Thread: Low cost economies, not so cheap: US report

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'Low-cost' economies not so cheap: US report
[04 Oct 2006]
WASHINGTON (AFP)


US companies bedazzled by low-cost economies fail to take account of the abysmal productivity offered by workers in countries like Mexico and China, a business group said.

The Conference Board said its study, the first by a private-sector group to analyse standardised labour costs globally, was a "critical lesson" to Western firms seeking to cash in on the cheap labour of emerging countries.

Fast-growing economies in China, India and eastern Europe do enjoy a comparative advantage over the United States, the research organisation said.

But it said that advantage is narrowed once a full account is taken of unit labour costs, which measure the standard unit of output per worker across economies.

Bart van Ark, director of the Conference Board's international economic research programme, said that unless workers in poorer countries raise their productivity in step with wage gains, "the 'cost advantage' begins to erode".

"The key for emerging economies is to promote productivity through technological change and innovation to match wage increases which will undoubtedly happen in a rapidly growing economy," he said.

The Conference Board highlighted Mexico, a top destination for US investment which loses nearly all its competitive advantage if productivity is factored in.

Mexico's total wage costs were 11 percent of the average US level in 2002. But because Mexican workers produce 10 times less than Americans per hour, the unit labour costs came out nearly the same.

India and China enjoy the biggest comparative edge because their wages are so low -- less than three percent of the level paid to US workers in manufacturing.

Even with lower worker productivity factored in, unit labour costs in India and China are on average 80 percent lower than those in the United States.

But the report also noted that those averages were for all manufacturing companies. US and other foreign companies typically pay their local workers much more than domestic ones.

Newer, poorer entrants to the European Union such as the Czech Republic, Hungary and Poland have seen their comparative advantage wane as wages have risen faster than their workers' productivity.

In Poland, for instance, industrial workers earn about 13 percent of the average US salary but their unit labour costs come out much higher at 73 percent.

"These differences underscore the challenge that even very low-wage countries have in fostering productivity growth that keeps pace with or exceeds rising wage levels to preserve their relative global competitive position," van Ark said.

The Conference Board found that the United States has extended its comparative edge over Europe and Japan, not by depressing wages but by getting more out of its workers.

Japan has succeeded in restoring its competitiveness by bringing down its manufacturing wage costs below levels seen in the 15 richer countries that constituted the EU prior to the bloc's 2004 expansion into eastern Europe.

"For advanced countries, the issue is to keep labour compensation in check with productivity," van Ark said.

This is a matter of having the subcontractors invest in labor saving devices and bringing in efficiency experts. We use more labor saving equipment than most of those countries we compete against. If Mexico wants to be competitive they will have to start financing smaller business so they can.