Is China the last economy to get rich with cheap labour?
The global structure of trade and production is changing at a rapid pace, with 3D printing and increasing digitisation at the forefront of this transition. This means that factors such as cheap labour – one of the key elements behind the rise of China, for example – are becoming less and less important, as Brian Caplen describes.
China is busy moving up the manufacturing value chain as wage levels rise and companies invest more in technology. But those countries hoping to be the beneficiaries of this trend – frontier markets with large populations attractive to investments in low-end manufacturing – may be disappointed.
The global structure of trade and production is changing radically and cheap labour may not have the pulling power that it once had for attracting investment. In the new digital economy with data transmitted to 3D printers, companies are looking at citing production closer to markets. This could be bad news for emerging markets, where the main competitive advantage is cheap labour and which are not plugged in to the digital economy.
For banks it changes things too. Cross-border lending has fallen sharply since the financial crisis and anyone who expects it to recover as physical trade rebounds may be in for a shock – trade may stay flat for years. The future for banks may be more about financing digital start ups than cross-border trade flows.
In a new report, the McKinsey Global Institute points out that data flows – information, searches, online transactions, video and intracompany traffic – are transforming the global economy. While in the past few decades globalisation has been about flows of physical goods and finance, now data flows are playing a much more significant role.
Total trade in finance, services and goods peaked in 2007 at $30,000bn, then fell sharply during the financial crisis and has only recently crept back to its pre-crisis peak in total volumes. But as a percentage of world gross domestic product (GDP) it has fallen from 53% to 39%. Meanwhile, data flows have risen 45 times over the nine years from 2005 to 2014 and McKinsey estimates that of the $7800bn of value added to world GDP by global flows – in terms of raised productivity, for example – data flows had a larger impact than flows of goods.
There are a number of trends that come out of this. “The makers of many finished goods are beginning to place less importance on labour costs and more on speed to market and non-labour costs,” says the McKinsey report, which is entitled ‘Digital globalisation: the new era of global flows’. “As a result, some production is moving closer to end consumers,” it adds.
Supply chains are also shortening as Chinese and other manufacturers decide to concentrate production and keep things simple. This is also bad news for developing countries that hoped to get a slice of the action.
But are these trends good for advanced countries? The rise of populists such as US presidential hopeful Donald Trump is based on issues such as increasing inequality, as jobs have gone overseas to cheap labour locations. Yet whether this new production structure sends large numbers of jobs back to the US is extremely doubtful; 3D manufacturing tends to be about small-batch production rather than large-scale output.
The real winners in all of this are small companies from anywhere that can tap into a global digital market for their goods and services. These are the companies that banks should be backing.
Brian Caplen is the editor of The Banker.
