Nico Colchester was one of the finest economics journalists of his generation. Just before his death in September he delivered these five theses on the world economy, peering behind the "fractions of unimaginable things"by Nico Colchester / November 20, 1996 / Leave a comment
Published in November 1996 issue of Prospect Magazine
To understand today’s world market economy you must first look behind the bewildering fa?ade of percentages. Yes, east Asia will grow at 8 per cent per year over the rest of this century; Latin America and ex-communist Europe at 4 per cent; and the rich world at something over 2 per cent. But what are we to make of these fractions of unimaginable things?
Think of the world economy as 26 Italys. Italy is a convenient unit of account because the size of its economy, give or take the Mafia, is $1 trillion a year of demand. One trillion dollars means nothing to anyone except Bill Gates. But an Italy can be imagined. North America is eight of those Italys. Western Europe is another eight. Japan is five Italys. That already makes 21.
Of the rest, the whole of east Asia, including China and the dragons, is two Italys. Latin America is one and a half. The economy of the entire former Soviet empire is just half an Italy?which puts Russian superpower into perspective. The economy of the one billion people of the Indian subcontinent amounts to spending of one third of an Italy.
This tally is calculated at market exchanges rates. If critics insist on purchasing power parities (theoretical exchange rates that equalise the price of the same things in different countries), remind them that to compare Russian like with American like was CIA folly. Even if you concede adjustments, the message remains clear. The buying power of the rich, old world remains huge compared with that of the emerging world.
The growth rates of the emerging world need to be kept in perspective, too. Of every extra dollar of world demand in 1995, 60 cents came from Europe and North America, and 35 cents from all of Asia. By the year 2000 Asia will be providing 42 per cent of the world’s added demand, compared with 47 per cent in Europe and North America. The world economy will have grown from 26 to 30 Italys, and developing Asia will have provided just one and a half of the extra four.
But emerging Asia remains important in three big ways. First, the barely touched potential demand of its 2.7 billion people. Second, its lively propensity to import: the two Italys of east Asia imported almost as much last year as all of the EU or North America. Third, its impact in redefining the price of things produced in the rich world.
The moral of this crude guide to magnitudes is that in looking for much needed employment, the rich world should look to itself and its mistakes quite as much as to Asia. The old world’s governments face five main economic realities. These realities are the product mostly of technological changes, in computing and communications, which are not reversible, and to a lesser extent of the new consensus on open markets, which certainly is reversible.
The globalisation bogey
Globalisation is reality one. The dread word is under attack in the intelligent media. It is taken to imply that a free market monster now has national governments in its grip, rendering them powerless to do anything but praise Hayek and scrap regulations. The right protests that governments can still make protectionist mistakes; the left protests that governments can, indeed must, resist the multinational monster and remain interventionist. Both protest too much. Governments do retain many options; but they are judged in the exercise of them as never before.
The world economy is becoming steadily less able to be divided and ruled in country sized chunks. The proof of this lies less in the volume of trade than in its character. The most telling transformation is that direct investment is the new form of trade. The worth of factories and subsidiaries owned by companies outside their home countries is growing at a prodigious pace-11.5 per cent per year between 1989 and 1994. During that time, world trade rose at a rate of just 5.3 per cent, which itself eclipsed the 1.4 per cent rate of growth in the world economy. More percentages: what do they mean?
In order to sell something in a foreign country these days, you are more likely to make it there than to ship it there. By 1993, according to the UN Conference on Trade and Development (Unctad), the sales of foreign subsidiaries and factories had reached $5.2 trillion a year, or one fifth of the entire world economy, and comfortably more than world exports. One third of all those exports were flows within companies. This is not the work just of multinational behemoths. Multinationals are now much too normal to be satisfactory bogeymen. There are 40,000 of them, according to Unctad, with 250,000 subsidiaries in other countries.
The result is that national trade officials are stranded. The corporate Germany that employs people is shifting relative to the geographic Germany whose government people turn to when times get tough. Commerce can no longer be refereed on an international basis; it has to be refereed on a supranational one, even though that is not how most people wish to be governed.
Services and skills
This uncomfortable mismatch between governing commerce and governing people will grow. Domestically, it will be exacerbated by reality two: the changing balance of market and state within the national economy.
The rich world is condemned by modern productivity alone to employ the majority of its people in services, in administration, or as professionals. That means less than 5 per cent working on the land and less than 20 per cent in manufacturing; the rest, by default, are either performing services for each other and the manufacturers, or doing nothing. This distribution, give or take 5 per cent, has the force almost of gravity: it can be tinkered with by government, but it requires an Albanian degree of coercion to challenge it.
It is a source of great discomfort in rich Europe that so much of its potential employment (and foreign exchange earnings) lie in services that were performed by the state in the heyday of manufacturing. Now they are no longer support services, they are the economy; and if it is to be a mainly market economy, the market has to invade them.
The first battleground is familiar. It is the strategic service industries that the European state took over, often because of mobilisation for total war: energy, post, telecoms, transport and finance. Privatisation is creeping in like the tide; patterns of life, and the expectations of the public as customers and state employees, are leached painfully away.
