THE
BEAR'S LAIR Eroding Western living
standards By Martin
Hutchinson
Tata Motors’ emergence as
front-runner to buy Jaguar and Land Rover from the
ailing Ford brings one question uppermost to a
commentator sitting at a wealthy Western desk:
precisely which economic sectors can be relied
upon in the future to provide jobs for Westerners
at wages higher than are obtainable in the Third
World? Will there continue to be opportunities to
improve Western living standards, or are those
living standards destined to descend to some kind
of population-weighted average between Boston and
Benin?
Tata is a typical and highly
capable example of that new breed: the Third World
multinational company. Part of the
multi-industry
Tata
Group, over a century old, from which it had
access to both capital in its formative years and
steel currently, it has established itself as the
premier manufacturer of light trucks in India and
as one of the top three automobile manufacturers.
At the bottom of the market, it has announced
plans to being out a 100,000 rupee (about US$2,500
currently) automobile, which if successful will
undercut its major competition by more than 30%
and greatly expand the market for automobiles
among the still impoverished Indian people.
Conventional Western business analysts
have no problem with Tata manufacturing mini-cars
for the Indian market, or indeed for developing
country markets in Africa and elsewhere. They
imagine that Tata is able to use its comparative
advantage of cheaper labor to squeeze costs out of
the manufacturing process, thus achieving what in
the West would be an impossibly low price. They
point knowingly to the expensive environmental
features that the new automobile will lack, and
imagine smugly that it will be both tiny and of
low quality, adequate for the noble impoverished
of the Third World, but not seriously to be
imagined as competition on the roads of London,
New York or Stuttgart.
The announcement
that Tata is to buy Land Rover and Jaguar has thus
caused a considerable amount of cognitive
dissonance. Land Rover and Jaguar are both icons
of British automobile manufacture, hand-crafted by
generations of British skilled labor. Admittedly
in the 1970s Jaguar’s quality control became so
poor that Jaguars rivaled the Moskvich or the Yugo
for frequency of repairs, but since 1979 or so
quality has improved and the marque has
established a cherished if not particularly
profitable niche among the luxury automobiles of
the world. Moreover, would Western buyers shell
out the substantial cost of a Jaguar if they knew
it had been manufactured in India; after all, how
could the quality be relied upon?
Such
thinking betrays a limited understanding of modern
automobile manufacturing. Fifty or 80 years ago,
you could reasonably contrast mass-produced
automobiles such as the Ford Model T or the Morris
Oxford with luxury automobiles such as Mercedes
and Rolls Royce. The former were manufactured on
assembly lines to relatively low tolerances,
whereas the latter were hand built one by one,
with parts being filed down to precision so that
everything fitted precisely. Mass-produced
automobiles rattled, luxury automobiles didn’t; it
was as simple as that.
With the advent of
automated manufacturing, this distinction has
disappeared. The only differences between a cheap
automobile and a luxury automobile today are
materials and gadgetry; the manufacturing process
is the same. Both Mercedes and Ford are made by
robots. The only exceptions are a few models such
as Aston Martin and Maserati, where production
volumes are so small that it’s not worth buying a
full set of robots, so highly skilled craftsmen
remain cheaper.
In such a world, Tata is
just as capable of manufacturing Jaguars as Ford;
it can use the same computerized manufacturing
techniques, merely substituting cheaper Indian
labor for the expensive and recalcitrant British
workforce. To the extent that expensive
automobiles still require more labor than cheap
ones, it is in such areas as finishing, skills
that can quickly be learned by an intelligent and
diligent Indian community. As for marketing, Tata
will have a substantial domestic market among the
emerging Indian wealthy, for whom British
nostalgia still represents quality - a lingering
and very valuable dividend from the Empire - while
internationally it can either play down its
national origin or start a marketing campaign
based on the vast fleet of Jaguars no doubt owned
by the Maharajah of Patiala in the 1930s.
Design and research can through modern
communications easily be subcontracted to Western
boutiques, but after a few years’ Indian
experience with the marque there will be every
possibility of carrying out those functions also
using Indian labor.
In summary therefore,
there is no sector of the automobile industry that
cannot be mastered by an Indian manufacturer of
adequate skill in modern manufacturing and
inventive marketing. Since Indian labor costs less
than a tenth of British, German or US labor, it is
likely if the ethos of globalization and free
trade remains that after a moderate period of
transition the vast majority of automobiles,
cheap, mid-priced and expensive will be designed,
manufactured and marketed from India, China or
similar economies that retain large skilled
workforces and relatively low wage rates.
The idea that, by subcontracting
manufacturing to a low-wage-cost country, a
wealthy country might be extinguishing its own
business contravenes David Ricardo’s 1817 Doctrine
of Comparative Advantage. This states that every
product should be manufactured in the country
where its comparative costs of manufacture are
lowest, and that both rich and poor countries gain
from enabling this. However, Ricardo’s theorem
assumes a static world. In reality the world was
not quite static even in 1817, and it has been
growing progressively less static ever since.
In Ricardo’s time, it might have taken a
Third World manufacturer a couple of generations
to acquire not only the manufacturing techniques
but also the design, control and marketing
know-how of its Western counterpart. Today
however, with modern business education,
widespread travel and ubiquitous communications,
that process can be accomplished in well under a
decade. Hence the calculus of comparative
advantage changes quickly once outsourcing and
technology transfer are undertaken, generally
substantially to the disadvantage of the wealthier
country’s workforce.
