Posts Tagged ‘Development’

I learned quite a bit about Apple from the NYTimes article by Duhigg and Bradsher. One particularly striking passage:

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

This discussion about the flexibility of Chinese labor highlights that the lack of American competitiveness is not simply due to high wages and living standards in the U.S. It is the entire supply chain that makes production in China so appealing to firms. Americans would protest living in a dorm attached to their factory and being woken up at midnight to start a 12 hour shift. But that is exactly what makes China so enticing for businesses.

Yves Smith fills in much of what the article left out. But here I want to make a connection to economic theory. This article reminded me of my undergraduate macroeconomics course in the Spring of 2008. The economic crisis was just setting in, and one of my classmates asked the professor if the solution was simply to cut wages, so that American firms would be competitive again. The professors answered: “Yes. That’s right.” End of story. The same professor repeated this claim in a panel discussion on the crisis, claiming that decreasing the prices of factors of production will make U.S. firms globally competitive once again. Duhigg and Bradsher demonstrate the danger of assuming away production to a black box “production function.” The production function approach ignores supply chains and institutional arrangements surrounding production, and leads certain economists to make quite silly proclamations. Cutting wages in the U.S. will not make U.S. factories more competitive; China has an entirely different supply chain that simply does not exist in the United States.

One person who does study global supply chains and institutional arrangements is economic sociologist Gary Gereffi (note: again, interesting economics happening outside of economics departments). He also directs the Center for Globalization, Governance and Competitiveness at Duke University, which has mapped Global Value Chains in North Carolina. (The website is quite fascinating to explore.) This approach to studying the global economy looks at the supply chains, and where each stage takes place and how much value is added at each step in the process. This is a type of economic analysis, very different from what academic economists do, that should prove more useful in understanding global competitiveness and production.

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Some of my economics colleagues were certainly unimpressed by the President’s focus on encouraging manufacturing in the United States, and his condemnation of the outsourcing of jobs. Economists tend to have a great deal of faith in market forces, and consider the market price an accurate reflection of “all relevant information.” In economics, aiming for insourcing or encouraging particular sectors of the economy (and not others) is “distortionary” because those policies distort prices and quantities from their market price, which (sometimes!) in theory yields the most efficient price and quantity. Generally, economists have little faith in the government’s ability to “pick the winners.”

However, I found Obama’s focus on manufacturing in America, “an economy to last,” as one of the more promising aspects of the address. As I have written before, we should not ignore the benefits of the manufacturing sector in the economy. A healthy manufacturing sector not only affords well-paying jobs, which fosters a middle class, but also leads to R&D spillovers in related industries that may not even exist yet. Why are Japan and South Korea leading in lithium ion battery technology? Because electronics industries fled to there throughout the 1980s and 90s, and when it became clear that battery development would be the next global challenge, they were already far ahead. The U.S. is trying to catch up, but we are starting for our own goal line.

A great deal of research supports these arguments. One of the classic works on global competitiveness is Alice Amsden’s Asia’s Next Giant, which challenges the conventional wisdom that liberalization and market forces caused South Korea’s economic boom. Amsden attributes Korea’s success to a strong government that supported the manufacturing industry and worked with firms to import key technologies and train workers with relevant skills.

And this brings me to a second key aspect of The President’s address: the relationship between market and government. He is the first president in my lifetime to recognize that it is not about government vs. the market. (Even Bill Clinton favored a small government and lower taxes.) Obama’s speech recognized that the market and the government needed to support each other in order for our economy to succeed. The two are intertwined, and by supporting each other can achieve higher economic outcomes and realize more competitive firms. The debate should not be about whether responsibility lies with the government or the private sector to create jobs; the economy should not be understood as something apart from or in opposition to the economy. Rather, the government can support and even initiate certain desirable industries, so that we may achieve a healthy and resilient economy:

Think about the America within our reach. A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs. A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off, and responsibility is rewarded.

*Third because the 2009 address shortly after Obama’s inauguration was technically not a state of the union.

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The American Jobs Act would provide much needed stimulus to our ailing economy. However it is more like putting a bandage over the deep flesh wounds inflicted by globalization over the past two decades. The U.S. economy needs to be fundamentally restructured in order to address the prolonged recession in a sustainable way, a restructuring that involves political, legal, and business institutions. More stimulus is no silver bullet.

Germany provides a wonderful example of how a society can fight back and protect itself from the damaging effects of the spread of the market economy, (á la Karl Polanyi). Instead of just giving away manufacturing industries as the United States did, Germany took a very active role in preserving manufacturing. They have an entirely different institutional environment. Corporate boards have labor representation, the government works to encourage industries that provide jobs that they want in Germany, and the corporations are not chasing extraordinary short term profits like we do in the United States as a result of mandatory quarterly reports and their influence on the capricious stock market.

