. Providing vocational training at APAC facilities can also help inmates find quality job opportunities after serving their sentences and help fill some of the skills gap in Brazil’s workforce. For example, tourism will create 1.5 million jobs in Brazil by 2027 – jobs that will require language and hospitality skills. Agriculture makes up 45 percent of all Brazilian exports, and changing technologies will require workers with more technical skills to work in agriculture. Training recuperandos in the tourism and agriculture sectors can help meet future demand and complement existing APAC programs that train inmates to be car mechanics, painters, and security officers, among others.

Bringing the APAC Model to Indonesia

19 countries in the Americas, Europe, and Asia have APAC-like prisons. They are notably absent from Indonesia, a country which could benefit tremendously from the model. Indonesia’s prison population has nearly quadrupled since 2000, making it the seventh largest in the world today, with roughly 248,000 prisoners. The prison system in Indonesia faces challenges of overcrowding, escapes, riots, and understaffing like that of Brazil. Corrupt prison staff provide drugs, outings, and phones to wealthy convicts. Prisons are at 198% of capacity, making it difficult for prison guards to monitor communications to counter the important issue of radicalization. In 2016, for example, a radicalized ex-convict launched a suicide bomb attack in Jakarta. He had been influenced by an Islamist cleric in prison who, while incarcerated, was able to publish his allegiance to the Islamic State on Facebook.

Implementing the APAC model in Indonesia would help address some of these issues. Receiving education and skills training at APAC prisons could discourage inmates from becoming radicalized and help them find jobs after serving their sentences. Levels of labor productivity are exceptionally low in Indonesia, and almost one-third of the workforce is in a position of vulnerable employment. Indonesia ranks low in terms of technological readiness and has made efforts to increase its economic competitiveness, but technological advances threaten to thwart economic growth. Addressing some of these issues will require a more productive, skilled workforce and placing a greater emphasis on the manufacturing and high value services sectors. Providing prisoners with technical and vocational training can help fill some of these skills gaps, and it can ensure that convicts are prepared for the jobs of the future when they are reintegrated into society.

With regards to improving inmates’ well-being, the rehabilitation and education aspect of the APAC model could greatly aid the drug crisis in Indonesian prisons. One of the major reasons for Indonesia’s large prison population is that the country criminalizes narcotics use with a three-year sentence. Over 80 percent of Indonesian inmates are in jail due to narcotics-related charges. The drug problem continues within jails; prisoners contract HIV within cells and, in 2013, even a meth lab was found inside Indonesia’s biggest prison, Cipinang. Transferring some of these addicted inmates to APAC-like facilities and offering them rehabilitation and education could help alleviate their addictions, reduce HIV mortality rates, and decrease prison overcrowding.

Education and rehabilitation benefit both inmates and the state, and Indonesia stands to gain from other aspects of the APAC model as well. First, Indonesia could save a large sum of money and address the problem of overcapacity by reallocating prison guards. In 2015, there were only 15,000 prison guards in the entire federal prison system and they earned an average $300 a month. Low pay and understaffing can lead to corruption, escapes, drug use, and radicalization, among others, so this issue must be promptly addressed. Since APAC prisons require little to no guards, transferring prisoners to APAC facilities would allow federal prison personnel to pay better attention to remaining convicts. They could receive higher pay and more staff could be hired with the amount saved.

Second, Indonesia could save money on maintaining the prisoners themselves. The Indonesian government spends 15,000 rupiah (about $1 dollar) per prisoner per day – which translates to $90 billion per year. If APAC facilities in Indonesia had similar cost structures to those in Brazil (i.e. if the cost of maintaining a prisoner in an APAC facility were one-third the cost of maintaining one in a federal prison), and if just 20 percent of the prison population were transferred to APAC facilities, over $12 million could be saved per year. If APAC facilities yielded lower recidivism rates, overall cost savings could increase yearly. These funds could be reinvested in education, social reform, health, or rehabilitation programs for drug offenders. However, it is unclear whether the same cost savings would apply – further analysis should be conducted on this matter.

Lastly, the Indonesian Ministry of Justice and Human Rights announced that 49 prisons, 13 detention centers, and 62 rehabilitations centers would be constructed in 2015. In 2016, plans for a new high-security prison and four other new prisons were also announced. It is unclear how much progress has been made on these initiatives, but it signals that Indonesia is paying attention to prison-related issues and is aware of the need for reform. This presents a great opportunity to promote the APAC model and install it in detention and rehabilitation centers. These centers could be built instead of high-security facilities and conventional prisons, cutting construction costs and transferring non-violent prisoners to detention centers, thereby addressing the issue of overcapacity, and maintaining dangerous convicts in conventional and high-security prisons.

Broader Implications and Recommendations for Prison Reform

The APAC system could be implemented in both developed and developing countries, beyond Brazil to countries like Indonesia. However, the model’s success in Brazil does not guarantee that it will be equally successful elsewhere. Even in Brazil, local involvement and political will are necessary to open APAC prisons, and efforts to open new facilities have been thwarted in the past due to financial issues, overcrowding, and corruption. Nevertheless, there are APAC prisons in 19 countries and those that are running are thriving, suggesting that the model can be replicated in different contexts. Countries interested in this model must first consider social, economic, and political factors, strengths and weaknesses of current penitentiary systems, and skills and workforce needs. The amount of money saved, the number of prisoners held, and the types of education and rehabilitation offered at the facilities would vary from country to country. Further study on potential impact should be conducted to ensure that the APAC system is viable and beneficial in the long run, in Indonesia or in any other country.

