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Wednesday, November 15, 2006

Comments

Arthur Eckart

The two questions asked in the article are: How to retain a viable manufacturing sector in OECD countries and how to handle the impact of the structural shift from manufacturing to services (displaced workers, for example). Firms tend to make better decisions than government in the realm of microeconomics (e.g. utilizing limited resources efficiently and raising living standards), although government has a role in market failures, purchases, investment in successful programs, etc. Manufacturing in OECD countries will generally remain viable, since productivity remains high. It's inevitable that manufacturing will produce more value with fewer inputs similar to the progress in the Agricultural Revolution. So, unnecessary government intervention seems best to generally retain a viable manufacturing base. Workers should be required to save a portion of their income for retirement, unemployment, health care, education, or appropriate emergencies. Individual accounts should replace social security, although unemployment insurance should be kept. This will reduce excess government expenditures and force workers to set aside a portion of their income for needs rather than wants (to somewhat offset these two market failures).

Lafayette

AE: "Manufacturing in OECD countries will generally remain viable, since productivity remains high."

If only.

VW robotized its assembly line a donkey's age ago, but that has not stopped production from moving (south and eastward) to the Czech Republic. The Skoda is a poor man's "Volkswagen" (pun intended). Germany’s highly engineered car manufacturing focused on quality but expensive design and is surviving well. But, this is atypical of German manufacturing, which is still overly concentrated on the machine-tools industry.

More and more of the leading European countries maintain core competencies in the homeland country (such as design, marketing, financial controls) and outsource manufacturing to the “near East”. The recent expansion of the EU eastward will benefit “Old Europe”, since production will be cheaper and in Euros. (Look for Russia to become the white knight to save Airbus, but at the cost of off-loading production into Russia. And, why not? Aircraft production is a sector in which Russia is competent. All they need do is keep the rouble cheap.)

Europe had better focus on the services sector to maintain employment and that lesson is slowly coming around to most of them. That Britain began exiting out of manufacturing a decade ago is not lost on anyone. It has an enviably low unemployment record (compared to the rest of Europe) and its economy is largely entrenched in the services sector. Finance comes to mind, but also consultancy services (both engineering and otherwise).

Productivity could be enhanced by additional and large investments in IT, but once again in the services and not necessarily the manufacturing sector. IT training has become a must in southern Europe (Spain, France and Italy), without which one is relegated to menial jobs.

Still, as regards productivity it is important to make the essential distinction between hourly productivity and total productivity (per unit output). For as long as Europeans are wedded to leisure time at the expense of work, their total productivity will remain poor.

John F. Opie

Hi -

I run a 160 sector model of the Austrian economy as part of what I do where I work.

Austria is perhaps a special case (a lot of Germans are moving to Austria for tax purposes), but the Austrian industrial sector has been outperforming most of Europe handily over the last ten years or so.

Why?

Because a) the government got out of owning manufacturing enterprises, b) clustering, coupled with extremely efficient logistics and planning of key manufacturers, led to some very high-tech sectors and c) long-term industrial policy paid off.

If you look at Austrian manufacturing, you see massive growth of one sector in particular: the automobile sector (ÖNace 34). This is largely clustered around Graz and is the result of one major player, Magna, entering the Austrian market with a vengeance. But government industrial policy, one that really went for the long term, also paid off: around 20+ years ago, the Austrian government decided to fund a number of professorships for the Austrian technical universities for diesel technology. The result is that there are few diesels made today that don't use Austrian-developed technologies, and a huge number of diesel engines, including but not limited to those used both by BMW and Mercedes, are made every year in Austria for world-wide use.

Far sighted? Yes: it was a gamble. But it paid off. And consider this: the Austrian government just endowed more than 20 chairs at various technical universities. This time, it's nanotechnology, materials science and logistics.

Both hourly and total productivity in Austria is high, the result of what is largely a highly trained workforce.

Services, on the other hand, have serious problems: tourism, one of the key employers in Austria, faces severe productivity problems that are almost impossible to solve, given the personnel-intensive nature of the business.

I'm afraid I can't go into more detail than that right now: suffice to say that I think it's more important to talk not at the macro level, but rather at the sector-level (mesoeconomics...) in order to see what is really going on.

John

Charles Butler

Does it not seem unreasonable to expect a society to fuel economic growth through personal consumption and at the same time think that manufacturing will not move to low wage environments? People will buy less if the stuff they're buying is more expensive, and that's what is required to keep the ball rolling. It's hard to have it both ways. As for Austria's success in the auto industry, it's more likely related to the fact that Magna's Frank Stronach was born there than anything inherent in the Austrian model. Brilliant and very successful man meets "home town boy makes good", so to speak, and therefore not necessarily repeatable in other countries.