The example of the
automobile sector strongly suggests that there are
few manufacturing businesses in which Western
workforces are truly competitive in the long run.
In some areas, such as pharmaceuticals,
conventional wisdom has held that new drug
advances come only from the well-funded
laboratories of the majors, or from
entrepreneurial biotech companies that rely on the
uniquely innovation-friendly California
environment to thrive. Yet companies such as
India's Dr Reddy’s and the Eastern European Pliva
and Richter Gedeon suggest that innovation can
easily come from out-of-the-mainstream areas. The
belief in large research and development
facilities may have been a 1950s' fantasy; it is
notable that Bell Laboratories, the quintessential
such operation, has been progressively downsized
and is now owned by the French Alcatel.
Nevertheless, the education facilities of
advanced countries represent a huge physical and
intellectual capital that appears likely to
continue paying dividends. Virtual communication
across the Internet remains less effective than
physical communication over a coffee in the
faculty lounge, and this is unlikely to change. At
the very sharp end of innovation therefore, it
seems likely that the most skilled Westerners will
continue to give their countries a comparative
advantage against emerging markets. However, there
is no guarantee that these research-intensive
sectors are likely to support the entire Western
population. Far from it. They are highly cyclical,
benefiting hugely from an active stock market and
venture capital market. Further there is no
evidence that innovation itself, as distinct from
the fruits of recent past innovations, is
significantly expanding as a percentage of output
- indeed, research expenditure has if anything
declined.
A number of service sectors also
seem likely to survive. Financial services, like
Scotch whisky manufacture, require ample supplies
of cheap capital, which would normally give an
advantage to wealthier countries. That advantage
has been squandered by the decade of excessively
low interest rates worldwide, which both
eliminated the comparative financing cost
advantage of rich countries and forced their
citizens’ savings rates down to derisory levels.
At this stage, the rich world’s banking systems
are in trouble while developing countries have
piled up record levels of foreign exchange
reserves. It thus seems likely that the financial
services business will also migrate to cheap-labor
markets, although possibly to a lesser extent than
automobiles.
At the bottom of the scale,
there is a wide range of services that are
location dependent, so impossible to outsource. A
haircut in Boston will be essentially identical to
one in Bangalore, but will cost much more and
employ a correspondingly better-paid barber.
Construction by definition takes place where
facilities are being constructed. Hotel and retail
services are also location-dependent, hence can
employ large numbers of low-skill workers in rich
countries at wages far above those available in
Africa.
Since the majority of
location-dependent jobs in Western countries are
low-skill it therefore follows that if governments
wish to protect local living standards, they need
to discourage low-skill immigration. Except in
Japan, they have not been doing so; both in the EU
and the United States low-skill immigration,
frequently illegal immigration, has got completely
out of control and is immiserating the working
classes. The Economist and the Wall Street Journal
calling for looser immigration laws are like
Reform Bill-era Whig grandees calling for the
workhouse; their urgings are theoretically driven
by aristocratic concern for the poor, but in
practice betray a complete lack of understanding
of what the poor actually want and need.
From the summary above, it is pretty clear
that income levels in the West are converging with
those in the more competently run emerging
markets. The bad news is that in the years ahead
this is likely to happen through an absolute
decline in Western living standards. The
populations of India and China greatly exceed
those of all the rich countries put together.
Further, as discussed above, the greater part of
Western economies is vulnerable to low-wage
competition. Thus the economic histories of a high
proportion of the Western population under 30,
except the very highly skilled, will involve
repeated bouts of unemployment, with job changes
involving not a move to higher living standards
but an angry acceptance of lower ones. By 2030, it
is possible that the median real income in the
United States and Western Europe may be no more
than 50-60% of its level today.
A number
of factors will exacerbate this trend. High
low-skill immigration will introduce domestic as
well as international competition for low and
medium skill jobs, thus quickening the decline in
their wage levels. The gigantic baby factories of
the poorest Third World countries will provide an
ugly Malthusian competition at the very bottom,
forcing living standards down still further.
Expansive governments will employ ever higher
proportions of Western populations in unproductive
ways, thus increasing exponentially the burden on
their unfortunate taxpayers and quickening the
exit of jobs.
The solution oddly enough
lies among the very poorest countries, sub-Saharan
Africa, Bangladesh and the worse run areas of
Latin America. If their governance can be brought
up to an acceptable standard, they too will
participate as recipients in the outsourcing of
Western industry. However, in becoming richer they
will inevitably reduce their rate of population
growth as well as increasing demand for Western
luxury goods, a sector that seems likely to
migrate only slowly to lower-wage countries.
Once the world competes once again on a
level playing field, with high-quality education
and infrastructure as available in Bangladesh as
in Baltimore, and no gigantic surplus mob of the
unskilled, living standards will begin to increase
in tandem worldwide, with both the ex-rich
countries and ex-poor countries benefiting.
However, until the Malthusian pressure from
low-end overpopulation is broken, that desirable
point will not be reached.
Thus a
combination of improving governance and population
control at the very bottom and enlightened
economic and social policy in rich countries could
both raise world growth rates and slow the
convergence of Western living standards with the
Third World. This would lessen the drop in Western
living standards that must occur before
equilibrium has been reached. One is not
optimistic, however, that enlightenment will win
out.
Martin Hutchinson is the
author of Great Conservatives (Academica
Press, 2005) - details can be found at
www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-07 David W Tice &
Associates.)
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