Saturday, July 23, 2011

What will make the EU's periphery competitive in the Eurozone, the EU Single Market and world markets?


Continued from: Time to rethink global trade (and save the Euro & the US economy as well as Earth)?

Many things have happened in recent days.

Yet the core issue remains:

What will make the EU's periphery competitive in the Eurozone, the EU Single Market and world markets?

And to widen the strategic question: What will make the Eurozone and the EU competitive in world markets?

Much of global trade, in spite of the fact that economies are more and more Services economies (ie the % of Services (vs industry and agriculture) in the GDP increases in recent decades), is in manufactured goods. So while the manufacturing base of most countries/economies is narrowing it is that same "niche" of the economy that economies/countries rely on for the largest part of their exports. Yes, there are internationally traded or tradable Services (as well as intangible/intellectual products), such as tourism plus banking, insurance and other services of financial genre, telecoms, but can services such as haircuts, restaurants, medical services, etc, become part of a country's exports?

Well, there are people who travel to California 1-2 times a year from Europe to get and thus technically "import" cosmetic surgery. People do travel to Asia or other countries, often funded by their own country's national health service, to receive (and thus "import") medical services (various types of operations). And a lot more services as well as intellectual products can be made into exports using online technology as well as (and more importantly) entrepreneurial creativity.

The main growth oriented idea behind the programmes that the IMF and the rest of the Troika as well as national government are implementing for Greece as well as Ireland and Portugal is to create a "devaluation" effect (called internal devaluation) without actually devaluing (since they have no currency of their own to devalue).

The idea behind devaluations is to make a country's "native" products and services (eg tourism) cheaper to foreign consumers (b2c and b2b) while making imports more expensive to "native" consumers (both b2b and b2c).

Germany's competitiveness is allegedly mostly based on the quality (and thus uniqueness) of the "complex" (as opposed to "simple") manufacturing goods it produces, to a large extent by allegedly sophisticated SMEs. Goods that people and companies are willing to buy (import) even at high prices (especially when Euro is above 1.3, 1.4 USD or even higher). Or as traditional Economics calls them, goods with demand that is inelastic to price.

But which are these types of goods (and services) that people or companies are willing to buy even when the economic climate is bad? They must have a very high utility value that makes them appealing at almost any price, ie a (very) high value to price ratio! They also have to be pretty unique, in that they are only produced by a certain country ie not replaceable by goods from another country.

Another strategy option is to be the cheapest (product/good) in the world.

In the middle, there is a strategy that tries to combine some uniqueness or value/price with some price competitiveness. Must be a huge area of the "map" of world products and services, a "crowd" where each product is trying to find its "vital" market space.

One other key factor is consistency, which is the original definition of quality. All product units have to be the same, identical, no deviations from the product characteristics. Needs reliable tools (that is why reliable tools/machinery tends to be one of the complex types of products that allegedly Germany produces and exports). Same applies to apples, oranges, even haircuts. There is no room for bad apples, literally and metaphorically, in the package or crate. If they come out of the productuve process, then they must be left out of the goods to be sold, counted off as waste or at beast sold as generic or used for some different purpose (eg make "marmalade").

Which leads to the same concept at work. Who wants workers of any kind (general staff or top execs, etc) who are brilliant one day but have off days? Even in sports that is less and less tolerated, by the systemics. A music band? Even a lover! In these types of systemics, things get very demanding and complicated. That is one reason machinery has been replacing humans for decades, and in some cases, centuries now. In other cases, humans were replaced by animals (or treated as such).

Another key factor, maybe the most overlooked one, is access. You may have the best and cheapest (!) product in the world, but unless the large wholesale and retail conglomerates are willing to take your product (in which case you may also need to produce very large quantities of it) and put at the shelves of the supermarkets of this world, then your options for reaching a market are fewer, albeit more than they used to be before the internet and e-commerce (and even E-Bay) era.

Complicated huh? Much more complicated that the simple "productivity" and "unit labor cost" concepts that lots of economic analyses and plans seem to rely on.

Which brings us to the question: How cheap must Greek, Portuguese, Irish etc labour cost (and and how salaries) become, via austerity and internal devaluation, for the Greek, Portuguese, Irish economies to be competitive? Competitive vis-a-vis whom? The other Eurozone ones? The other EU ones? The other WTO ones? To the Chinese?

To be continued ....

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Nick

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