The squeeze on the middle

Globalisation has for the first time in history made poverty an advantage. It obliges companies to search the globe for ways to cut costs.

The lower the wages in any country, the more competitive production there is, other things equal. Of course, such a country will have to create a good investment climate, infrastructure and skills in order to ride the globalisation bandwagon.

Once it does so, poverty becomes an advantage, and global jobs and production shift to it. China and other Asian countries have long proved this. India has now followed suit.

However, there is a less comforting corollary. If globalisation helps the poorest countries the most, it helps the middle-income countries the least, and maybe not at all. Middle-income countries have per capita incomes of between $3,000 and $10,000 per year (against India’s $750).

They typically lack the high skills of rich countries like the US and Japan. And they lack the low wages of India and most of Asia. So they find it difficult to compete both at the high and low ends of the production spectrum. They are squeezed from both ends by globalisation.

Hence, most of Latin America (consisting mainly of middle-income countries) has fared poorly in the last two decades. Chile is an exception that shows how good policy can overcome the squeeze on the middle. But in general the squeeze has thwarted rapid growth.

I met a South African educationist last year, who said that white engineers in her country earned 200,000 rand per year, whereas unskilled blacks earned only 20,000 rand (Rs 1.3 lakh) per year. The challenge of education, she said, was to create millions of skilled blacks who could also become engineers earning 200,000 rand per year.

Okay, I said, but India and China are churning out millions of engineers willing to work for one-tenth that sum. How will South African engineers, white or black, compete? She turned pale and said she didn’t even want to think about it.

Now, many senior Indian engineers are very well paid, and top-class software engineers start with good wages. But private colleges today are churning out lakhs of diploma engineers every year, and they earn much less.

A company like Bharat Forge employs only engineers: it has no blue collar workers at all. Engineers earn more than blue collar workers, but their productivity is so much higher that they have made Bharat Forge the most competitive producer of automotive forgings in the world.

What do you think?