The mayhem in the world economy will only get worse, especially for the developed countries. The problem is inherent in the model of free trade on which present model of globalisation is built. Developed countries have proprietary rights on most advanced technologies today. Globalisation has encouraged them to transfer these technologies to other countries. For example, American and French companies are excited about transferring advanced nuclear power reactors to India upon the successful culmination of the nuclear agreement. In this way China and India have been successful in getting the winning combination of advanced technologies and cheap labour. One consequence is that the American economy has lost its special technological advantage and is not able to maintain its high level of living that it is accustomed to till recently. Say the cost of production of nuclear power is Rs two per unit against Rs four per unit for thermal power. The cost of energy in the U.S. will be Rs two if the U.S. does not export the technology of nuclear reactors to India and closely guards it. India will have to produce thermal power at Rs two per unit. Consequently the cost of production of goods in India will be more and the U.S. can pay higher wages to its workers to that extent. But companies producing nuclear reactors will be deprived of profits from the export of their technologies. The logic of globalisation pushes the Corporations to make profits, if need be, by sale of advanced technologies. The market is inherently shortsighted. It does not examine the long term consequences of actions undertaken by the players. In the result, Western corporations will supply advanced nuclear reactors to India, the cost of energy in India will also decline to Rs two per unit, and the U.S. economy will loose its comparative advantage.
Cheaper production in India will make it impossible for the U.S. companies to pay higher wages to their workers as they were paying previously. This loss of income is the cause of the sub-prime crisis. American workers are not able to repay the housing loans, which is leading to huge losses for the American banks.
Free trade has added to the woes of developed countries in another way. The daily wage of an unskilled worker in India is about Rs 200 against Rs 5,000 in the U.S. It has become profitable for U.S. companies to produce in India and export the manufactured goods to their home economy. Wal-Mart is reported to procuring about 80 per cent of its goods from China. Production of garments, toys and footwear has practically come to an end in the U.S. This has happened because China and India have got the winning combination of advanced technologies and cheap labour.
Developed countries were protected against such competition previously. Advanced technologies were closely guarded. For example, India virtually begged for cryogenic engines for its space missions and super computers for its meteorological applications. These were denied at that time. Restrictions on exports of technologies had insulated the developed countries from competition from China and India in two ways. One, exports of advanced technologies were prohibited; and two, imports of goods from China and India were subject to higher import taxes. It was possible for American companies to pay higher wages to their workers behind this protective shield which has since been dismantled.
The U.S. Government has made a huge $700 billion package to bailout U.S. banks from the present crisis. The U.S. Government will buy these loans from crisis-ridden banks. This package will be successful in lessening the immediate pain but it will wholly fail in solving the present crisis. The cost of production of American companies will continue to be more than that of Chinese companies after implementation of the package because of continued adoption of free trade. The resulting downward pressure on wages of American workers will, therefore, persist.
Where did the model go wrong from the perspective of the developed countries? My reckoning is that there was misplaced trust in continuous development of new technologies. The U.S. left no stone unturned in having the TRIPS agreement included in the WTO. The underlying idea was that gains from exports of advanced technologies will be huge and more than compensate for loss of employment due to cheap imports. The gains were indeed huge?but only as long as new technologies were being developed. The last new technology of consequence has been that of the internet which was responsible of the making of the IT bubble of the late nineties.
Absence of a new technology since then has deprived the Western countries of this steam of monopoly incomes. Now they have to fend for themselves against China and India on the strength of cheap production alone. This they are unable to do because of low wages in the developing countries. The model failed because new technologies did not appear and benefits from export of new technologies failed to materialise. This has led to the collapse of globalisation, as we know it. The future will belong to India and China because we have the winning combination of cheap labour and advanced technology, courtesy globalisation.
(The writer can be contacted at Lakshmoli, PO Maletha Via Kirti Nagar, Uttarakhand-249161; e-mail- [email protected])