Monday, March 19, 2012

Third World Wages Coming to a Factory or Workshop Near You

Commenting on my little rant about British Budget Baloney, Roderick Russell makes the point that:
In Canada we can compete in export markets with the third world, at the things that we do well, where the requirement is for a highly educated and skilled work force and capital intensity. Indeed in Canada we have the extra advantage of huge natural resources to exploit.
This is absolutely true, but it supports rather than negates my argument that mass unemployment in Europe and America is due to competition from cheap Third World labor and that the recovery of full employment will not likely be achieved without the imposition of Third World wages on a large part of the Western workforce.

As Roderick Russell asserts, Canada competes well with the Third World in natural resources which make up an overwhelmingly large share of Canada's exports. Like Russia and Australia, Canada has a vast storehouse of natural wealth, which means that a significant proportion of Canada's rather small workforce can get decent wages in the capital intensive production of the resources upon which the World's industrial economy depends.

In other words, Canadian labor has a monopoly in the exploitation of a huge natural resource base, which greatly enhances wages. If Canada were to allow "guest workers" from the Third World to work in Canada's resource industry at Third World wages -- as Herman Kahn's Hudson Institute proposed many years ago as a way to develop the oil sands economically -- Canadian wages would be headed sharply downward, as they are in in the US and Europe.

But that means, simply, that Canadian labor is somewhat sheltered from low-wage Third-World competition. And yet despite such protection, the Canadian labor market is not immune to the effects of competition from low-wage Third-World nations.

A few years ago Canada was the largest exporter of car parts to the US. Then we were overtaken by Mexico. Now Mexico has been overtaken by China. Furthermore, most of the industrial and technology products that Canada exports are re-exports, things snapped together or stitched up with parts or fabric made with cheap labor abroad. This has caused huge long-term damage to Canada's industrial sector.

Thirty years ago Canada had a highly diversified industrial economy. Then with NAFTA, jobs began going South. The Janzen swimwear factory in Vancouver, to take one local example, moved to Mexico to take advantage of wages below the British Columbia minimum wage.

With the GATT agreement, we came into competition with cheap labor everywhere. Sawmills and pulp mills were dismantled in British Columbia and moved to places like Indonesia and the Philippines. That's capital disinvestment in the resource industry and is one of the factors accounting for declining real wages throughout British Columbia's once mighty forest-based industry.

Declining wages are a reality in the high-tech world also. Computer science grads who, in the 80's and 90's could expect to start work at $80,000 or more a year were suddenly in surplus. The local computer science school went from being a a training ground for the brightest Canadian geeks to a school for students mainly from Asia.

America's best hope for economic recovery seems to depend on the oil and gas industry, which through new technology may make America once again energy self-sufficient. With natural gas in the US selling at less than $3.00 per million btu's American industry has an energy cost advantage over Asia, which in part counteracts the wage differential.

But in addition to the impact of a developing energy cost advantage, the rise in American unemployment has been limited in recent years by declines in real wages, whereas in Britain and the rest of Europe real wages have risen.

Yet, still, black youth unemployment in America is around 90% and youth unemployment overall is approaching 50% as it is in Britain and most of the rest of Europe. And the longer young people remain unemployed the greater becomes the loss of workforce skills.

There's no doubt that unusually high unemployment in America and Europe can be reduced by lowering wages. In fact, unemployment is less high in America that it would otherwise be because of a booming underground economy that employs millions, many of them illegal immigrants, at less than minimum wage and often under conditions that fail to meet statutory workplace health and safety standards.

So yes, mass unemployment can be beaten, and is being beaten in some degree, by the adoption of Third World wages and working conditions. There may be other alternatives as I have spelled out elsewhere, but there seems zero interest in such solutions.

Huge trade deficits induced by stimulus spending will hasten the Third-Worldization of wages in the West by precipitating substantial currency realignments. The sooner this happens the better chance Western nations have of retaining manufacturing workforce skills and the critical mass of engineering and software firms necessary to a revival of manufacturing industry.


  1. Yes, 3rd World Wages will be coming your way thanks to 3 decades of Neoliberal Reaganomics packaged by idiotic Austrian economists like Hayek and von Mises!

    1. That's not so.

      In fact, there is no connection between supply side economics (Reaganomics) and Austrian economics, or with what underlies the current impoverishment of the working class.

      Paul Craig Roberts was one of the principle architects of Reaganomics, serving in the Reagan administration as Deputy Secretary to the Treasury.

