Wednesday, May 29, 2013

French Manufacturing

The Current Moment, a blog run by two young scholars on which I have posted in the past, has an interesting argument on French industry in response to an FT article. The bottom line:
There has been much debate about how France can regain some of its competitiveness. Some suggest a strategic reorientation away from traditional manufacturing towards more hi-tech activities. What seems obvious is that lowering wages is still the strategy overwhelmingly favoured by businesses. Given how unlikely it is that this occurs via internal adjustment in France, the most probable outcome is that French companies continue to exploit outsourcing opportunities.
I don't agree with my colleagues at The Current Moment. If the wage bill were all that mattered, or what matters "overwhelmingly," all manufacturing would have moved to Bangladesh years ago, and Germany, even with the advantage it derives from outsourcing to Eastern Europe to lower labor costs, would not be the export powerhouse that it is, because whatever competitive advantage in labor cost it enjoys over France, it does not enjoy over China, Greece, or Spain. So clearly there are many other factors at work. Technology is certainly one of them, and France is right to try to take advantage of its relatively well-educated labor force by shifting investment to industries where scarce skills, organizational capacity, and slowly-acquired engineering knowhow are important inputs. Nor is there any necessary reason to disdain outsourcing of labor-intensive parts of the production process to lower-wage countries. This can benefit both partners in the exchange, as Economics 101 teaches. This is indeed "exploiting outsourcing opportunities," but, if everyone benefits, without the negative (perhaps Marxist?) connotation attached to "exploit."

To be sure, there is a numbers game to be played here. Can the shift of investment to new sectors which employ relatively fewer workers per unit  of output really ensure employment for all those who lose their jobs in more labor-intensive sectors? There are reasons for doubt as well as reasons for hope. But it is not helpful to portray the global economy as a cutthroat race to the bottom. It is not that and never has been.


To said...

You can say that German wages are low given their level of technology and productivity, or you can say that they are very productive for their level of costs. It is not either/or, but simply different parts of the same picture.

Basically there are three options for France to regain its competitive edge: (a) a sudden, unexpected and miraculous technology boom (b) extra inflation in Germany (c) leaving the Euro.

bernard said...

you need to replace "labour cost" by "labour unit cost" in your argument, which may well lead you to rethink some of your argument.

On the shift towards higher technology manufacturing, most manufacturing sectors, old and new, do that all the time. Take a look for instance at a picture of a Renault assembly plant, say Ile Seguin in 1970 and Flins today.

There is a tendency among economists to visualise the move towards high tech as abandoning some sectors and concentrating on others because it fits with a conceptual - and childish - interpretation of Schumpeter.

Of course at the same time as existing sectors change towards higher technology, new sectors or products emerge, which in post-industrial economies means high tech sectors.

However, little do their theoretical proponents understand that their main employment creation occurs not necessarily in the sectors themselves but as a consequence, economy-wide, of the development of these high tech sectors and the attendant high tech highly paid jobs.

There are a lot more relatively low qualified and paid workers assembling computers (Thailand was a choice destination in th eighties because the same skills were needed as were in the old textile industry...) than there are high tech workers. And there are a lot more workers building houses for these high tech employees and a lot more fast food workers feeding them and so forth.

It is enlightening in this respect to take a close look at the job creation numbers by qualification in a place like Northern California (Southern California numbers are "polluted" by the vagaries of the military economy, which was illustrated superbly in the movie Falling Down). Northern California is, arguably, an almost pure example of the consequences of concentrating on high tech over the decades: high tech industries create high tech jobs and a hell of a lot more low tech jobs in the whole economy. And, frankly, if this were not true, you would not see as many brown faces there today (actually more) as you saw several decades ago.

Finally, regarding the comment above, I would argue that Germany is to a certain extent implementing b) with the wage increases that have occurred in 2012 and are occurring in 2013. France obviously also needs to do some of the work as it will not recover the 15%-20% unit labour cost lost since 2001 vis a vis Germany through German efforts alone. As a result, the most likely option implemented by France will in my opinion be option d) a long, painful, politically inadvisable period of wage restraint. Another option would be of course to continue the period of cosy decline as took place during the Sarkozy years. After all, the Mezzogiorno does not look great but still exists more than a century after the political and monetary unification of Italy!

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