Source:Benzinga,
The Trading Idea Network
By Charles Krakoff
October 24, 2010 16:03 PM
In the Financial Times, possibly the best newspaper in the world and full of intelligent reporting and comment, John Kay stands out for his incisive take and economy of expression. One of his most recent articles, “Why you can have an economy of people who don't sweat,” takes to task the “manufacturing fetishists” who believe that any economic activity apart from manufacturing, agriculture, or mining is of minimal real value. We are all prey to this attitude to some degree, especially in the wake of the financial crisis, which saw economies that rely heavily on a somehow “unreal” financial sector have fared worse than those economies more focused on production of things you can drop on your toe.
I have long been troubled by this attitude, to which we all are susceptible. Somehow, a banker inventing and flogging new forms of derivatives or trading algorithms seems morally and economically less worthy than someone who makes pig iron or beer for a living, and this view may be justified. But on close examination, many other jobs, which involve more brains than brawn, generate far more real value, however you care to measure it, than tightening bolts or stitching sleeves on an assembly line.
Kay mentions Apple's iPod as a product in which the value added from manufacturing the device itself, including the extraction and processing of the metals and plastics it contains, amounts to three or four dollars of the two or three hundred dollars the finished product sells for. Product and production design, marketing and promotion, and logistics and distribution are where the real value is created. This is increasingly true of almost any physical product we buy. When you pay several dollars a tablet for your heart medicine or Viagra, the value resides not in the cost of producing the pill itself, which in most cases amounts to fractions of a cent, but in the billions of dollars spent on research and development and testing: the intellectual value. Even if pharmaceutical companies are often guilty of inventing cures for conditions no one knew existed until they saw the TV commercials, the intrinsic value of much of what they produce is incalculable, and has little to do with the hourly wages of workers on the assembly line. Kay also cites the example of book publishing, in which “the books that Britain exports have, for as long as I can remember, been made from trees grown abroad; but then globalization meant the paper was also made abroad, and increasingly the printing took place overseas. Soon shipments will be entirely electronic; selling a book will involve no physical objects.”
Lately I have been working on development of industrial parks in Haiti, in which international garment manufacturers, attracted by cheap labor, special trade preferences, and proximity to the U.S. market, will set up factories.
This is unpopular in many quarters. Anti-globalists point to the exploitation of poor Haitians. A Haitian garment worker can expect to make less than six percent of the earnings of an American on minimum wage. Working and living conditions will be poor, and a worker might spend a quarter of his daily earnings for transport to and from work. Though the factories for the most part are clean and well-lighted and ventilated, it is not an easy life. Many also decry the shipment of American jobs overseas, as if employing Americans as minimum-wage sewing machine operators were vital to our national interest.
Most of the garment manufacturers likely to invest in Haiti's industrial parks are Korean companies. Once Korea itself was a huge manufacturer and exporter of clothing, but as Korea grew richer it could no longer compete with lower-wage countries. But the Korean companies that had formerly made garments in Korean factories using Korean workers did not quit the business. Instead, they began setting up factories in places like Vietnam and Cambodia and Honduras and Nicaragua, which, with Korean experience and know-how, became some of the most efficient manufacturing operations in the world. The Korean companies integrated these factories into their global supply chains, becoming suppliers of choice to U.S. clothing companies and retailers like Levi Strauss, Wal-Mart, Nike, and Gap.
When you buy a pair of Levi's made in Haiti, what is the source of value in the product? Is it the product design, distribution, quality control, and marketing provided by Levi Strauss? Is it the factory design and construction, production engineering and management, fabric sourcing, and logistics provided by the Korean manufacturer? Or is it the Haitian sewing machine operator? Obviously, all participants in this complex supply chain play an essential role, but you'd have to be a devout Marxist to argue that the product's value resides exclusively or mainly in the direct manufacturing labor. That may have been the case in the 19th century, but certainly is not in the 21st. What differentiates one product from another, except perhaps for hand-made watches costing $100,000 and up, is not the skill and hard work of the laborer but the design, engineering, production management, logistics, distribution, and marketing that transform an idea into a tangible item.
It goes even further. The end product needn't even be tangible, as John Kay points out in his example of book publishing. To put it another way, why do most of us instinctively feel that manufacturing a TV set is somehow a more worthy activity than producing a TV show?
Our entire way of looking at the economy is conditioned by this bias. We talk about our balance of trade, but although statisticians and econometricians do their best to quantify trade in services, such data are much harder to capture than information on trade in physical goods. When a software package is exported or an engineering firm designs and manages construction of a new road in another country, those transactions show up in the balance of trade of both the exporting and the importing country. But it gets far more complex when we consider all the trade in non-tangible items and services that take place within a single company or supply chain. When Gap sends its new T-shirt design to a manufacturer in Haiti it is effectively exporting its intellectual property to the manufacturer. When an engineer flies from Korea to Haiti to oversee the retooling of the manufacturing line for the new product, his employer in Korea is exporting his know-how. But it's unlikely that either of these transactions shows up in official trade statistics. So, to complement our manufacturing bias, we have a system of recording data that fails to capture much of the value of non-physical trade and thus devalues that trade in the estimation of both the public and the policy markers who rely on those data.
It gets worse. Engineering is still considered a noble endeavor, but mainly because it remains directly linked to the production of something physical, be it a toaster, a bridge, or a pair of pantyhose. But a designer? Someone who slaps his initials on a T-shirt so as to sell it for ten times the price of the equivalent generic product. Where's the value in that? And what about the marketers, the shippers, the wholesalers, the retailers, and the advertisers, not to mention the customer support staff? Useless parasites all of them, in the popular view, selling us stuff we don't need and adding layer upon layer of profit to make everything more expensive than it should be. A moment's reflection should dispel that belief, but it doesn't. So Wal-Mart, which has outsourced much of its manufacturing to China, is considered a villain for shipping American jobs overseas, even though it has devised one of the most sophisticated systems of distribution, logistics and inventory management on the planet, which employs 2.1 million people worldwide, 1.4 million of them in the U.S.
The garment industry is an especially pertinent example, because it employs so many people and, in many poor countries, is the first step on the path to industrialization and greater prosperity. It is also one of the first industries to leave a place when the cost of production rises, usually as a function of rising wages. It happened in the U.S. right after WWII, when New England textile mills moved to the Carolinas, attracted by lower wages, less powerful unions, and cheaper electricity. It has happened again as textile and garment companies moved their factories to Mexico and El Salvador and Lesotho and China, and now Vietnam, Cambodia, and Haiti. Each time this happens there are recriminations and self-criticism. We are losing the manufacturing base that makes us strong. Our leaders should have done more to keep the jobs here. Those underhanded foreigners are grabbing “our” jobs.
If this were actually true, and if the migration of low-skill, low-paid jobs to poorer countries were such a threat, unemployment in the U.S. would be much higher than it is, whereas, until the current recession hit, we had one of the lowest unemployment rates of any advanced country. Some proportion of the U.S. labor force does work slinging burgers, greeting shoppers at Wal-Mart, and calling you at dinnertime to sell you a new cable TV service, but that's only a fraction of the total. In Massachusetts, where I live, many of the textile jobs that went south and then overseas were replaced by higher-skilled and better-paid jobs in information technology, telecommunications, biotechnology, and finance. If our government had tried to resist the economic tide and preserve those textile jobs, these new industries might never have emerged. We should rejoice at these trends instead of seeing them as emblematic of the failure of our system of economic governance.
In John Kay's words, “The productivity of moder
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