Fantasy Economics


Reports by international organizations are usually greeted with well deserved yawns. Occasionally, however, such a report is a leading indicator of a sea change in opinion.

A few weeks ago, the World Economic Forum—which every year draws an unmatched assemblage of the world’s political and business elite to its conference in Davos, Switzerland—released its annual report on international competitiveness. The report made headlines because it demoted Japan and declared America the world’s most competitive economy.

The revealing part of the report, however, is not its more or less meaningless competitiveness rankings but its introduction, which offers what seems to be a very clear vision of the global economic future. That vision, shared by many powerful people, is compelling and alarming. It is also nonsense. And the fact that this nonsense is being taken seriously by many people who believe themselves to be sophisticated about economics is itself an ominous portent for the world economy.

The report finds that the spread of modern technology to newly industrializing nations is deindustrializing high-wage nations: capital is flowing to the third world and low-cost producers in these countries are flooding world markets with cheap manufactured goods.

The report predicts that these trends will accelerate, that service jobs will soon begin to follow the lost jobs in manufacturing and that the future of the high-wage nations offers a bleak choice between declining wages and rising unemployment.

This vision resonates with many people. Yet as a description of what has actually happened in recent years, it is almost completely untrue. Rapidly growing third world economies have indeed increased their exports of manufactured goods. But today these exports absorb only about 1 percent of first world income. Moreover, third world nations have also increased their imports.

Over all, the effect of third world growth on the number of industrial jobs in Western nations has been minimal: growing exports to the newly industrializing countries have created about as many jobs as growing imports have displaced. What about capital flows? The numbers sound impressive. Last year, $24 billion flowed to Mexico, $11 billion to China. The total movement of capital from advanced to developing nations was about $60 billion. But though this sounds like a lot, it is pocket change in a world economy that invests more than $4 trillion a year.

In other words, if the vision of a Western economy battered by low-wage competition is meant to describe today’s world, it is a fantasy with hardly any basis in reality. Even if the vision does not describe the present, might it describe the future? Well, growing exports of manufactured goods from South to North will lead to a net loss of northern industrial jobs only if they are not matched by growth in exports from North to South.

The authors of the report evidently envision a future of large-scale third world trade surpluses. But it is an unavoidable fact of accounting that a country that runs a trade surplus must also be a net investor in other countries. So large-scale deindustrialization can take place only if low-wage nations are major exporters of capital to high-wage nations. This seems unlikely. In any case, it contradicts the rest of the story, which predicts huge capital flows into low-wage nations.

Thus, the vision offered by the world competitiveness report conflicts not only with the facts but with itself. Yet it is a vision that a growing number of the world’s most influential men and women seem to share. That is a dangerous trend.

Not everyone who worries about low-wage competition is a protectionist. Indeed, the authors of the world competitiveness report would surely claim to be champions of free trade. Nonetheless, the fact that such ideas have become respectable—that much would-be sophisticated opinion apparently now agrees with Ross Perot about the “great sucking sound” from the South—suggests that the intellectual consensus that has kept world trade relatively free, and that has allowed hundreds of millions of people in the third world to get their first taste of prosperity, may be unraveling.

Originally published, 9.26.94