It is worth noting that, in Brazil, APAC only hosts a small fraction of the whole prison population. Even if the program were extended, not all prisoners would be eligible for transfer. Inmates in high-level security facilities, violent persons, and repeat offenders are unlikely to be given the keys to their own cells. However, APAC facilities can host vulnerable populations, non-violent and low-severity offenders, and prisoners awaiting trial worldwide. Therefore, the APAC solution is not a one size fits all: it may only benefit a subset of the prison population, but it should still be considered as part of prison reform due to the tremendous development opportunities it presents.

In sum, reforming prisons should be a development priority. Introducing more humane, cost-effective prison systems can save countries millions of dollars to reinvest in line with development priorities, decrease recidivism rates, and reintegrate ex-convicts into the workforce in ways that reduce skills gaps and advance countries’ economic interests.

 

 

BUILDing a Better Economic Future Requires People, not just Infrastructure

By Alicia Phillips Mandaville and Kristin Lord

 

Last month, heads of state from around the world gathered in New York City for the UN General Assembly to discuss, among other topics, global development goals. This year, there was no shortage of whiplash for both policy makers and American citizens who prioritize the United States’ engagement in the world: just after President Trump’s General Assembly address caused hand-wringing in New York, a momentous global development event unfolded in Washington DC with the bi-partisan passage and White House support of the BUILD act, which establishes a new U.S. International Development Finance Corporation (USIDFC).

 

Designed to enable infrastructure investments in emerging and developing economies, this new DFI can create new market opportunities for Americans and economic growth for our partners. But to fully reap the potential, we must ensure fresh, actionable thinking about the fundamental relationship between human capital and infrastructure in long-term economic growth. Based on prior experience with the Millennium Challenge Corporation (MCC) and the discussions around the USIDFC so far, this may not happen without an explicit and intentional focus early on.

 

Investing in infrastructure is important. It directly impacts economic growth and signifies progress to all who observe it. As anyone who has traveled to major urban centers or economic hubs knows, infrastructure is the nerve system through which an economy operates. Whether highways, sanitation, or telecoms, infrastructure enables transactions and information to move at the speed needed for a modern economy.  And, despite the noise and the dynamism, if you have ever stood in the middle of a busy industrial port anywhere in the world, there is something quietly reassuring about the resonant buzz of that operation. It is as if you can feel the growth happening around you.

 

But if there is one lesson that economists and humanity have learned over and over, it is that the economic growth equation fails in the absence of human contribution; no matter how well it is equipped, an economy without dynamic human resources is a recipe for stagnation. Development organizations know this: the historic, multilateral, “if you build it they will come” model of public goods provision led to roads-to-nowhere and was roundly critiqued by academics and development technocrats alike early in the 21st century. This was in part what led the US to stand up the MCC as an effort to put resources in those countries already investing in human capital and sound governance, and therefore was able to provide an environment in which investments in public infrastructure could have maximum impact. It is also why World Bank President Jim Kim’s efforts to focus on human capital so revolutionary.

 

The BUILD Act, and the USIDFC it creates, is built on this and other hard-learned lessons of development. But it emerges at a point in time when nearly everything we know about the nature of dynamic human contributions to an economy are in question. The global labor market is changing, and with the rise of automated systems, artificial intelligence, and employment platforms, so are our expectations about the very role of humans in a labor market. Common wisdom is that the jobs of the future in all economies will center around complex, creative, and interpersonal skills – but no one quite knows what it will take to get there. 

 

Looking at this uncertainty, it could be easy for a newly minted USIDFC (and other US levers of economic development) to cause the US to focus exclusively on the physical capital side of investment. That would be a mistake. To succeed, the USIDFC will need to apply one of the most complicated and least glamorous lessons of the MCC: investing in both the human and physical side of economic growth. Without that, it will fail to leverage this obvious moment for American economic leadership in a dynamic sector, and neglect opportunities both at home and abroad. To put it more pithily, US foreign assistance needs to invest in people as well as in stuff. 

 

What does this mean? The USIDFC needs to make a tangible commitment to rigorously designing and evaluating the human capital side of its investments. It may require new research and creativity to assess the evolving effect of secondary and higher education transitions, or the role of informal education, apprenticeships, or other employment focused interventions at the young adult and adult level. But to be successful over time, the DFC’s economic assessments must articulate their assumptions about the role of people in making economies work, and impact evaluations of that work should create the same type of robust experiments that MCC depended on to explore investment returns in agriculture, transport, and power sectors. That may also mean pulling other foreign assistance agencies as well as private sector and philanthropic partners in to make complementary investments in human capacity that align with their own mandates.

 

We know there are a tremendous number of ways for individuals to actively participate in an economy, and that this participation is necessary for growth as well as for political and social stability. Genuinely evaluating the ways US investments and foreign assistance support this crucial participation will invariably lead us to some positive conclusions and some painful realizations – that is the nature of robust impact assessment. But we all see the future of work changing. It would be inexcusable for the development community to believe that has no implication for the way we work too.  

 

Alicia Phillips Mandaville is Vice President of IREX, and a non-resident Senior Associate for the CSIS Project on Prosperity and Development. Kristin Lord is President and CEO of IREX, a global development and education nonprofit celebrating its 50th year.