The Bear's Lair: The world may become too flat for comfort

The Bear's Lair: The world may become too flat for comfort

By Martin Hutchinson

May 25, 2015  |  http://www.tbwns.com/2015/05/25/the-bears-lair-the-world-may-become-too-flat-for-comfort/

(this column was published on the True Blue Will Never Stain blog, www.tbwns.com )  

In Western countries, we have assumed since the late eighteenth century that technological advances will continue to increase our living standards, and that any living standards convergence with emerging markets will be overwhelmed by greater prosperity for all. About five years ago I questioned this view in the short term, believing that modern communications technology was allowing emerging markets to compete for Western business, narrowing differentials. However I then assumed that this narrowing was a temporary process, and that once the Internet's effects had been absorbed, differentials would remain, at perhaps half their previous level. Given UNCTAD's latest figures on foreign investment, however, I now think that may have been too optimistic (from a Western point of view.)

For the past 200 years Western living standards have been higher than those elsewhere, because of Westerners' better access to capital and the latest technologies. The West was able to exploit its advantages to dominate emerging markets as suppliers of raw materials and labor. Only a few countries, such as Japan and later the growth economies of East Asia, were able, by means of saving, good government and intensive application of Western know-how through education, to accumulate capital and reach standards of living that were more or less Western.

This began to change with the advent of modern telecoms and the Internet. Suddenly it was much easier to construct global supply chains for goods and services, in which routine work was outsourced to countries with low labor costs, notably China. At first, this appeared to be win-win; Western countries got cheaper goods while Chinese workers improved their living standards. You only have to look at the extraordinary decline in real prices of garments and shoes in the last quarter-century to see the benefit of this.

However, as was entirely in their rights and entirely predictable, the emerging markets workers participating in global supply chains quickly acquired new capabilities of their own. The software writers became fully fledged engineers, even designers. The garment workers became designers and production managers. It turned out those vaunted Western skills weren't so unique after all.