Dr Bharat Jhunjhunwala
China continues to sink even though it had devalued its currency two months ago to ward off such a situation. Exports from China to the US were more and exports from the US to China were less because Yuan was low and dollar was strong. The US had been asking China to revalue the Yuan upwards so that the above trade imbalance could be rectified. Instead, China has further devalued its currency so as to maintain the pace of its exports. China’s exports have been declining at a monthly rate of about (-)5 percent for the last few months. Factories are closing down. China has devalued to sidestep these problems but to no avail. China’s growth rate continues to slide and exports remain under stress.
The Indian rupee has declined in tandem. A cheaper Yuan means that Chinese goods will be cheaper for the US consumer. An American consumer was getting 64 Yuan worth of Chinese goods for ten dollars till a week ago. Now she will get 66 Yuan worth of goods for the same ten dollars. As a result Chinese goods will become more attractive. Correspondingly, Indian goods will become less attractive. Therefore, the Reserve Bank of India has allowed the rupee to slide in tandem with the decline of the Yuan. In effect, therefore, China has gained very little. It goods have become cheaper but so have goods exported by its competitors like India. It is like the weekly street market at 10 pm. Every seller reduces his price so that he can get rid of the stocks but none succeeds because the customers are few.
At root of the problem is falling global demand. The developed countries were previously making exclusive goods. In the fifties, for example, General Motors of the US and Morris of the UK were selling cars in India. They were among the few global producers of cars. They could sell the cars at a high price because the Indian consumer did not have much choice. These manufacturers paid high wages to their workers from these large earnings. In recent period US companies like Microsoft have likewise sold Windows software to consumers across the world at high prices and used these earnings to pay high salaries to its employees. The high wages of US workers were predicated on these pioneering products.
The situation has flipped lately. Indian companies are making cars and exporting to the US today. The number of pioneering products that the developed countries are able to sell in the global market is fast declining. China is making cameras, hybrid cars, flat screen TVs and other advanced products. As a result companies in the developed countries have few products that they can sell at high price in the global market. In consequence, wages are stagnant or declining. Their workers no longer have the purchasing power to buy TVs from China and clothes from India.
The decline in wages of workers of the developed countries is coming along with increase in wages of workers of the developing countries. The decline in demand from the developed countries, therefore, should be matched with an increase in demand from the developing countries. This does not happen, however, because the decline in wages of the developed countries is steep while the increase in wages of the developing countries is minimal. Think of a water tanker discharging its water into a pond. Decline in the level of the tanker will be huge while increase in the level of the pond will be minimal. The number of workers in the developing countries runs into billions. Therefore, the increase in wages due to the shift of manufacturing from Detroit to Chennai is virtually nil. Globalization is a one-way street with lowering wages for the workers of the developed countries.
This tendency of decline in demand in the global market is counteracted by new inventions. New products are created and these generate new demand. Last ten years have seen an exponential expansion in demand for mobile phones in the country, for example. Similarly, new demand for computers, TVs, photocopy machines, and metro rail has been generated in the last twenty years. We have thus before us two opposing tendencies. The demand for goods in the global market is declining because workers of the developed countries are facing a wage crunch. On the other hand, demand for new products is being generated.
It will be obvious that the decline in demand by the developed countries will necessarily continue. Global movement of goods will necessarily lead to a shift of manufacturing to the low wage countries like Bangladesh and Vietnam. Similarly, the global market for services like call centers, translations, websites, legal research, and medical transcriptions will shift to providers like India and Philippines. Accordingly, the number of jobs in the developed countries will decline. This is an irreversible trend.
The increase in demand due to the invention of new products, however, will always remain uncertain. One did not know in the eighties that the personal computer will be invented. One did not know in the nineties that mobile telephony will become so cheap. Invention of a similar game-changing product has not been made in the first decade of this century. We may have broken the human genome and sent spacecraft to the moon but these have not led to generation of demand of goods like the computer or the mobile.
The natural trajectory for the global economy, therefore, is to slip into a long recession. This tendency has been counteracted in the last century by a spate of new inventions beginning with the manufacture of Ford T on the assembly line. Whether the natural tendency will be nullified by new inventions is hard to predict. Experience of the last two decades is not encouraging. Therefore, I think a global recession is more likely in the coming period.
The Government must change gears. Its efforts aimed at attracting Multinational Corporations to “Make in India” for the global market are certain to fail. One does not put up a new cold storage when the potato stored in the existing facility is rotting. Therefore, the Government must push for import substitution. Let us make goods that we are importing at present. Another line of action is to focus on exports of services instead of manufactured goods. Purchasing power in future will be concentrated among the rich. These will not consume ever increasing quantities of cameras, TVs and toys but they have an insatiable appetite for designer clothes, customized video games and movies and space travel. The Government must establish an ambitious program to support export oriented services startups. We must not denigrate the energies of our entrepreneurs by singing songs of foreign investors.
(The author author was formerly Professor of Economics at IIM Bengaluru)
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