Monday, December 17, 2012

The Pursuit of Growth: A Western Perspective



Recent downturn in the world economy, the Great Recession, has made “Pursuit of Growth” a source of migraine for policy makers. Growth or growth levels for Individuals, enterprises and nations (especially in the west) have been hit hard and a recovery to “normalcy” is nowhere in sight. Past-mistakes, present-survival and future-revival is an everyday topic on the Main Street, High Street and the Wall Street. In “Pursuit of Growth”, recent decades have seen a fundamental shift in the economic profile of the developed world. To fuel this shift, phrase coined and championed by free-market and globalization advocates was “move-up-the-value-chain”. Western governments and companies complied by moving “low-end” jobs to the cheaper world. The argument was compelling with three cornerstones:
 
  • Westerners would take up jobs high-up in the value chain commanding higher wages and influential positions 
  • A win-win situation, the consumer in return was promised cheaper products to satisfy its ever growing appetite for electronics, textiles and lifestyle items and many more things 
  • The trend would fuel growth in the developing world further encouraging demand of western branded (not necessarily manufactured) goods. Western companies would have increased profits implying more affluent lifestyles and prosperous societies
There is little doubt that growth by the above mentioned formula did happen. However growth has come with side-effects and implications that I want to elaborate. I am based in Germany so readers might find this article a bit euro-centric. Europe has been in news for all the wrong reasons so this might be an interesting read for many.

Jobs High-up in the Value Chain

The transformation into a knowledge based economy has exerted a lot of pressure on the western-manufacturing-dependent-middle-class. Competition and cheaper prices in developing markets are forcing westerners to prepare for skilled white-collar jobs.  Knowledge based jobs generally require sophisticated training but a functioning educational system alone isn’t adequate to produce a quality workforce. I think education infrastructure also requires a social fabric, like fight to exist, belief of control over own destiny and pressure from parents and peers to compete and excel. Compared to levels I saw in my Indian upbringing (not an advocate of the Indian education system) I find this pressure missing or not enough in the western world.  A general worry in Germany about companies not able to find young engineers to fulfil open positions shows a trend. Education in Germany, at all levels, is almost free but still German companies worry about lack of quality engineers. So definitely it indicates that free-education-to-all is not sufficient to produce quality graduates. That is why, in the developed world, parents/mentors and teachers have a big obligation to train people in subjects like Math and Science. The future jobs in the west would demand sophisticated training and a high proportion of western kids studying the “easier subjects” can be a worrying sign. Talking about Europe, inadequate evening and weekend courses to train people get the right skills for the changing world along with supporting a livelihood is one aspect policy makers need to look into.

Innovation

It is becoming evident that growth can’t come just by filling existing positions but establishing new companies. Except for American companies like Google, Facebook, and Apple flourishing, the IT revolution has almost escaped the developed world (especially continental Europe). Innovation to produce new jobs has not come from every corner but new globalized economy has exerted pressure on traditional sources of livelihood. Reckless government spending, faulty accounting methods and irrational asset bubbles have been counted as one of the major factors for the on-going sovereign debt crisis in continental Europe. However, I see lost investor confidence due to “lack-of-innovation” in recent past in a lot of countries as one of the major causes. Factors like dwindling demographics, stagnant domestic consumptions, huge public sectors and inflexible labour market also play a part.  United States, the largest debtor nation in the history of man-kind continues to live comfortably due to favourable economic indicators and investor confidence in American companies to innovate. Of course Dollar being the world’s reserve currency has a special role to play.  It should be noted that unlike continental Europe, America doesn’t offer free education to its citizens (and pays a huge cost in terms of social inequality) but still it has been the birth-place for most of the high impact innovations of the past decades. Somehow, the social fabric discussed earlier in the article has a role to play.

Forces from the East

It appears that some of the big corporations as they started shipping jobs overseas were not completely prepared for the future. Exposure the low cost manufacturing hubs like Korea, China got in the process enabled local companies beat their western counterparts at their own turf. Existing giants like Nokia, Phillips and Siemens (to name a few) in businesses with low entry barriers have taken a big hit due to pace of innovation and relentless competition from the East. Companies like Samsung, LG, Lenovo and Huawei are no more interested in producing gadgets only for low budget customers. High profile take overs of IBM PC manufacturing, Arcelor steel and Jaguar luxury cars by rich companies based in relatively poor countries shows a trend.  New players from the East including sovereign wealth funds like China Investment Corporation, Qatar Wealth Fund and big conglomerates like Wipro, Tata, Mahindra and Reliance with deep pockets are taking the established western giants’ head-on.

Growth in the Developing World

Not every company in the west has struggled in the globalized world. Flourishing sectors like American technology companies, European aviation, German cars, Italian fashion ware, French luxury items and British services and education see new avenues of growth. As I write this blog, luxury car maker Porsche reported record sales due to strong demand in China and America. China would soon overtake France to become Germany’s largest trading partner and this trend has benefited Germany.  Employment in German manufacturing has seen enormous growth but it’s not a win-win situation for everybody.  The recent announcement by General Motors to close its Opel factory, the bankruptcy of Qimonda (Memory division of Infineon), Financial Times Deutschland in booming Germany are some examples. There is a huge list of companies that have ceased to exist in Germany to force redistribution of labour. Recent uproar about car and steel manufacturing in France is another example. Today an industry if not competitive globally, irrespective of socialist/protective measures would meet its destiny (not necessarily bankruptcy) sooner or later.  People need to acclimatize in the new environment to see some of the old power-houses biting the dust. Days of starting and ending a career in the same sector (forget a company) are over.

Pursuit of Growth
 
Western companies generally operating at higher profit margins need to identify a niche market and innovate before it’s too late. I personally feel most of the smarter ones have already done it.  Talking about Porche’s record sales it is worth mentioning that Porsche in 2012 was one of the first luxury car makers to open a dealership in Nigeria. This bold move was a topic of discussion in western media but a country like Nigeria with huge oil reserves provides the perfect clientele that any forward looking company should crave for.  Companies and individuals in the west are set to benefit a lot from a richer globalized world but not without an ambitious “Pursuit of Growth”. As I read somewhere, the illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn and relearn. The mantra to “learn, unlearn and relearn” would be the key to sustain growth and high quality of life.

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