While it is important not to romanticize manufacturing, we must not ignore its benefits. Maintaining industry has had massive benefits for Germany. While unemployment is higher than it was before the crisis, it is much lower that we are still suffering in the U.S. (by some est., 6% vs. 9% in the U.S.).  Industry provides jobs for middle skilled laborers; these jobs have left the U.S. and left a growing gap in income – and this is the cause of the disappearance of the middle class that everyone is talking about but no one understanding. In addition, R&D activities have been shown to follow manufacturing; certainly it is not difficult to imagine the benefits of having the research teams in close proximity to the manufacturing process. It is only a matter of time before R&D and “high tech” jobs also leave the U.S. in pursuit of the industries, unless we do something to protect our economy.

There are other spillovers, too. The article linked above details how German companies are exporting kitchens to China. These companies build the kitchens to fit European size ovens, which are smaller than American ovens. This has essentially blocked all competition from American companies that might want to export ovens to China, and has paved the way for a boom in German oven businesses as well.

The restructuring necessary for the health of the U.S. economy will require a multifaceted institutional reform, that includes the political system, the legal system, and the stock market.

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Wealth Breeds Rage

John Githongo warns that in Africa, uneven economic growth can lead to a combustible situation when inequality festers and is not well managed [ht:cr]:

Across the world, as growth has spread and accelerated, so has inequality. It is clear that growth is often not enough to guarantee stable, cohesive societies. Rather than create a rising tide that lifts all boats, it can actually increase inequality in a society. And inequality, unlike poverty, is far more easily politicized, ethnicized and militarized, especially in African countries with heterogeneous populations and weak judicial and regulatory institutions. It is also far more combustible because it creates an identifiable enemy — a class that benefits disproportionately because of its unfair access to those who wield power. Mismanaging it can be catastrophic.

Steady economic growth and urbanization, combined with high levels of youth unemployment and conspicuous consumption on the part of the corrupt ruling elite, create a situation in which growth exacerbates political volatility instead of quelling it.

This story highlights the importance of a political economy of development that takes in to account changing socioeconomic conditions and respects local cultural institutions and social networks in order to promote a cohesive and stable society. Mainstream growth models, however, completely neglect any of these factors while only focusing on how to best promote the development of markets, which by definition will optimize growth for everyone. Githongo reminds us that a narrow approach to growth can lead to social unrest, outbreaks of violence, and the fragmentation of traditional social networks.

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Bourgeois Dignity: Why Economics Can't Explain the Modern World

It is no secret that modern economic theory fails miserably at explaining the tremendous explosion in economic activity and income levels that has taken place since the 18th century. We don’t have a good story of why in 1800 an ordinary person lived on $3 a day, whereas today an ordinary person in a “bourgeois” country earns over $100 a day.

In her new book, Bourgeois Virtues, Deirdre McCloskey attempts to tell such a story of why the past two centuries have been so good to ordinary people in bourgeois countries [ht:sn]. She describes how economic theory in its current state is useful for explaining how resources are allocated – but in order to explain the economic revolution that took place since 1800, economic theory needs rhetoric:

I am claiming that the economy around the North Sea grew far, far beyond expectations in the eighteenth and especially in the nineteenth and most especially in the twentieth century not because of mechanically economic factors such as the scale of foreign trade or the level of saving or the amassing of human capital. Such developments were nice, but derivative. The North Sea economy, and then the Atlantic economy, and then the world economy grew because of changing forms of speech about markets and enterprise and invention.

She takes the usual line that innovation drove the Industrial Revolution. But she has an uncustomary explanation for innovation:

But I also argue—as fewer historians and very few economists would—that talk and ethics and ideas caused the innovation. Ethical (and unethical) talk runs the world. One-quarter of national income is earned from sweet talk in markets and management.  Perhaps economics and its many good friends should acknowledge the fact. When they don’t they get into trouble, as when they inspire banks to ignore professional talk and fiduciary ethics, and to rely exclusively on silent and monetary incentives such as executive compensation. The economists and their eager students choose Prudence Only, to the exclusion of the other virtues that characterize humans—justice and temperance and love and courage and hope and faith—and the corresponding sins of omission or commission.

One will need to read the entire book to see if her argument is persuasive. I appreciate her attempts to integrate virtue into economic discourse, seemingly reminiscent of the origins of the discipline in moral philosophy. But at the same time, she endorses neoclassical economic theory as the main tool for economic analysis – a tool which grew in popularity because of its supposed value-neutrality.

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