Economy: Coping with a Changed World

We can carry on the way we’ve been doing for some time. One has to reckon however that once the developed economies

By Anil Gujadhur

The time will come when the world economy will emerge from the present crisis. Build-up of structural distortions from the past is making it difficult to predict as to when exactly the situation will change for the better at the global level. Different paths are being advocated to disentangle the world economy from its current predicament.

On the one hand, some policy makers want to address existing distortions head-on: correcting budget deficits that have become unmanageable, cutting down public debts of different countries that have grown disproportionately high compared with the individual countries’ capacity to amortize them in the near term, ensuring that under-capitalized financial institutions do not crash simultaneously with governments that cannot honour bonds falling due and, above all, restoring consumer confidence which has been severely hit by the crisis.

On the other hand, other policy makers do not find it acceptable to apply the austerity measures as harshly as it is being done in certain countries (e.g., UK) to deal with all these problems that were simmering for long but that have surfaced up all at once with the onset of global economic downturn as from 2007. They are of the view that the economic repression effect on households from the austerity measures adopted so far runs the risk of undermining consumer confidence even more, thus postponing economic recovery further off into the future. They prefer to go more softly with the conservative economic policies to put back economic parameters in shape.

Policy makers on both the sides could in fact be right. The question is one of striking the right balance to set key economies back on track on the road to stable and sustained growth once again while not allowing the distortions to amplify. It is this balance of policy proposals and their implementation that is sorely lacking as economic fundamentalists on either side stick to their guns. Fear that some amount of Keynesian revamping of economies through relaxation of the austerity package might accentuate prevailing macroeconomic distortions is helping to maintain the status quo. This is why certain emerging signs of pickup of demand for certain specific goods and services (e.g., cars) are not generalizing themselves easily on to other sectors to start warding off the crisis for good.

Past Changes in the Structure of Production

It is true that the world has become more interdependent than ever before. Thus, a wheat crop failure in the US or in Russia is immediately impacted by rising wheat price all over. Dynamic global exchange will no doubt remain a springboard for global economic growth in the future but the way things will be done will change and not necessarily to consolidate the present model of global exchange.

In the past, technology development overturned the existing mode of production on several occasions. Thus, the process of producing goods on a small scale employing intensive household manual processes was overtaken with the introduction of mechanisation. For example, cotton mills replaced cottage industries in textiles. Initially limited to the western economies, the mechanisation process spread out to countries worldwide, making redundant numbers of workers who were used to the manual system up till then. Mechanisation was itself overtaken in the 20th Century by automated mass production; the consequence was the spread of this method of production by means of assembly lines to hundreds of different lines of production.

Instead of keeping labour employed, this development was based rather on labour-saving techniques. Labour was seen as an avoidable cost in terms of cost saving in this type of production. What saved the jobs nevertheless was the acquisition by workers of new skills associated with the upcoming methods of production the world over. Technology was copied and replicated in hitherto unsuspected domains. Mass production led to price reductions. This in turn brought many goods within reach of large swathes of populations the world over.

At the same time, a new philosophy emerged in political thought. There was an increasing advocacy now of better sharing of wealth generated by the industrial revolution; this is where trade union movements and wage-bargaining processes gathered pace in the developed economies. Those among the capitalists who were enlightened enough to see how the redistribution of wealth and incomes would support their businesses even better than if they continued to corner off gains from development found virtue in the labour movement. From here, the idea of income redistribution spread out to the so-called under-developed countries, a number of them colonies of the industrialized world. It proved more difficult to overtake resistance in these essentially highly exploitative societies but inroads were actually made in the fiercest pockets of resistance on this front.

The point to note is that the sustained phase of growth that slowly embraced the whole world during such big changes in the pattern of production did not spring up from a situation in which a few only ended up skimming off the benefits of development. On the contrary, demand sprung up the more from newly empowered middle classes and this sustained multi-faceted areas of growth spreading out to the whole world as liberalization took better shape. Another point to note is that those who broke away from classic poverty were those who learnt new skills and adapted themselves to the emerging environment that soon became altogether different from what it had been for centuries in the past. This is what explains insistence upon more and better education. This is the reason why many societies put a premium on education and acquisition of skills.

Shape of Things to Come

It would be incorrect to assume that the process of transformation of production launched successively by mechanisation and industrialization will stop.  On the contrary. The industrial revolution is continuing apace despite the economic difficulties that have temporarily trapped several developed countries. As in the past, the driver of change in the future will be to get to better products, more custom-made, faster delivery and reasonably priced to suit the emerging social structure.

The age of information has introduced possibilities of production that did not exist in the past. Its effect is already being seen in certain activities. The media industry has changed drastically. It is possible today for bloggers located in different places in the world to post their information, views and analysis of facts within short lapses of time and at relatively low cost across the world in as swift a manner as it has never been the case. Amazon and others have so changed the face of retailing that dominant players like Wal-Mart have to follow suit at the risk of being left behind.

A swifter combination of the elements that go into individual production processes (digitalisation, design, engineering, logistics and marketing) will transform economic activity. Gains in productivity will challenge those who are used to cashing it up on certain natural advantages, as we have done in Mauritius, such as availability of a relatively cheaper pool of labour than in other places to man certain specific activities. The gains will be achieved by putting together high skills, production and markets in close physical proximity of each other. Efficiency will play a bigger role in the development of production of this new generation than incentivisation of investors, which has been another one of our fortes.

Knowledge and skills are deeply imbricated in the successful production of this type in the future. These are no superficial things like currency depreciation which give a breather to economic activities faced with conjunctural market constraints. They run deeper and call for a culture of performance on high speed international markets. We need to get into structures which can vie successfully into this kind of model. While a quantum jump is possible for catching up in certain market segments by accelerating the learning process, there are also skills that are deep seated and cultivated over time. We will need to build them up, perhaps at a slow pace initially but with the objective of catching up on a par with the best in those occupations we want to take up.

This is not an easy undertaking for a small population of barely a million which has hardly created a hard core of skills in the sectors of activity that will matter (e.g., robotics, digitalization, miniaturisation). It is not impossible either. We have to think in terms of a wider geography to serve. Nothing is more natural in this respect than coalescing our resources with those of our neighbouring countries. All of them have to league together in the new adventure coming up on the global stage at the risk of remaining eternal importers of ever more sophisticated goods and services from the upcoming new industrial structures into which the world is to make a break from its past.

The structures of production in developed countries will not change in the expected direction all at once. We can carry on the way we’ve been doing for some time. One has to reckon however that once the developed economies recover from the crisis, things are not going to be the same as in the past. America will not want to go on consuming imported goods with a perpetually swelling deficit on the current account of its balance of payments. Europe will give access to its markets increasingly on reciprocal terms and we may not be able to qualify for it foreseeably. We need therefore to scale up our home production to become recognized as a producer of some substance at the international level. We need to grow up better schools to give the skill training required. We need to cut an edge against competition. In simple terms, to get to the proper station, we need to be swimming in much deeper waters than the current state of policy making is throwing up.

* Published in print edition on 4 May 2012

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