The post-industrial paradigma has dominated last decades: The impact has been a new international labor division that is adverse to old industrial countries. It can't be dealt with through the currency policy.
1. One of the most successful byword of the late twentieth century was the emerging of post-industrial society. The idea has become conventional wisdom, and taken for granted. It was explained by new technologies and market globalization, not new in the history of capitalism. However, a new phase has brought on. .. The international division of labor was, according to Ricardo, based on the theory of "comparative advantages" : each country has its own natural vocation which dictated the technological development. Instead, in the new phase of the globalization, the international division of labor is applied not only to countries, but also to industrial companies. The new information and communication technologies along with the fall of shipping costs, allowed them to relocate part or all of their production in other countries, without losing control on investments, technology, work organization and trade networks.
Such relocations , often in very far-away countries, required sharp adjustments, from logistics to the costs of settlement . It was only worth doing it if it gave significant advantages : an open market, political stability, lower labor costs and a full labor’s flexibility, freed from the legislation and the union constraints of the West. On their side, the emerging countries, eager for the foreign investments, favored this shift, and accepted every condition requested by the multinational companies.
This new framework, induced the neo liberal scholars to single out deindustrialization of the old countries as a natural and progressive evolution from manufacturing to services and the primacy of the finance (see Appelbaum and Batt in this issue of Insight) Those stressing the importance of manufacturing industry were seen, in the words of prof Bhagwati, as worshipers of a “fetish” and “a quasi –Marxist fallacy” (see Colitti’s comment in Insight).
The post-industrial thesis was boosted up by the sharp profits that the large multinational corporations obtained from relocation, due to an almost unlimited supply of unskilled labor with very low wages and no constraints from the environment and working conditions. A the same time, the relocation, or its mere threat, reduced the bargaining power of the Unions at home. The industrial employment collapsed and wages stagnated , reversing the implicit social pact that had governed the labor relations in the US, linking the wages to the productivity growth. With the deregulation of the labor market and the fall of the union representation an army of working poor grew up. Inequality became the mark of the US economy and the society. The economic and social problems arising from the de-industrialization and globalization were considered the price to be paid to the benefits of the transition to the post-industrial society.
2. This was not the only outcome of the deindustrialization. Beside the social cracks, deindustrialization had an harsh economic impact on the role of the US toward the new emerging economies. The post-industrial thesis was based on the idea that America's disappearing manufacturing jobs would be replaced by high-value jobs in the service sector. America was meant to keep the high-end jobs at home, while the emerging economies would get all the low-value added productions. But the emergence of the BRICs over the last decade created a new situation. . China is an example of the deep change in the international labor division. Large Chinese companies moved from cheap and low-cost products to sophisticated technologies. “In the past –wrote the NYT - the US jobs most susceptible to being shipped abroad were lower-skilled positions. But now emerging economies have been harvesting their long-term investments in math and science education and attracting high-tech companies – not just textile or call centers - to their shores”.
The Chinese government has identified a cluster of strategic sectors that it wants to develop, including bioscience, nanotechnology and new materials. It has increasingly required foreign companies to license their technology to local partners as a condition of entry to the Chinese market. China is not only building the larger world network of fast trains: it has obtained the technology to produce them by the big French, German, Japanese and Canadians companies. China is already one of the world’s leading producers of wind turbines and solar equipment energy – and this is a central piece of the new global manufacturing sector which , given the diminishing public expenditure in US and Europe, risks to be defeated by the growing Chinese competitiveness. The industrial jump is evident in all sectors, including those long dominated by the old industrial countries. According to the current forecasts, China will produce thirty million cars trough 2015 , double the US number. Electric cars emerge as a pillar of the new five-year growth plan fostering the development of highly efficient batteries in competition with US, Europe and Japan.
There is now a growing gap between US manufacturing industry (reduced to about ten percent of the overall labor force) and the developing industrialization of the emerging economies. So, it is not a coincidence that global companies are shifting research and development to China and India to be close to the production process and to the big markets. The supposed superiority of technologically sophisticated products over lower-specialized production is going to vanish.
3. Is it reasonable to ignore these dynamics and to give to the currency policy the task of solving the US current account imbalance and the unemployment? Fred Bergsten, director of Peterson Institute, said to a Congress commission that the rise around 20% - 25% of the Yuan over the next two to three years would create about half a million U S. jobs. Indeed, a figure hardly comparable to 8.4 million, the recession's employment total decline . In any case, the argument is not convincing. When , between July 2005 and July 2008 , the Yuan rose about 20 percent against the dollar, China’s trade surplus with the US kept growing, and the devaluation was largely offset by chinese higher productivity and lowered costs. Moreover, China’s exports contain an average fifty per cent of imported intermediate components, whose cost is reduced by the currency revaluation. Add that a third of US import is made up of products of US multinational companies, who could increase import of goods like textile, apparel and office equipment from other low-wages South-eastern countries. That would not help close the U.S. overall trade deficit.
The attempt to solve the US current account balance by currency exchange might be misguided. Stephen Roach of Morgan Stanley Asia has noted that the dollar has fallen 23 percent (in inflation-adjusted terms) since 2002, yet “America continues to struggle with high unemployment and stagnant wages, and now has trade deficits with 90 countries around the world.”
Other structural problems, starting with the long and accepted decline of manufacturing industry, must be dealt with. “The very concept of currency manipulation itself - J.Stiglitz has observed - is flawed: all governments take actions that directly or indirectly affect the exchange rate…China’s current account surplus…as percentage of GDP is 5% percent, compared to Germany’s 5,2%... Unfortunately this global crisis was made in America, and America must look inward”.
The dispute over the value of Yuan is, ultimately, the objective of a devaluation of the dollar, indirectly already in place in respect of emerging countries (and Japan). Minister of Finance of Brazil reported a gradual and unsustainable situation of real appreciation that undermines growth. The paradox is that U.S. monetary policy with interest rates close to zero is not used to boost domestic investment but to feed the export of capitals to emerging countries which are the only ones growing, fueling an appreciation of their currency, fostering inflationary pressures and the risk of real estate bubbles. In other words, the inability of the United States and European Union to boost domestic growth through public investment policies, blocked by the austerity policies, prolongs the crisis in rich countries and undermines growth in developing ones.
Returning to the theme of de-industrialization, the “fascination with manufacturing” is not a flawed case, as J.Bhagwati argues. Among the European big countries, UK, first with Margaret Thatcher and then with Tony Blair, went after the post-industrial totem and now we can see its dismal results in the aftermath of the financial crash. A different pattern with better results has been pursued by France, blamed for its "colbertist" preference toward the “national champions”. By far the best alternative to the post-industrial doctrine was Germany’s , which has shown that deindustrialization is not predestined. It is an example of a strong industrial power based on highly competitive companies in every important manufacturing sector. This is the basis for a constant high trade surplus. As well as for a different approach vis à vis the employment and working conditions, as it is significantly shown by the recent deal between Siemens and IG Metall, aimed to guarantee permanent job stability for its 120,000 German workers.
Rebalancing the US economy, and the Western economies at large, requires investments in research and technologies to renovate old industrial sectors and to become a leader in new ones: namely, a re-evaluation of a clear-cut and long-term industrial policy. That's exactly the opposite of the government withdrawal from the economy and of the post-industrial paradigm, maintained by the “ideology” of the last decades. A currency war can only mask serious economic and social problems, which in the first decade of the XXI century have twice devastated the US as well as Europe.