      Here's what he has to say about the current lack of jobs in America and the impoverishment of working Americans:

      "These are discouraging times, but once in a blue moon a bit of hope appears. I am pleased to report on the bit of hope delivered in March of 2011 by Michael Spence, a Nobel prize-winning economist, assisted by Sandile Hlatshwayo, a researcher at New York University. The two economists have taken a careful empirical look at jobs offshoring and concluded that it has ruined the income and employment prospects for most Americans. ..."

      Globalization created the opportunity to drive wages to practically nothing with consequent massive increases in corporate profits and in the salaries and benefits of the one percent.

      What's happening is the necessary and unavoidable consequence of globalization, which is the antithesis of Reaganomics which aimed at, and succeeded in, raising America's productivity, not outsourcing and off-shoring jobs.

  2. Canspeccy – I take a rather Ricardian view and believe that free trade is generally beneficial, resulting in a better standard of living for most, if not all, of its participants. Of course free trade has to be fair trade where we all abide by similar rules. Manipulating terms of trade to subsidize exports and penalize (or effectively ban) imports as the Japanese did in the 60s / 70s / 80s is not fair trade; nor is manipulating currency values as the Chinese do today. But the fault here is not the Japanese or the Chinese, but incompetent Western politicians who let them away with it. Obviously some industries will loose out, but in aggregate I think most will be better off.

    The UK is a rather unusual case; having destroyed its once word beating maritime, engineering and manufacturing industries it is becoming uncompetitive and I suspect will face hard times in the near future. The fault lies largely in the over centralization of the UK economy and not with 3rd world competition who have simply taken advantage.

    1. "I take a rather Ricardian view and believe that free trade is generally beneficial..."

      Ha, but you haven't read David Ricardo sufficiently carefully.

      Ricardo was explicit that international free trade is beneficial to all parties only if capital is immobile, since exporting capital, one of the factors of production, will inevitably lower the productivity and hence reduce the prosperity of the population.

      In Ricardo's day (we're talking 18th Century) the assumption that capital was largely immovable across national borders was entirely realistic. In the current age of airliners, the Internet and mega accumulations of a capital, the assumption is nonsense.

      Jimmy Goldsmith, was absolutely correct in predicting in 1994 that the GATT agreement of that year would destroy countless jobs in the West and trash living standards. That is exactly what has happened.

      It is interesting to compare Goldsmith's reasoned analysis, in the video linked above, of what the Gatt treaty would do, and has now done to American jobs and living standards, with the high-pitched, incoherent rant for globalization from Clinton's Chair of Economic Policy advisers, Laura Tyson.

  3. "The UK is a rather unusual case"

    I don't think so, unless "a rather unusual case" can include, Greece, Italy, Portugal, Spain, Ireland and the United States. All those countries and many others are suffering the consequences of transnational corporations out-sourcing services and off-shoring production to low wage jurisdictions.

    And the process has only just really begun to roll. There's lots more than can be shipped out. What's the point in paying a heart surgeon in London or New York ten, twenty, fifty thousand dollars to do an operation that a surgeon in Mumbai or Calcutta will gladly do just as well for only a tenth the price.

    Talking of resource industries, the forest industry, one of Canada's great resource sectors, is largely off-shorable, and that is what is happening to it. Fewer and fewer logs are processed in Canada, large quantities now being exported for a few dollars a cubic meter rather than being converted here in Canada to building and other products worth hundreds or thousands of dollars per cubic meter.

    And what about government services? That's the great mainstay of all those countries engaging in deficit spending to prop up the economy. But why not ship the whole bureaucracy to India? The Indians speak English and can, I'm sure, push paper, and do it very cheaply too.

    Anyone who thinks globalization will end without totally transforming the social structure of the West is surely in a dreamworld, carried along by the media-created fantasy that now supplants reality almost totally.

  4. Canspeccy – May I just respond on two of your points. Firstly, capital has always been mobile as Ricardo would have known. But on a practical matter, I can never forget that the once vibrant (high tech) engineering and maritime economy of my home town (Glasgow) was created by free trade, and largely destroyed by its opposite - protectionism, high taxes and over regulation. Free trade to Glasgow meant jobs and good jobs too.

