Some might argue that greater convergence of international wages is essential for the achievement of a more just and balanced world economy. The perceived injustice of a system where 0.00000004% of the world’s population has as much wealth as the poorest 42% of the world’s people is a cause for alarm. True sustainability of both the people and the planet invariably depends on improving the quality of life more equitably.
It seems that the belief that free trade will equalize the wages of workers and the profits earned on capital throughout the world has not so far been truly realised. This was premised on the argument that when the prices of goods are equalized between countries as they move to free trade, then the prices of capital and labor will also be equalized. The overarching ideal of equalization of wages, where market wages are set by profession and productivity rather than nationality or geographical coordinates, is still an elusive dream.
In fact, economic integration often leads to a skewed industry concentration and structure in weaker countries, often effectively transforming local firms from producers for their domestic markets to product assemblers for foreign-owned firms from developed countries. This situation makes for an unequal equation. For example, the benefits of closer economic integration on wage equality are yet to be fully realized in Mexico. Workers in the manufacturing sector in Mexico earn $6.48/hour versus $23.42/hour earned by US counterparts.
Further, if it is significantly the case that the huge demand of developed markets and booming commodity prices are driving the economies of developing countries. But, this model does not imply sustainable economic success. According to the example of iPhone cited by the Federal Reserve Bank of San Francisco, “In 2009, it cost about $179 in China to produce an iPhone, which sold in the United States for about $500. Thus, $179 of the U.S. retail cost consisted of Chinese imported content. However, only $6.50 was actually due to assembly costs in China.”
This is not to suggest that things are not changing. In a recent wage rate gap comparison for manufacturing workers in selected economies, seven out of the 12 countries in this assessment are better off in 2011 than they were in 1996. As would be suspected, East Asian economies recorded the greatest gains in their wage-rate position. JPMorgan Chase & Co. and Mizuho Securities Asia Ltd. estimates predict 10 percent to 15 percent increases in wages in China. China’s leadership is pushing for pay increases as it seeks a structural transformation of the economy from polluting and capital intensive manufacturing to a more services-driven economy. This will accelerate the trend of shifting low-end manufacturing bases to South East Asia and undoubtedly make economic growth more dispersed.
However, supply chains shape East Asian trade in what has been called the ‘flying geese’ pattern of development. Nearly 80 – 90 percent of East Asian South – South exports is absorbed in the region itself for reprocessing and only 22 percent are related to final products. Clearly, this integration into regional production chains where the net exports are ultimately destined to the advanced economies that capture most of the value does not promise a very rapid equalisation of economic fortunes, although it may be necessary as a bridge toward more sustainable economic systems.
Undoubtedly, some benefits will accrue to developing countries. But, the process is painfully slow. It is sobering to bear in mind that economic change based substantially on cheap labor is not wholly conducive to substantive economic transformation and global equity.
The flying geese analogy is led by Japan. The second-tier of nations proposed as these nations fly wing to wing are the newly industrializing economies of South Korea, Taiwan, Singapore, and Hong Kong. After these come the main third tier countries: Indonesia, Thailand and Malaysia. Finally the supposedly least developed major nations in the region: China, Vietnam and the Philippines make up the rear guard in the formation.
The fact that this theory, developed in 2005, missed China’s continued growth so dramatically brings some pause. Perhaps the people who believed that wages would equalize quickly have not predicted accurately.