Globalism to Bring 50% Drop in Western Living Standards

The Bear's Lair, by Martin Hutchinson

Eroding Western living standards

January 07, 2008 Martin Hutchinson is the author of "Great

Conservatives" (Academica Press, 2005)

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.

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 the 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 eighty 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 fit 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 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 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. 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.

Nevertheless, the education facilities of advanced countries represent

a huge physical and intellectual capital, which 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 are 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.