Ali’s blog

Mostly quant stuff with occasional digressions

Eroding Western living standards

Posted by alifinmath on January 12, 2008

This piece resonates with me and indeed I’m off to the public library to get a printout:

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 $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.

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 U.S. 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 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. However companies such as the Indian 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.

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.

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