The next battleground will be more difficult still: health, education, provision for old age and for unemployment. The last of these apart, the cost of these services can no longer be seen only as a burden on society to be held down as far as possible. As our society ages, and satiates itself with material comforts, these needs offer the best prospect for our employment. An economy consists of people satisfying each other’s desires, and here lies the next great realm of such desires.
The burning questions then become: how many of these needs should be regarded as entitlements and how many should be bought through market choice? Which of them should the state provide itself and which the private sector? To prevent Soviet-style implosion in this vast area of future employment, our governments must find ways of combining social justice with the placing of more of these services in the economy of market choice, rather than the non-economy of entitlement.
What of the interface with globalisation? We will also be obliged to pay our way by exporting skills without embodying them in tangible products. This involves direct investment, because to sell most services abroad you have to provide them on the spot. The new service reality and the new foreign direct investment (FDI) reality fit together. In 1970, 23 per cent of the world’s stock of FDI was for the extraction and sales of natural resources, and 31 per cent in services. Today one tenth of it has to do with natural resources, and one half of it with services. These days, you do not ship the iron ore here: you move the designs and skills there.
Skills are crucial to reality three: technology and open trade make this the age of competence. The security of a company’s future lies in its competence, not its nationality; and the security of an individual’s income lies in his own, not his company’s, competence. These are not statements of right wing faith; their truth derives from the way that technology and transport have given a new shove to the old division of labour. They enable companies to focus on what they do best and to do it in international partnership with others. In short, now that they can communicate so easily, international orchestras of specialists make better music than national one-man bands.
The shift shows itself in a number of ways:
These are hard times for conglomerate companies that claim to find synergy in a range of activities. Look at Daimler Benz.
Companies are contracting out for many services, reducing core employment. (This has the optical effect of reducing manufacturing employment because a security guard working for British Steel is regarded as a steelmaker until his job is contracted out.)
Corporate hierarchies are slimming, threatening careers and white collar employment-a big source of angst in the US.
State industries face an identity crisis. Should they serve the interests of the state or focus on their customers and markets? Watch Air France wrestling with this.
But the shift also has benefits:
Specialist service companies, say of security services, can offer more job security than a job as a security guard within a bank.
Sub-national centres of particular excellence can still thrive. One “community of competence” within 50 miles of Oxford builds all the world’s racing car frames. Silicon Valley is another famous one. The City of London is clearly one. Such communities are a particular feature of Italian industry.
Jobs versus wealth?
Trade-through-investment, the services future, and the era of competence: all these changes lead to reality four: a rich nation’s employment, but not its average wealth, depends mainly upon how flexibly its jobs market can adapt to the above changes.
The US has its strategic service industries in private hands and has a labour market in which the obligations of an employer are relatively slight. It has created 26 per cent more jobs since 1980, mainly in business. The EU has created 8 per cent more jobs, mainly in the public sector. The creation of small companies in the US has been dynamic?employment in companies with less than 100 workers has been growing twice as fast as average in the US. The birth rate of new companies in Germany?the country of the Mittelstand?has been sad.
Yet the evidence for reality five is just as strong. It is that while flexibility creates jobs, it does not suffice to make a population wealthier. The advance in the standard of living of the average American over the past 15 years has been depressingly small compared with that in France, Japan, or Germany.
Three things add up to set the pay of a given worker. The first is the value of what he does or makes, as constantly redefined in the world market. Education and training are the best means of raising his pay. The second is his efficiency in doing it-training and the capital investment that increase his output are the deciding factors here. The third-neglected by the free market ideologues-is the “collective productivity” of the society in which he works.
This last factor, above all, explains why the doomsayers are wrong when they claim that, through open trade, a resident of Myanmar with a machine tool will torpedo the pay of a Swiss with a similar piece of kit. Switzerland has formidable collective productivity. Its infrastructure is superb. People pull together in an atmosphere of consultation, consensus, fairness and self-discipline.
It is this third factor which explains, above all, why a bank clerk-a good example of a basic but largely untradeable job-can earn $78,000 a year in Switzerland, $28,000 a year in New York, and $8,000 a year in Rio, doing the same thing in front of the same screen. It explains why a German fitter, making a tradeable good, is able to cost his employer twice as much a year as a British one. Yes, the German handicap may now be a bit too demanding and need adjusting. But it remains Germany’s triumph.
These are the new givens of the world we’re in. Leaping out of this analysis are two big requirements to reconcile opposites. The first is to accept a certain amount of supranational government, but at the same time to foster the sense of local and national identity that people crave. People still do not feel the instinct to turn to Brussels or Geneva, when the forces described above sweep into their lives. The compromise must involve the grim word “subsidiarity”: control supranationally only things that have to be controlled there, and allow everything else to be run nationally or locally. As far as possible, let different approaches to civilisation and collective productivity?including ways in which companies manage their labour relations?evolve locally. Let different models of rich societies be tested against, and learn from, each other. That has always been Europe’s genius.
The second challenge is to reconcile Anglo-American employment flexibility, with Franco-German-Swiss collective productivity. The continental Europeans have to allow their labour markets and service sectors to “breathe” in a period of daunting change. The Anglo-Americans need to work harder to create societies that are well educated, with decent infrastructure, and civil disposition. It is easy to say, fiendishly hard to achieve.