Glob­al­i­sa­tion, China and the mys­tery of wage stag­na­tion in de­vel­oped coun­tries

Financial Mirror (Cyprus) - - FRONT PAGE -

There is grow­ing ev­i­dence that the wages of mid­dle class work­ers in both North Amer­ica and Europe have stag­nated for the past sev­eral decades. For the first time in re­cent mem­ory chil­dren in these coun­tries face the prospect of earn­ing less than their par­ents.

The ini­tial re­ac­tion has been to blame the lower wages on the slower growth of pro­duc­tiv­ity. But re­cent stud­ies have shown that wages have failed to keep up even with the slower pro­duc­tiv­ity. The pres­ti­gious Eco­nomic Pol­icy In­sti­tute has cal­cu­lated that be­tween 1973 and 2013 pro­duc­tion/ su­per­vi­sory work­ers hourly pay in­creased 9% while pro­duc­tiv­ity in­creased 74%.

There is a sus­pi­cion that the fail­ure of wages to grow is due to glob­al­i­sa­tion and more specif­i­cally the re­cent trade treaties which have low­ered bar­ri­ers to im­ports, es­pe­cially those from low wage de­vel­op­ing coun­tries.

The pos­si­ble link be­tween wage stag­na­tion and trade lib­er­al­i­sa­tion has fu­elled grow­ing op­po­si­tion to new trade treaties. In the U.S., both ma­jor po­lit­i­cal par­ties con­test­ing for the pres­i­dency have dis­played not only a lack of en­thu­si­asm but even down­right op­po­si­tion to­wards new trade pacts.

There is sim­i­larly dis­en­chant­ment with trade lib­er­al­i­sa­tion in Europe. Af­ter three years of dis­cus­sions. Ger­many, Aus­tria, Bel­gium have all voiced op­po­si­tion to the Transat­lantic Trade and In­vest­ment Talks (TTIP). France has called for an out­right halt to these ne­go­ti­a­tions.

This is a marked re­ver­sal of pre­vi­ous trends. For decades the low­er­ing of trade bar­ri­ers was con­sid­ered in a pos­i­tive light. This was backed up by one of the most revered the­o­ries of eco­nom­ics. Some 200 years ago David Ri­cardo proved that free trade is a win-win sit­u­a­tion. All coun­tries party to such

treaties gain. So, what has gone wrong?

Although it is ac­cepted that free trade will ben­e­fit all par­tic­i­pant coun­tries, very lit­tle is said about who (which groups) within these coun­tries will gain and which might lose. Some in­sight into this is pro­vided by an­other part of trade the­ory which goes by the daunt­ing name of “fac­tor price equal­i­sa­tion”. This sim­ply means that with free trade, wages for sim­i­lar work­ers in high wage and low wage coun­tries will tend to con­verge. Wages in de­vel­oped coun­tries wages will tend to de­cline while those in low wage de­vel­op­ing coun­tries will tend to rise. The key word here is “sim­i­lar”. Un­til rel­a­tively re­cently work­ers in de­vel­op­ing and de­vel­oped coun­tries were not sim­i­lar. There were ma­jor dif­fer­ences in pro­duc­tiv­ity. The su­pe­rior pro­duc­tiv­ity of work­ers in de­vel­oped coun­tries un­der­pinned their higher wages – a sit­u­a­tion which many thought un­likely to change. But it has.

Coun­tries such as Sin­ga­pore, Hong Kong, Tai­wan, Mex­ico have shown that when equipped with sim­i­lar cap­i­tal equip­ment, man­age­ment, skills and tech­nol­ogy, work­ers in de­vel­op­ing coun­tries can be every bit as pro­duc­tive and some­times even sur­pass their coun­ter­parts in Europe and Amer­ica. The small size of these coun­tries (even when con­sid­ered col­lec­tively) means that their ex­ports are un­likely to have been the main source of the wage stag­na­tion in the USA and much of Europe.

China is a dif­fer­ent mat­ter. China only opened its mar­ket to for­eign busi­ness in the late 1970s. Since then its growth has been phe­nom­e­nal. In 1990, China ac­counted for only 4% of the global econ­omy. By 2012 this had grown to 14%. In the year 2000, Chi­nese ex­ports were one third of those of the US. Only nine years later, China had be­come the largest ex­porter in the world. A re­search study by the US Fed­eral Re­serve found that “US job losses were con­cen­trated in those sec­tors where Chi­nese ex­ports grew most rapidly”. (Board of Gover­nors of the Fed Re­serve sys­tem, In­ter­na­tional Fi­nance Dis­cus­sion Pa­pers, Num­ber 1033, Nov 2011)

China’s ex­ports in­clude com­modi­ties such as steel and raw tex­tiles. How­ever, a large and grow­ing pro­por­tion are high value, high tech prod­ucts such as com­put­ers, mo­bile phones and branded goods aimed at the con­sumer mar­kets of de­vel­oped coun­tries. Ex­ports of this na­ture re­quire more than tech­nol­ogy. They re­quire a com­bi­na­tion of tech­nol­ogy, man­age­ment ex­per­tise and above all, in­ti­mate knowl­edge of fast mov­ing con­sumer mar­kets in the de­vel­oped coun­tries. They also re­quire de­pend­able sales out­lets and lo­gis­tic sup­ply chains in the tar­get coun­tries.

De­vel­op­ing the nec­es­sary con­tacts, mar­ket ex­per­tise and fa­cil­i­ties in these for­eign mar­kets nor­mally takes many years. How did China man­age to do this in such a short space of time and in mar­kets that are cul­tur­ally, eco­nom­i­cally and po­lit­i­cally so dif­fer­ent from those Chi­nese firms were ac­cus­tomed to?

Multi­na­tional com­pa­nies were quick to re­spond to the open­ing of the huge Chi­nese mar­ket. They were able to pro­vide not only the much needed tech­nol­ogy but also the re­quired man­age­ment ex­per­tise, close knowl­edge of Western mar­kets to­gether with the con­tacts and fa­cil­i­ties re­quired to mar­ket their Chi­nese pro­duced goods there. More than half of China’s ex­ports are from for­eign com­pa­nies based in China.

This helps to ac­count for the rapid pen­e­tra­tion of the for­eign mar­kets from which these multi­na­tional com­pa­nies orig­i­nated. The mo­bil­ity of com­pa­nies, tech­nol­ogy, cap­i­tal and ex­per­tise has changed enor­mously in re­cent years. Low wage work­ers in de­vel­op­ing coun­tries can now be more com­pet­i­tive with their coun­ter­parts in de­vel­oped economies. It’s pos­si­ble that the more tra­di­tional views of trade have to be ad­justed to the new global en­vi­ron­ment.

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