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Whoever the winners in the midterm elections in the United States, their top challenge would have been the same: strengthening the U.S. recovery and extending its benefits to the vast majority of Americans who have seen their incomes fall even as growth has resumed. One of the main obstacles would have remained the same, too: unusually weak growth in wages and prices, which keeps signaling that the economy’s paramount source of growth – the demand for goods and services – is likely to remain weak, too.

More alarming, the wage and price stagnation could well turn into deflation – a situation of falling wages and prices that tends to worsen and plunge growth itself into a nosedive. Consumers put off purchases in the expectation of better bargains, businesses therefore sell less and less, they hire fewer and fewer (if at all), wages sink further, and a race to the bottom is on.

Deflation of course will need to be fought on the home front. But its deep rooted international roots will need to addressed as well, in particular the impact of literally hundreds of millions of workers from gigantic but very poor developing countries who began flooding world labor markets at the beginning of the 1990s whose capacity to produce was orders of magnitude greater than their capacity to consume.

It’s now become a commonplace that what I once called this worldwide worker explosion – epitomized by the rise of China – has undermined pricing power throughout the world economy, and especially in segments whose output could be readily traded, like manufacturing. Less commonplace, but just as important, is that the persistence and even strengthening of deflation since means that the uber-prediction advanced to sell expanded trade with these countries has so far proven completely bogus. At least in a relative sense, consuming power in the developing world hasn’t grown nearly fast enough to rebalance supply and demand.

In recent weeks, however, some news has emerged indicating that deflationary forces are about to get stronger still. I’m not talking about the worsening of economic stagnation in the European Union – the world’s largest single economic unit. I’m talking about the renewed determination of two other third world population giants – India and Indonesia – to become major manufacturing powers along the lines of China.

I’m actually surprised that it’s taken them this long. But contrary to my expectation – as expressed in my book The Race to the Bottom – Indonesia focused on exploiting its oil and other natural resources. India’s industrialization has famously been slowed by the dreadful state of its infrastructure and its choking bureaucratic red tape and, paradoxically, by its success in computer software and high tech services.

Both countries recently elected new leaders, and both of them have decided that promoting manufacturing can fill crucial national gaps and promote crucial national needs. India has concluded that even the most advanced services sector offers no hope of providing decent employment for the vast majority of its people living on subsistence wages – at best. Indonesia believes that it will never approach first world levels of prosperity by continuing to rely on commodity production.

Unquestionably, industrialization remains the best long term bet for meaningful third world economic progress. Over the shorter term, though – if it works – it could inject a huge new deflationary shock into a world economy at exactly the wrong time.

Consider some of these figures. Indonesia’s population is 250 million. Even after an excellent, commodity-led growth run over the last few years, only 13 million households have annual disposable incomes greater than $10,000. In large measure, the explanation is that, as one analyst puts it, “Compared with other countries in Asia Pacific, Indonesia…has the most attractive hourly wage.” Meaning of course, the lowest wage. India has 1.25 billion people. Its average hourly manufacturing labor cost of 92 cents is just over one-fourth of China’s.

Of course both countries are hoping – and need – to serve export markets, especially in higher income countries, where the world’s critical mass of purchasing power is still found. But both are also hoping to supply their own internal markets from within. So export opportunities for U.S. and other workers from the developed world could be even less lucrative than suggested by these two countries’ low living standards.

As a result, their big-time entry into global manufacturing markets stands to bring not only deflation, but greater international imbalances like those that triggered the financial crisis six years ago. Figuring out how to harmonize worthy and entirely legitimate third world hopes for progress and prosperity on the one hand, and the global financial stability that benefits everyone on the other, is the greatest international economic policy challenge of our time. Is there any reason to think it’s even close to the screen of either the Obama administration or Republican leaders in Congress?