Feb. 22, 2020

From QCostarica.com-Article on the collapse of globalization

 

I always seem to see the most dismal future. They used to call economics the dismal science. Maybe they were right.

At business school in the early 1970s they taught us that manufacturing would inexorably move towards globalization. The reasons seemed obvious:

  • It made sense to buy the production of both finished items and components from countries that could produce them at a lower cost.
  • International shipping was becoming faster and less expensive due to ever bigger ships, containerization and air transport.
  • In many countries, strikes disrupted local production. Imports might help avoid such issues.
  • The revolution in IT and communications offered instantaneous transmission of designs, orders and shipping information.
  • Interest rates were high, so it made sense to reduce stock holding at every point in the production and shipping process. The concepts of ‘lean manufacturing’ and ‘lean logistics’ were learned from the then-dominant emerging economy, Japan.
  • International consumer tastes seemed to be converging and global brands were becoming dominant.
  • Economists, free-market politicians, and the World Trade Organization were pushing for ever-lower trade and tariff barriers.
  • Outsourcing services, telemarketing and the emergence of the dotcoms speeded all this up.

A seamless, ever-growing paradise of low-cost efficiency beckoned.

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I became a partner in a global consulting firm that helped multinationals around the world to realize this dream. We made hundreds of millions and clients saved billions by globalizing supply chains.

Fast forward to the chaos we face today. Everything has gone into reverse.

  • Interest rates are persistently close to or below zero when inflation is taken out. The cost of holding stocks of raw materials and finished goods is much reduced.
  • Populist politicians play to those demanding protection for local jobs. The military arms race has moved towards interference in free trade, through embargos, subsidizing local production and protective trade barriers. Cyberwarfare causes further disruption.
  • Supply chains suffer from wars, pandemics and computer hacking. Carrying no inventory has become a recipe for corporate suicide.
  • Shipping costs are under pressure from fuel prices, environmental concerns and even piracy.
  • The spread of robotics and artificial intelligence, coupled with new manufacturing technologies like 3D printing, mean that small batches of anything can be made less expensively, closer to end markets.
  • Mass tourism is under threat from environmental and transportation disruptions
    The great trend to globalization will never be totally reversed, but we have entered a new age. Uncertainties remain. What might be different?
  • Traditionally economists have argued that labor released by more efficient production will be redeployed in growth industries. That may not be the case given the shortages of high tech skills and the threats to lower-tech jobs from things such as driverless transport, GMO, agricultural robotics and the like. Persistent low wage levels for less killed work support this argument.
  • Do those who own most of the world’s wealth need consumers in the long term? Their tastes and lifestyles may not require keeping the lower-skilled employed. We are already seeing cutbacks in keeping the masses healthy in the USA. Many ex-pats coming to Costa Rica cite lower healthcare costs as a reason.

Here are some issues facing Costa Rica in this emerging new order.

  • The economy here is inflexible. This is due to the burden of high wages, super pensions, and inefficiency in the dominant state sector. The tendency to strike and disrupt any attempt at reform and the vested interests of those in all branches of government mean that adaptation to new conditions will be slow and painful. High debt burdens at both the state and personal levels expose Costa Rica to the risk of any global recession.
  • If remittances from the US and elsewhere and the ability of Ticos to work in the US are diminished, there will be less cash flowing into our economy.
  • Mass tourism has been an important driver for growth and employment for some years. It runs counter to Costa Rica’s image as an ecologically friendly country. There are ecological, virus and recessionary threats to this sector.
  • There are lower cost agricultural producers around the world of everything grown here. This threatens the profitability and employment in this important sector.
  • Any trends towards less outsourcing to developing countries like ours and high costs of employment might cause further unemployment.
  • Trade agreements and promises of support from the US and elsewhere can no longer be relied on.
  • Given the above and the increasing security threats from narcos and addicts, expats may increasingly feel exposed. This could impact the economy in multiple ways, from falling property prices, lower employment of those working for expats and less hard currency remittances from the US and elsewhere.