11.15: Global Production

GLOBAL PRODUCTION

At times industrialization has propelled countries to great economic heights. Britain, The United States and Japan all rode an industrial wave to international prominence. In those countries and others, a (largely mythical) golden age centers around a time when low-skilled workers could earn a sufficient wage to secure economic security. This is more-or-less what the “American Dream” was. Deindustrialization has changed the economic trajectories of these countries and the people living in these countries. However, it must be noted that post-industrial countries have not seen rapid increases in poverty. Wages have been largely stagnant for decades, but they have not generally gone down. The largest difference has to do with relative prosperity for industrial and post-industrial countries. Countries such as Japan, the UK or the US are no longer far wealthier than their neighbors. In the same way that flooding a market with a particular product reduces the value of that product, flooding the world with industrial capacity lowers the relative value of that activity. Developing countries function as appendages to the larger economies in the world. The poor serve the needs of the wealthy. Industrialized countries buy goods from developed countries, or they license or copy technology and make the products themselves.

Space and Production

In the context of a globalized market, a factory built in one market may not built in another. This is not to say that producing goods is a zero-sum game, but there are limits to the amount of any good that can be sold. It’s a valid question to ask why transnational corporations (TNCs) have bought into China at rates far greater than in Cuba, Russia, or other Communist or formerly Communist (to varying degrees) countries? There is only so much spare capacity for production in the world. If one giant country (China) is taking all the extra capacity, then there will be none left for others. FDI is simply easier in China, since there is more bang for the buck. This is largely a function of population. The population of China is roughly two times the population of Sub Saharan Africa. And China has a single political/economic running class, as opposed to 55 different sets of often fractious political classes. If the industrialization of Africa happens at all, it will occur after China and its immediate neighbors who have been drawn into its larger economic functioning have largely finished their own industrializing. An example of this proximate effect is seen in the shift of some industries from China to Vietnam and Indonesia.

China’s industrialization had to do with promoting itself as a huge cheap labor pool, and as a gigantic market for goods. It successfully leveraged both of these characteristics to attract foreign investment, and to gain foreign technology from the companies that have invested in producing goods there. Industrialization overall seems to have slowed. The speed at which China industrialized has not been matched by other countries following China. One current idea is that the world is in a race between industrial expansion and rapid over capacity of production. In other words, the reason that industrialization isn’t expanding as rapidly as before is that we are already making enough goods to satisfy demand. Remember that goods require demand. Unsold goods don’t produce any income. If the factories in the world are already producing enough, or even too much, then new factories are much less likely to be built. Technological advances and the massive industrialization of China might have ended the expansion of industry.

It also appears that the highest levels of manufacturing income are well in the past. According to economist Dani Rodrik, the highest per capita incomes from manufacturing occurred between 1965 and 1975, and has fallen dramatically since then. This is even considering inflation. Many countries industrializing now only see modest improvements in income. This is related to supply and demand. When there are fewer factories, they make comparatively more money. When factories are everywhere, they are competing with everyone.

Trade

Even more than expansion of industrial production, the world has seen an expansion of trade. Global trade has produced an intricate web of exchanges as products are now designed in one country, parts are produced in 10 others, assembled in yet another country, and then marketed to the world. Consider something as complex as an automobile. The parts of a car can be sourced from any of dozens of countries, but they all have to be brought to one spot for assembly. Such coordination would have been impossible in the past.

Individuals can buy directly from another country on the internet, but most international trade is business-to-business. TNCs are able to conduct an internal form of international trade in goods that can be moved and produced in a way that is most advantageous for the company. Tax breaks, easy credit and banking privacy laws exist to siphon investment from one place to another.

Because of global trade, improvements in communication and transportation have enabled some companies to enact just in time delivery, in which the parts need for a product only arrive right before they are needed. The advantage of this is that a company has less money trapped in components in a storage facility, and it becomes easier to adjust production. Once again, such coordination at a global scale was not possible even in the relatively recent past.