Business/Finance

The efficiency of markets and how protectionism leaves the poor behind

There is something magnificent about the way that modern, market-driven businesses get ever more efficient. How they are able to derive ever more from ever less.

Agriculture used to be a matter of ploughing the soil, dropping in the seeds and rotating the crops every season to get nitrogen back into the ground. Now entire farms are mapped according to alkalinity, fertility, moisture, sunlight, orientation. Tractors are linked via GPS to ensure that precisely the right amount of fertiliser and water gets put in just the right places. Sophisticated breeding programs and genetic modification produces bumper yields.

Soon wireless sensors are to be mixed in with the soil to send even more data to computerised tractors.

The result of this in both Europe and the US has been that farms get by on less water and less land yet produce more food. Agricultural-subsidy addicted Europe has even started paying farmers not to return land to nature to ensure that the “historic and cultural” nature of farm-studded Europe is maintained.

This sort of progression isn’t limited just to farming.

The supply-chain revolution

In conversation with Stewart Cohen, one of the founders of the South African clothing retail chain, Mr Price, he describes where they started in 1985. “We couldn’t afford our own stores back then, or even stock, so we franchised the concept. We would buy remainders and then merchandise these.”

Remainders are the clothes ordered by major chains on a sale-or-return basis and then returned. Walmart and other major chains used to do this a great deal in the 1980s. It wasn’t possible to spot buying trends and entire fashion lines could sit unwanted on their shelves. Since they were purchasing so much they had a hold over their manufacturers and would return it, unpaid for. The manufacturers, desperate to recover some costs, would then unload it on value purchasers like Mr Price.

Unfortunately, sometimes – despite the low prices – the goods would still remain unsold. It was risky for everyone.

Then along came some nifty new business relationship software by the likes of companies like SAP and Oracle. Companies could now link disparate purchasing trends across the world and spot patterns that could make them more efficient.

“We work in seven-year cycles,” says Cohen. South Africa has the peculiarity of half the population and wealth clustered in Johannesburg. Come vacation-time there is a massive coastal migration that can leave Jo’burg shops severely overstocked and coastal stores grappling with shortages.

“Our software can tell us the exact 24-hour window in which this migration takes place and allows us to get stock moved in advance. In this way we don’t have very much wastage at all.”

The efficiency and trust in systems is astonishing. It is taking just-in-time to remarkable levels. And this information is shared on common relationship platforms across the value chain. The remainders business is rare in formal markets and isolated to developing countries where systems are still unsophisticated.

The US, where most of this technology was initiated, is way ahead and it is this efficiency lead that has allowed US manufacturers to stay substantially ahead of their competitors despite lower wages in Asia.

The poverty of choice

The impact on the poor is barely understood. Many US and EU protectionists look to low wage costs in Asia and are terrified of what it will do to their own industries. What they forget is the dramatic advantage that these efficiencies give to their work-force.

Consider sub-Saharan Africa. An area roughly the size of North America and containing some of the most fertile soil on the planet. Far from producing food, most of the land is either within unstable kleptocracies (like Zimbabwe) or covered in landmines (like Angola and Mozambique).

Sub-Saharan Africa could produce enough food to feed the whole world. But, aside from the obvious exception of South Africa, they’re not farming at all.

Poverty is exceptionally inefficient. Low wages, manual labour and limited education go hand-in-hand with poor performance and lousy product quality.

In the rich world the efficiency gains have allowed workers a choice: either they can work less, increase their leisure-time and still earn the same (the European choice); or they can work the same and earn more (the US choice).

In both cases, though, the quality of life and working environment improve to a degree never before experienced, except for the super-rich.

The sadness is that, instead of feeling satisfied with their achievements, the rich feel threatened. They look over the border at poor countries and see people who live impoverished lives, desperate for work and prepared to be paid considerable less. Instead of seeing this as a function of poverty they fear that their idyllic lives will be taken away.

It isn’t possible. The poor cannot approach that level of efficiency until they too have a society built on such systems. And then they’ll be rich too.

The petty and self-serving response is to demand that poor nations offer their workers the same benefits and opportunities that the rich themselves get. Combined with poor efficiency it would make their products hopelessly overpriced and uncompetitive.

This widens the gulf between the rich and poor.

China’s great success has been recognising this and focusing instead on absorbing as much as possible of the technological advances as they can while maintaining their low-skill and wage base. Other impoverished nations are following.

Africa in chains

The great exception is Africa.

Here NGOs and international development groups have ensured that countries impose rules they can’t afford and perpetuate the cycle of poverty.

The strategy for development is this: accept your circumstances; do not artificially restrain the natural tendency of businesses to optimise their systems for the conditions in which they find themselves; allow the market mechanism to work.

For those of you who think that this is a recipe for “screw the environment and human rights, let’s do it”, pause.

If you put a price on clean water that incorporates the cost of cleaning it, you get clean water. If a market-driven price is put on carbon credits or clean air then businesses will simply optimise this.

The duty of governments and legislators is not to impose artificial constraints but to listen to the market and ensure that the price mechanism is unconstrained. Subsidising coal, for instance, is a sure way to get coal-driven pollution.

And demanding a higher labour cost than business can afford for that market is a sure way to drive out investors.

3 replies »

  1. I’m reminded of something I read a while back about developing infrastructure in poor countries – because poor countries have so little of it, you can jump them into some of the most advanced infrastructure technologies right away (especially electricity generation) without having to worry about the cost of tearing out what you already have first and then replacing it. There’s literally nothing to tear out.

    Peripherally related, I know, but related nonetheless.

  2. A good comment, though poor incentives (and ready availability of coal) do still tend to favour messy technologies. But, if you look at things like mobile phones, you get that sort of picture. The average number of landlines is like 1 per 1 000 people. The average number of cell phones is about 40 per 100.

    And that includes real basket-cases like Somalia and the Sudan.

  3. Market driven economics without law enforcement doesn’t work. Economics seldom takes criminality into consideration. No-bid contracts, pallets of cash leaving the U.S. mint and disappearing, destruction of public records, secrecy, failure to enforce immigration law in order to create a new American underclass or reinforce the existing one, creating a safety valve for an overpopulated and corrupt nation on our border, all of these things can be covered with economic theory which restricts the numbers of exogenous variables under consideration.

    Africa in not China. Africa is not going to become China. China is a single nation with a single dominant culture overriding the others. Africa is a continent made up of nations many of which are dominated by tribal loyalties. Additionally, Africa is a multi-racial, multi-cultural continent where one ethnic/religious group is systematically working to destroy the other. Is there is a movement to restrict trading in high quality, attractively priced African goods?

    Odd how protectionist considerations never include access to competitively priced, high quality prescription pharmaceuticals.

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