The Globalization Gap

The Fly-over Zone

“The fly-over zone” is David Stockman’s term for the middle portion of the United States; the vast expanse roughly bounded by the Appalachian and the Sierra Nevada mountains. Stockman holds that people in the fly-over zone think differently from those on the coasts.[1] The election results from last November tend to agree.

In my view, Globalization, with its economic and social repercussions, provide insight as to why the fly-over folks think so differently from those on the coasts. In essence, Globalization has benefited Americans whose income relies on professional services and intangibles over the last several decades. Those who depend on tangibles, again speaking generally, have done considerably less than well.

 International trade, especially in consumer goods, and large-scale migration from less economically developed nations to more developed countries are two primary factors driving polarization of opinion about Globalization here in America, as well as in the European Union.

Free Trade

Global free trade is fundamental to increased and increasing global standards of living. Since the end of World War II, international economic history records a succession of moves to facilitate multinational trade by removing tariffs and other barriers to trade. One result is truly multinational companies, like GE or Nestle. Another is globalized value chains, even for small companies. Companies and consumers everywhere benefit from the lowest prices available anywhere in the world.

But it isn’t all good. Employees in some nations suffer as lower cost competitors abroad take business and jobs. Some nations import much more than they export, resulting in escalating debt. Some nations use access to resources as an economic means to political ends, like the recent Russian cuts in natural gas supplies to Europe or the OPEC oil embargo in the 1970s.

So, the benefits of free trade are widely spread, but difficult to recognize or quantify. The negatives, on the other hand, are localized and specific – those who have lost their livelihoods to free trade are not happy. And that unhappiness has resulted in political resistance to new trade pacts and movements in several countries to revise or rescind existing agreements.[2]

Migration

In 2013, author and investment banker Dan Alpert[3] wrote:

“The past twenty years have seen a transformation of the global economy unlike any ever witnessed. In the time it takes to raise a child and pack her off to college, the world order that existed in the early 1990s has disappeared. Some three billion people who once lived in sleepy or sclerotic statist economies are now part of the global economy. Many compete directly with workers in the United States, Europe and Japan in a world bound together by lightning – fast communications. Countries that were once poor now find themselves with huge large surpluses of wealth. And the rich countries of the world, while still rich, struggle with monumental levels of debt – both private and public – and unsettling questions about whether they can compete globally”

Alpert’s thesis is that the world suffers from gross over-supply of labor, capital and productive capacity. Capital moves readily across national borders seeking higher returns – meaning productive investment opportunities. When excess productive capacity exists, businesses don’t invest in more. Excess labor, looking for work and stimulated by numerous local wars and conflicts, continues to migrate from developing world countries toward developed countries.

The circumstances that Alpert describes do exist and significantly define world economies and the businesses that drive those economies. These conditions will continue until fundamental global imbalances change. That change may be gradual, spanning years, or quite rapidly, like the economic equivalent of an earthquake.

Chguck - Juneau AKThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

Container ship graphic licensed via www.dreamstime.com


[1] David Stockman was former President Reagan’s budget director. He now writes extensively, especially on political / economic affairs.

[2] For more on this, see “Trade, at what price?” in The Economist, April 2nd – 8th 2016 edition, page 27

[3] Dan Alpert’s The Age of Oversupply, Penguin Group (USA) LLC (2014) is offers much more on this.

 

On Globalization Immigration and Pragmatism

Globalization and its effects are simply facts of 21st century life. The pragmatist looks first at those effects that most urgently affect the pragmatist’s life and business, then seeks a pragmatic solution – a solution that can actually work for all involved.

Viewed from here in the southwestern United States, illegal immigration is one such issue needing resolution. The following, reprised from two earlier post to this blog, proposes an approach that offers a real chance for a lasting solution. The pragmatist also knows that band-aids and stop-gap measures may be necessary as a lasting solution is implemented. But the pragmatist does not confuse the temporary with the lasting.    — C.H.


A Tale of Two Borders

Benito Juarez, a five term president of Mexico in the mid-19th century, famously lamented “Poor Mexico, so far from God, so close to the United States”. Today, many in the U.S., especially here in the southwest, complain about illegal immigration from Mexico.

Finger pointing didn’t work in the 19th century, and it will not work now – in either direction. Canada is just as close to the United States as Mexico is. There are no significant immigration issues between the U.S. and Canada. The difference is the approximate economic parity between the U.S. and Canada. The solution to the illegal immigration issue lies in addressing the cause of that issue — the economic disparity between the U.S. and our neighbor to the south.