    Certainly it is a disgrace that our once potent timber industry should be exporting logs rather than more value-added product. But is this the fault of free trade? I do recall the US putting quotas, which are the opposite of free trade, on our export of timber products some years ago, thus encouraging this process and with hardly a cheep of protest from our politicians. Is it free trade agreements that are wrong, or just that our politicians can’t negotiate these agreements properly? It’s much the same in the energy sector today. We are looking to build pipelines to transport low end bitumen product, when some believe we should be transporting higher end refined product or at least synthetic light crude. So why?? It has little to do with economics and free trade; but a lot to do with the fact that for environmental (and political) reasons our politicians are scared to build the necessary additional (heavy) refining capacity. And furthermore, when we build a pipeline to take bitumen to effectively only one American market (Gulf refineries), the American refiners (cartel?) will have us over a barrel, since we will have no other market, and squeeze the bitumen pricing until the pips squeak.

    And your comment – “But why not ship the whole bureaucracy to India?”- Of course not! Free trade philosophies are irrelevant as governments have to be coercive monopolies (taxes, regulations, laws) and are not in competitive trade. Free Trade is a competitive private sector thing; when governments are involved (operating, fixing, skewing the terms of trade) it is no longer free trade.

    1. Roderick,

      You say:

      "capital has always been mobile as Ricardo would have known."

      But that ain't so.

      Here's what Ricardo actually said on the subject:

      "Experience however shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations."

      You have been taken in by the shysters promoting globalization, people like Jeff Rubin, chief economist at CIBC World Markets, who misquote Ricardo to make it appear that he favored globalization and the free flow of capital across national borders, whereas, the above quote from his "Principles of Political Economy" (published in 1817) proves, he knew that international capital flows would impoverish workers in high wage economies (at that time Britain in particular) and, speaking of his own time, he said such capital movement was very limited and that he would be sorry if the case were otherwise.

      I'll dispose of your other points in due course!

    2. Re: "the once vibrant (high tech) engineering and maritime economy of my home town (Glasgow) was created by free trade, and largely destroyed by its opposite - protectionism, high taxes and over regulation."

      Glasgow, known as the second city of the British Empire, thrived on the profits derived from the colonies:

      "After the Acts of Union in 1707, Scotland gained further access to the vast markets of the new British Empire and Glasgow became prominent in international commerce as a hub of trade to and from the Americas, especially in the movement of sugar, tobacco, cotton, and manufactured goods," i.e., in the products of the slave-powered colonies of the Caribbean and the Southern US (Source)

      So, yes, if you consider slavery part of the free market, I'll grant that Glasgow profited from free trade, but slavery has long been outlawed, the British Empire is long gone and the shipyards that grew up alongside Glasgow's trade economy have long since closed due to the impossibility of competing in a free market with cheap labor yards, first in Japan, then in Korea, now in China.

      Otherwise, Glasgow's greatest export has been trouble-making trades unionists and socialists. So if Glasgow's economy has been strangled by regulation, it was largely regulation and high taxes of the citizens' own making.

      As for log exports, it's a complicated issue, but the US was justified in imposing duties on Canadian lumber exports because Canada was not trading fairly. I'll explain why, tomorrow.

      I'll also provide an example from here in Canada of what you say is impossible, namely the outsourcing of Government services.

    3. You say: "Certainly it is a disgrace that our once potent timber industry should be exporting logs rather than more value-added product."

      On that both the Federal and Provincial Governments agree and accordingly impose severe restrictions on log exports (e.g., the British Columbia policy that "Timber harvested in B.C. must be manufactured in B.C., as required under the Forest Act."), thereby subsidizing the local lumber manufacturing and pulp industries. But that's not free trade, it's protectionism.

    4. With reference to the US/Canada softwood lumber dispute you say:

      "I do recall the US putting quotas, which are the opposite of free trade, on our export of timber products some years ago, thus encouraging this process and with hardly a cheep of protest from our politicians."

      The US imposed countervailing duties on Canadian lumber because Canada was subsidizing exports.

      Ninety percent or more of Canada's timber is Crown owned and therefore controlled by Provincial Governments. To stabilize the industry, governments vary stumpage rates -- the fees charged to the industry for the timber it harvests -- to counteract the boom bust cycle that characterizes the forest industry. When end product prices are down, stumpage rates are reduced to near zero, or if subsidies for road construction, etc., are taken into account, perhaps below zero.

      This stabilizes employment and tax revenues in Canada, but it plays havoc in the US by flooding the lumber market and driving prices below the US cost of production during a bust, while restricting supply and thus driving prices up during a boom.

      So, again, if you are truly in favor of unrestricted free trade, you are on the wrong side of the argument.

    5. And finally, you are, obviously, wrong about out-sourcing and off-shoring of government services and supply.

      Military aircraft, we outsource to the US.

      Dud submarines, we outsourced to the UK.