The "solution" in Spain (where I live), contrary to what Lafayette claims, is to continue to sap off the best students into government jobs for which they are overqualified and then to depress private sector wages by allowing employers to hire people on a "temporary contract" basis that is so advantageous that it more than offsets the economic cost of constantly having to train new and unexperienced recruits, not to mention that of the effects that that has on the quality of the product produced.

Lafayette

"contrary to what Lafayette claims"

I don't really see how what you describe is contrary to what I said, since it is exactly what is happening in France. However, Spain seems to a have a dynamic economy, which France does not.

I don't know about Spanish students, but I do know the French variety. They will NOT accept just any job. Not only that, they are NOT educated to accept just any job.

They went to university to study Sanskrit (or some such irregular subject) and now they are waiting for the state to hire them as teacher of Sanskrit. This is an exaggeration of course ... but not all that much.

Don't forget that French students demonstrated raucously against a government proposition that would make temporary hiring more supple. Why such a proposition? Because what you describe is a fact. So, why not make it easier for companies to do it? Not all students, once hired, would be let go. Some, those qualified, would "stick", thereby reducing unemployment. A great many would be let go, because they are plainly unable to work. (They haven't the faintest idea how to organize themselves, they must be constantly monitored and told what to do. All that is costly time for very little productivity.)

The students didn't like the proposition because they had swallowed the leftist blarney that only "durable jobs" should be offered by employers. So, we see why companies open up production centers in foreign countries. The children were demanding "guaranteed jobs". Yeah, right, when pigs fly.

With students as economically naive as these, it is no wonder that they are unemployable.

Let them eat brioches.


NB: In fact, what might well work is an arrangement by which students spend an entire year on a mixed work-classroom schedule (ten weeks in an office, ten weeks in a classroom). The employment, even at minimum wage, would give them both a salary and teach them early on how to organize themselves at work. By the time they graduate, they could already show prospective employers that they had a "work experience", which is the principal reason that employers will not hire them in present circumstances.

Charles Butler

Lafayette --

My apologies. I interpreted what you wrote as meaning that the issue had made it to the government's must-do list. Obviously, that wasn't the case.

The dynamism of the Spanish economy is, unfortunately, tied entirely to the construction industry and the decade-long building boom that is on the verge of dying down. This will probably be seen to have done serious damage to the Spanish economy in the long run as it has created an entire generation of construction workers and related tradesmen with very high expectations as to their earning power in the future and who have been rewarded very well for their decision to leave school at age sixteen. My wife is a high school teacher in the Andalucian town where we live and reports regularly on the complete disrepect the students and their parents have for the value of education. To be rewarded for this is exactly what Spain, with its historic disdain - on the part of both the educated and uneducated classes - for public education, does not need.

The fact that this dynamism is not the sort that serves the long term interests of the country is reflected in the ever increasing current account deficit. It's an overheated local economy that doesn't get inflationary because of the EU open door to Asian imports.

Once again, my apologies.

Lafayette

Pilat: "The distinction between manufacturing and services is blurring, complicating empirical analysis with data by economic activity."

Pilat is on to something important, here.

When the first Arab PC was to be produced (in the late 80s), a distributor in a North African country called proposed manufacturing it.

The proposition was never accepted because the value added of manufacturing, which consisted of assembling components, was barely 3% of the total cost. The idea was simply not viable.

What was propose finally, however, was to fund a school that trained individuals on after-sales services (repair, advisory, training). That idea eventually created real employment for a good many.

It is obvious that whatever fairly complex product is sold into a marketplace, regardless of its price, it will require either training to manipulate it or personnel to repair and/or enhance it.

The higher up the technology ladder one goes, the better are the chances that the product will require talented individuals involved in its life-cycle performance. And, those jobs can rarely be done from abroad.

Lafayette

"It's an overheated local economy that doesn't get inflationary because of the EU open door to Asian imports."

France's is certainly not an overheated economy, but the discussion about purchasing-power is a very live debate here.

Inflation is tame by most accounts and wages are rising only slightly. However, over the past ten years, the tsunami of gadgets and household products that has flooded European markets have allowed salaries to go much further. This factor is not sufficiently appreciated.

The wailing and gnashing of teeth over a closed factory makes national evening television, however.

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