Dr Bharat Jhunjhunwala
Success in the global marketplace today requires that a country be sound on three issues-low wages, frontline technologies and good governance. Weakness in any one of these is sufficient to stop the march of a contender. United States and Europe have fundamentally lost their competitive advantage vis-à-vis emerging economies like those of India and China. Transport through containers loaded on huge ships has made it possible for goods manufactured in emerging markets to be reached to these markets at a low cost. This has led to end of manufacturing of items like clothing, toys, shoes, TVs and computers in the western countries. The advances in internet and other communication technologies have made it possible to transport many services from the emerging economies. It is possible to edit movies, run call centers and undertake research in distant lands. The migration of manufacturing and services to the emerging economies has led to reduced production, employment and collection of taxes in the western countries.
Western countries had to compete with India and China earlier as well. Manufacturing has been migrating to the developing countries since three decades. But this was not visible because at the same time new technologies were being invented and jobs and incomes were generated in sunrise industries like mobile phones, computers, internet servers and animation movies. Western countries were making monopoly profits from the sales of these hi-technology products. They have lost this advantage now. New commercial game-changing technologies like the internet are not being invented. Other frontier technologies have been transferred to the developing economies in the quest for cheap labour. Thus the loss of competitiveness that had started to take place in the seventies is no longer being covered up by the profits from new technologies and is becoming visible.
Western economies have the advantage of better institutions and good governance to compensate for the loss of competitiveness. They have few obsolete laws, less red tape and corruption, and a better work culture and accountability among government employees. Indian businessman is handicapped because he has to pay monthly grease money to a number of inspectors and goods do not reach the port on time because there is a marriage in the family of the railway clerk. The loss of competitiveness due to high wages in the western countries is thus partly compensated by poor governance in the emerging economies. However, this is not sufficient and western countries continue to slide.
There is little that they can do to hold on to their dominance. Invention of new commercially viable technologies cannot be made at will. Inventions such as the steam engine or the internet ‘happen’ just as one movie meets success on the box office while another fails. Their crisis will worsen in absence of such inventions. The only solution to their woes is to make a deep cut in the wages on their workers so as to bring the labour cost at par with that prevailing in the emerging economies. The daily wage of an unskilled worker in the US is about Rs 5,000 against Rs 300 in India. There has to be some equalization. My guesstimate is that wages will stabilize at about Rs 2,000 per day in the western countries and Rs 500 per day in the emerging economies. This difference might be sustainable in view of better institutions and work culture; and higher per capita availability of natural resources such as minerals and forests in the western countries. This would imply a huge reduction of about sixty percent in the wages of the workers in the western countries and lead to much social unrest as being seen in Greece and Spain presently. This reduction in wages will come along with reduction in the price of goods, reduced collection of taxes and downsizing of the government budgets.
The United States has adopted the policy of borrowing and stimulating the economy. It is like a loss-making factory borrowing against its property to continue to pay high wages to its workers. This will be catastrophic. It will become increasingly difficult for the US to borrow. Repayment of loans taken in the past will also have to be done. Tax revenues will dwindle. This will lead to a deep recession and social unrest. Europe, on the other hand, has taken the path of fiscal austerity. Welfare benefits and government jobs are being cut across the region. This is in the right direction but will be inadequate. A reduction in wages paid by businesses has to take place for them to regain their competitiveness. The governments of the western countries are not facing to this harsh facet of globalization. They are living in a make-believe world thinking that the problems are only due to financial mismanagement or the like. They are neither looking at the structural problems not trying to solve this.
The center of world economy is inexorably moving towards India and China. These countries have the unbeatable combination of low wages and advanced technologies.
A section of economists believes that the western countries will pull us down with them. The impact will be transmitted firstly through reduced foreign investment. This much is correct that capital inflows will be reduced. But this need not translate into a net loss of capital because outward capital flows, I suspect, will decline more. Huge amounts are being transferred illegally through hawala and under-invoicing because investors believe the west is invincible. Some developing countries are remitting monies for maintaining higher forex reserves. This will change. Investors will realize it is better to invest in the emerging economies. Our politicians will prefer to keep their money within the country because solvency of the dollar, euro and yen will be in question. Petrodollars too will move towards the emerging economies. The loss in foreign investment will be more than made up by these.
The second route of transmission of the negative impact will come through a decline in exports. Indeed, lesser purchasing power will translate into less imports from us. However, faced with declining incomes, the consumers will need to buy cheaper goods produced in the developing countries. Also, the decline of wages in US and Europe will come along with an increase in wages in the emerging- and developing countries.
Globalization has to necessarily lead to an global equalization of wages and standards of living of people of the world. Differences due to governance and natural resource endowments alone will sustain. This provides a golden opportunity for us. We can become No 1 if we improve our governance. Corruption, red tape and crony capitalism are our problems. There is no stopping our juggernaut if we are able to handle ourselves on this front. Simultaneously we must step up investments in frontline technological research.
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