      Government IT Services, we outsource to all and sundry, and in BC we even sold off the ferry service, an integral part of the transportation system, to a NY company. In Britain, everything from nuclear power plants to water supply and sewage have been sold off to foreign interests. And the US outsources much of its military manpower needs to private contractors located at home and abroad.

      So, it seems beyond doubt that the Indians could administer just about everything from dog licenses to the National Health Service at much lower cost than the British Civil Service.

  5. 'shipyards that grew up alongside Glasgow's trade economy have long since closed due to the impossibility of competing in a free market with cheap labor yards'

    It wasn't cheap foreign labour that ruined the world's greatest shipbuilding centre - though government likes to pretend it was. It was undercapitalization caused by excessive UK tax rates - nobody will invest when taxes are so high that there is no after tax return. I could name a Glasgow CA who was paying 97-1/2% (nineteen shillings and sispence in the pound) marginal tax rates at the time. The other major factor was the ruination of the steel industry caused by excessive nationalization - a vibrant heavy engineering sector needs its own up to date steel industry nearby. The truth is that the whole heavy engineering/shipbuilding sector went together, largely as a result of undercapitalization caused by high taxes.

    1. It's true UK taxes were a tad high after the war. Roy Jenkins introduced a one-year emergency rate in excess of 100% on investment income (Someone with investment income above £15,000 paid total taxes £1.36 on every £1). But that was because all the folks in Glasgow voted Labour instead of Conservative.

      Another small factor, was that Britain had just gone from being the World's greatest empire and the greatest holder of capital to a post-war bankrupt, heavily indebted to the US and Canada. It was not until 2006 that the debts were settled with payments of $83.25m (£42.5m) to the US and US$22.7m (£11.6m).

      The 97.5% tax rate you mention was on personal income, not corporate profits, which were taxed but at lower rates. And anyhow, you need have income to pay any tax at all, and that the shipyards were unable to achieve.

      So anyway you look at it, your notion that free trade would have solved the problem of Britain's uneconomic shipyards holds no water.

  6. Your comment - “all the folks in Glasgow voted Labour instead of Conservative.” Not the folks I knew. Glasgow even had safe Conservative seats in those days. Glasgow had traditionally been a Liberal stronghold. When the Liberal party collapsed in the 1930s, Glasgow’s vote split between Conservative and Labour. Only since the destruction of its great industries did Glasgow become entirely a Labour monopoly.

    Your earlier comment about slavery – Glasgow was always too moral to indulge in this nefarious trade. It was introduced to the British Isles by Drake and Hawkins from Devon.

    The shipyards didn’t make money in the 1950s/1960s because they were undercapitalized and couldn’t afford to retool their machinery to compete with international competition. During ww2 Glasgow business had spent its last own sources of capital retooling the yards for the special needs of warships; needs that were largely redundant in the post war period. After ww2 nobody would lend private risk capital for no after tax return. Capital had an alternative; it could go offshore to earn a decent after-tax return, and did – As for currency controls on capital flight, or sheltering offshore income in tax havens: not a problem if you had the right connections in the City. Which rich man would invest in shipyards only to have your profits confiscated by the inland revenue, when you could invest offshore through the City with your profits sheltered from taxes.

    1. Re: "Your earlier comment about slavery – Glasgow was always too moral to indulge in this nefarious trade."

      It was Glasgow not Devonshire that profited mightily from the products of the slave trade: tobacco, sugar, rum and cotton. That is what the economy of the city was built on.

      Re: "The shipyards didn’t make money in the 1950s/1960s because they were undercapitalized"

      So you have said before, but however well capitalized they might have been, the capital investment would not have beaten the labor cost advantage that was enjoyed first by the Japanese, then by the Koreans and then the Chinese.

      A thirty- or fortyfold wage differential caps a great deal of capital investment. That is why, for example, BYD, who now make half the World's cell phone batteries, after studying Japan's robotized battery manufacturing industry, decided to go massively with dirt cheap manual labor. They beat the Japanese cell phone battery makers that way, just as the Japs beat the Brits in shipbuilding.

    2. As for Glasgow being one-time Liberal, that goes with the profits of the slave trade. William Ewart Gladstone's family fortune was based on the driving of slaves on West Indian plantations.

      And the Liberals haven't changed their position since the early 19th century. It's just that the use of sweated labor has moved from the Americas to Asia, and the plantation has given way to the assembly line.

    3. And Francis Drake was named for a certain Francis Russell, maybe a relative of yours?

      Drake, incidentally, discovered British Columbia and Vancouver Island in 1579, naming these lands Nova Albion. But the discovery remained a state secret, to keep the information from England's rivals.