Combating the decline of western economies

The Managing Director of FIAT, Sergio Marchionne, is right when he invites us to be serious. In reality, the situation is more complicated than it seems. In so-called developed countries, progress towards the opulence envisioned by Adam Smith has been interrupted, if not exhausted.

The next decades risk seeing exclusively the growth of emerging countries, and not just for the low cost of production but also due to their advanced technological level and capacity to create capital, which is far superior to that of the old West. These countries will also become heavy consumers, attracting production investment which until now has been the privilege of western economies. In the developed and by now, ex-rich, world, the process risks becoming the reverse. The law of economic gravity will progressively transfer investments to emerging countries, while with a GDP in continual decline, fixed costs due to the aging of the population will become unsustainable.

In a world where ideas and knowledge freely circulate, those who win are those who know how to capture and transform them into competitive abilities, which in turn become lower costs. With a marked advantage for consumers which does not always coincide with an advantage for un-competitive producers. These producers risk succumbing and being forced to lay off, giving rise to a circle of unemployment and poverty. Economic integration in a global world creates the success of inexpensive products and the failure of more expensive ones with a consequent penalty for labor which becomes rigid in offers and lack of mobility.

Attention should be concentrated on this problem. In the absence of other strategies, in fact, employment is created where it costs less whereas unemployment exists where labor is more expensive. With the de-localization of productivity, aimed at creating less expensive products and greater buying power, developed countries have exported labor to emerging ones. Progressively, however, they have also modified the structure of their own economies, becoming prevalently consumers, with a GDP growth only in debt. When all of this became too much, they threw in the towel. Emergency measures from the State became necessary in order to raise public spending, but to be sustainable it needs GDP growth, otherwise taxes become unbearable. In fact, this is what has happened.

It is a problem which can be confronted by growth in productivity – thanks to advantages offered by technology and the digital economy – channeling savings to small and medium-sized businesses through the banking system and finally, studying appropriate currency measures. Production growth in the West appears indispensible. And it implies a change in the mentality of manual work, which needs to be re-thought.

The challenge launched by the Managing Director of FIAT should be evaluated closely.

Technological innovation and the digital economy should be analyzed by western governments so that they can contribute to reinforcing the GDP, creating labor and sustaining GDP growth. It is also necessary to reflect on  the need to balance the loss of competitiveness, despite the cost of importing raw materials, by making exportation of European products easier. One could then re-import production activity favoring employment in European countries.

One often has the impression that not everyone has understood what has happened to the global economy in the last few years. Many think that individual States need to intervene in order to resolve economic problems. But that, as stated, happens with an increase in public debt. Countries that have chosen this path now regret it. Others have not taken that road, thanks to their politics which are more attentive to the budget. But it is also necessary to be able to count on savings, on entrepreneurs, and on good banks. Important elements, if not the only ones, to re-invent labor.