Those demographics and trends suggest that reducing the economic gap between Mexico and the U.S. / Canada is possible over the coming two or three decades. With the active support of its neighbors to the north, Mexico could build a large, globally competitive economy that exports worldwide and builds big new markets within Mexico. With a cooperative arrangement that catches the demographic tide, Mexico’s economic growth need not be at its northern neighbors’ expense.

The prize is a U.S. – Mexican border that works like the U.S. – Canadian border.

Lose the Sombrero

serape and cactusLose the sombrero, the serape and the siesta. Those old stereotypes hardly fit the modern country that Mexico is rapidly becoming. Two recent news items put this into focus:

(1) The World Business Council for Sustainable Development’s Vision 2050 report [i] projects that, in 2050 — 37 years from now — Mexico will have the fifth largest economy in the world, as measured by GDP. That’s right, #5 — behind China, the U.S., India and Brazil; but ahead of Germany, Japan and everybody else. That may shock the stereotype. However, Mexico is already #12 and growing at about 4% annually, while most of the larger economies are currently growing at considerably slower rates.[ii]

(2) Fifty years ago, the fertility rate — the number of children per woman — here in the U.S. was about 3.2, while the rate in Mexico was a whopping 6.8. That’s right, on the average, each Mexican woman had about 6.8 children. Today, the rate in the U.S. is about 2.0, while the rate for Mexican women is about 2.2. And, the projection for 2020 for the U.S. is closer to 2.1, while the Mexican rate is projected to drop below 2.0. [iii] As Mexico’s population growth rate drops, conditions exist for economic growth per person to increase sharply.

The Giant Sucking Sound

Ross Perot received 18.9% of the vote as an Independent candidate in the 1992 U.S. presidential election, a huge percentage for an Independent candidate. Perot was strongly opposed to the North American Free Trade Agreement (NAFTA). He famously warned of a “giant sucking sound” as manufacturing jobs in the U.S. went south, into Mexico. [iv] Perot lost the election and the manufacturing jobs went. But they went to China, not to Mexico. Why? Labor costs in Mexico were lower than those in the U.S., but labor costs in China were much lower yet:

capture-mexico-avg-mfg-costs

But that Was Then

As you can see, the difference between labor rates is shrinking because rates in China are increasing much faster than those in Mexico. Add to that the costs of transporting goods from China to the U.S., the logistic costs associated with long lead times from China, currency fluctuations, and the hassles involved with doing business in China. Mexico is becoming more competitive every day.

But wait… there’s more: [v]

>> Mexico graduates more engineers every year than Germany.

>> Mexico has free trade deals with 44 countries, more than any other nation.

>> Minimum wage in Shanghai and Qingdao is now higher than in Mexico City and Monterrey.

>> Mexico produces substantially more petroleum than it consumes, and Mexico’s petroleum reserves are sufficient to allow Mexico to remain energy independent for a long time. 

As a consequence of all this, five years from now, Mexico is projected to have passed China as a supplier of manufactured goods to the U.S.:

Mexico exports to the US

 

Certainly, Mexico has problems, big internal problems, that must be resolved if Mexico is to take advantage of these opportunities for economic development. The Economist referred to Mexico as “Latin American’s perennial underachiever” — if the political will to manage those problems comes to pass, as appears increasingly possible, Mexico may well lose the “perennial underachiever” tag, along with the sombrero.

What This Means for Smaller Manufacturers

Mexico is a big country, 11th largest in the world by population, with an average age 27.4 years (as compared to 37.1 years in the U.S. and 41.2 years in Canada). [vi] And, Mexico is right next door to the U.S. American manufacturers should remain aware of Mexico and its potential across their entire Value Chain:

>> As a Competitor: As discussed above, Mexico enjoys several competitive advantages over many other nations. Expect Mexican manufacturers to become increasingly strong competitors.

>> As a Market: Economic development requires capital goods and infrastructure – related products and services. As Mexico’s per capita GDP grows, demand for consumer products will also grow. U.S. manufacturers are just as close to Mexican markets as Mexican suppliers are to U.S. markets.

>> As a Supplier: The competitive advantages that Mexico enjoys as a competitor also apply to Mexico as a supplier, especially in comparison to Asian suppliers.

Chuck - SedonaThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome

Photo credit: Man with Sombrero and Serape licensed through www.dreamstime.com.


[i] Here, the Vision 2050 report cites data from Goldman Sachs. Learn about Vision 2050 at the WBCSD website, www.wbcsd.org. The entire Vision 2050 document and/or a summary are available for free download in about 10 languages. There are also PowerPoint presentations and visual aids available.

