Monday, August 15, 2011

Winds Of Change

The recent downgrading of sovereign US debt, balooning joblessness and precarious economic conditions in US, Western Europe and Japan are not at all surprising. This is bound to happen when the cost differential, in different parts of the world, of a major economic resource, human l
abour, becomes alarmingly high, particularly when much of the goods and services consumed are no more niche.
Till the early 1960’s, the developed world closely guarded the technologies for mass produced items installing a barrier for the rest of the world. Technologies kept advancing and helped improving labour productivity. Quality of goods improved and prices kept dropping. This lead to a consumption boom resulting in more and more demand for goods and services and creation of more and more jobs. The currencies of these countries continued to appreciate considerably. I remember that one USD in 1960 was worth around Rs 4/- and today, it is Rs 45/-. As a result of the boom, real wages in the developed world kept on increasing by leaps and bound and the wage differential with the developing countries kept on mounting.
Japan was the first country to break the technology barrier. The Japaneese became masters in copying the technology developed by the US and European countries and with the relatively much lower wage costs at that time, flooded the developed markets with mid and lower end product at highly competitive prices. In the initial phases “made in Japan’ was like ‘made in China’ these days. Over a period, Japan started investing in R&D and subsequently became leaders in manufacturing technology. This created a major headache for the manufacturing industry in the developed world. However, history has a habit of repeating itself with Japan’s currency appreciating and real wages shooting up so much so that it went up beyond some of the developed countries. Next in line where Taiwan and South Korea who replicated Japan’s success. However, with wages in these countries soon rising like in Japan, wage parity was almost maintained with developed countries and the threat to jobs in the developed world was more or less mitigated.
The latest entrant to this game was China in the 1980’s. It followed the footsteps of Japan of the 1960s, and flooded the world, including the developed countries, with large quantities of low priced goods . However, with its huge workforce, wages in China did not rise as fast as in Japan and are still relatively very low. The manufacturing companies in the developed countries started becoming uncompetitive and, to protect themselves, started partially locating themselves in the low wage cost countries with skilled labour. China was the major gainer with a large base of diverse industries and a big consumer base already available. As these ‘foreign’ companies grew in China and other developing countries, they started steadily shedding jobs at home. As time passed, the relocation of manufacturing companies to low wage countries increased exponentially and there is no way today for the developed countries to stop manufacturing job losses from becoming a flood.
The developed countries, to safeguard the local jobs, and more importantly wages, had created a big barrier by restricting immigration, though, whichever country allowed some immigration benefited to a certain extent by limiting the quantum of wage increase. This barrier has now crumbled as a result of the reverse migration of companies to low wage countries.
While China was becoming the manufacturing hub, another revolution was happening in the world – the telecom revolution. Today, leased lines with enormous data carrying capacity and extremely high speeds are available at extremely low prices. Combined with internet and web, this has made the world to shrink. Today all service activities, from the low end back office jobs, call centres etc. to high end jobs such as pharma R&D, Engineering Design & Development to animation products to whatever services one can think of, can be outsourced to a low wage country.
While China has emerged as a manufacturing hub, India, with a huge English speaking workforce, has emerged as a service hub. The immigration barrier created by the developed nation has thus more or less been completely dismantled. Now, there is no stopping of job losses in the developed world and the resultant gain in the developing countries. However,because of the huge population of China & India, real wages in developing countries rose but not as fast as it happened in Japan in its sunlight years. It will, therefore, take some time to close the wage gap between the developed countries and the developing countries. But one thing is sure - the wage differential will shrink throughout the world and I will not be surprised to see that the real wages in the developed world comes down over a period while it rises elsewhere.
This change will have a profound impact on the world. Government of developed countries, will have to learn to cope with a dissatisfied and disgruntled population [what happened in Britain recently is an example] and live with declining revenues from taxes because of job losses and lower consumption and high expenses on account of social security costs. On the other side, developing country governments, where consumption will increase by leaps and bound, because of more jobs, higher real wages and huge population, will have to learn to cope with rising inflation and demands for quality infrastructure, clean environment, and high quality governance. We are going to see a new world order in the next 20-30 years, - hopefully a much more balanced world.

B K Biyani