[ii] Statistics from the World Fact Book, www.cia.gov

[iii] These figures, and many others in this post, are from The Economist, 24 November 2012 issue, Special Report on Mexico. Reprints of the Special Report are available at www.economist.com. In instances where figures are not footnoted in this post, refer to the Special Report.

[iv] Information on Ross Perot are from Wikipedia, www.wikipedia.com

[v] Information from The Economist, ibid

[vi] Statistics from the World Fact Book, www.cia.gov

 

 

“The Age of Sustainable Development” – Part 3

This is the last of a three post series seeking an operational definition of “Sustainable Development” as that term applies to smaller manufacturers. That is, a definition that answers the question: “what characteristics and actions can be expected to enable smaller manufacturing firms to grow and prosper indefinitely, within context of a sustainable world?” (A sustainable world does not self-destruct ecologically, socially or economically.)

U.N. Sustainable Development Goals

Part 2 of this series of posts looked at two routes to an actionable definition of “Sustainable Development”. The first was the original (1987) Bruntland Commission single sentence definition: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The second approach was to take the entire contents of Dr. Jeffrey Sachs’ “The Age of Sustainable Development” – the on-line university level course plus the 500+ page textbook – as an operational definition.

UN FlagClearly, a single sentence definition isn’t specific enough, while a book plus a MOOC is a bit much. A third route involves the United Nations’ Sustainable Development Goals. By examining these global goals, smaller manufacturers can identify specific, actionable areas that fit with their business and those it serves. From those specifics, each firm can construct their own operational definition – a definition that reflects and contributes to global initiatives.

The U.N. adopted an Official Agenda for Sustainable Development in September of this year (2015). The Official Agenda includes 17 Sustainable Development Goals, to be achieved by 2030. The Goals are sweeping, general statements, each reinforced by a number of more specific Targets. Sustainable Development Goal #1, along with its associated Targets provides an example:

Goal #1: End poverty in all of its forms everywhere

Target 1.1: By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day

Target 1.2: By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions

Target 1.3: Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the vulnerable

Target 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance

Target 1.5: By 2030, build the resilience of the poor and those in vulnerable situations and reduce their exposure and vulnerability to climate-related extreme events and other economic, social and environmental shocks and disasters

 Target 1a: Ensure significant mobilization of resources from a variety of sources, including through enhanced development cooperation, in order to provide adequate and predictable means for developing countries, in particular least developed countries, to implement programmes and policies to end poverty in all its dimensions

Target 1b: Create sound policy frameworks at the national, regional and international levels, based on pro-poor and gender-sensitive development strategies, to support accelerated investment in poverty eradication actions

Before you throw up your hands and blow this off, consider that Goal #1 and its targets affect about 2 billion people. Any real global effort toward achieving this will involve huge opportunities in agricultural products, distribution methods, irrigation and other water related products, along with a multitude of other areas. Somebody will supply each piece of all that is required. Some will participate directly, others as suppliers to other manufacturers. So, many firms will do some business and help make the world a better place by doing so.

The remaining 16 Goals and the 162 Targets associated with them are just as ambitious as Goal #1. Rather than list them here, you can visit original list on the United Nations’ Sustainable Development website:

https://sustainabledevelopment.un.org/topics/sustainabledevelopmentgoals

For Smaller Manufacturers

>> Each of these Goals and Targets deserve careful thought as to how they fit with your firm’s business model and web of relationships. The 17 Goals, taken together, are so broad that there has to be opportunities for just about anybody who can make anything. Personally, I don’t believe that world poverty will be eliminated within the coming 15 years. But there may well be significant action toward that end. China’s progress over the last few decades demonstrates that major improvement is possible. Helping even a fraction of 2 billion people out of abject poverty is a very good thing.

>> The United Nations’ Goals, along with Professor Sachs’ book and MOOC, serve to remind us of just how broad the scope of doing business is today. Finding a way to keep in meaningful contact with the multitude of changes occurring in globalized commerce is a major management challenge for smaller manufacturers.

3P Graphic>> The U.N. Goals signify that the U.N. has decided to combine its (human) economic development efforts with Sustainable Development. That means the U.N.’s current idea of Sustainable Development has a much different focus from the original Bruntland Commission definition. Bruntland emphasized the longer term (intergenerational) relationship between economic development (meaning industrial development) and environmental impact. The new U.N. focus is shorter term and emphasizes human and fairness matters. The U.N. hasn’t forgotten the environment – just much more emphasis on people issues.

Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about surviving and prospering in this globalized 21st century. … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

U.N. Flag Image: www.dreamstime.com