Saturday, June 12, 2010

CBF and the big picture ahead....

I wrote about CBF (Cheaper, Better, Faster) here[Link] but today I want to talk about it in a larger context.

There was a strike in China's Honda plant for higher wages a few days ago[Link]. The strike ended when Honda agreed to raise wages by 20-30%[Link] for each worker. The average pay for each worker before the hike was 1200 yuan($240) per month. Following the hike, workers will get closer to $300 a month. Yes, $300 a month to build top quality cars exported around the world. The US auto worker in the 50s had a middleclass lifestyle owning a home, supported a single income family, drove to work and had a pension. Today, a worker in a Chinese car factory lives in a bunk full of double decker beds and earns enough to ...stay alive. The stark contrast represents how the world has transformed in the past 40 years and understanding this is important as we look for changes ahead in the coming years.

The wage component for each car has fallen tremendously from the time cars were made mostly in US later to Japan when it became the biggest producer of cars and now to China. Singapore used to be able to win investments by just being cheaper than Japan, Europe and USA. That was in the 80s when investment from these countries poured into Singapore. They paid good wages and brought along with them developed countries worker benefits - these benefits were great even though they trimmed them down from what they gave out back home. Early 70s, BP (not doing too well these days) actually gave pension benefits to Singapore workers. All these started changing in the past 2 decades when China & India came into the picture 2 decades ago. For low tech low skilled jobs such as making textile, TVs, fans and China offered something like 70-80% in cost savings in the 90s and these industries quickly moved there. That wasn't too problematic for Singapore because we kept the higher tech stuff like hard-disk, semi-conductors etc. The Malaysians benefitted from China's demand for commodities and that compensated for the loss of manufacturing jobs. Right up to the 90s, Apple kept a manufacturing plant for its iMAC in Singapore. Today, its products are made by Foxconn which recently has been tarnished a spate of suicides[Link]....no question where you would rather be a 90s worker assembling iMAC in Singapore or a Foxconn worker in Shenzhen buiding the latest iPhone.

Realistically when it comes to manufacturing, we cannot keep the lower end stuff anymore because they don't create jobs that allow you to make enough to live in Singapore. There are still reasons for multinationals to keep their facilities in Singapore - some want to diversify their production to keep down the risk, some require advanced infrastructure and supporting industries that still don't exist in China, some industries have such high margins and high standards such as pharmaceuticals, they rather not risk moving to China. However, there are many industries at the margin that will move or stay due to level of wages. In Singapore, the strategy was to bring in workers from China willing to keep wages down, the govt argues that we will lose these industries if we don't import foreign labor to meet the demand.

"Top task for PM - to save and create jobs. There is one thing on Prime Minister Goh Chok Tong's mind these days : jobs, jobs, jobs." - Straits Times, Oct 26, 2001

Very often we are told the importance of jobs and job creation. Just look at the unemployment rate in developed countries - 10% for USA, 20% for Spain and so on. However, just focussing on jobs is only half the picture[Link]. The fact is the PAP govt is so good at creating jobs we need to import hundreds of thousands of foreign workers to fill them so why is this constant fear about not having enough jobs in Singapore? The real problem in Singapore is wages vs cost of living. We traded off better wages for jobs. When Obama creates a job, he has to create one that pays more than the minimum wage and gives a number of benefits such as healthcare so a job in USA is not the same as a job in Singapore. The problem with trading off better wages is you end up with a big income gap and people who work full time and can't make ends meet. The govt tried to fix this by implementing Workfare which is a completely inadequate scheme:


Giving low wage workers $50-80 a month is probably considered highly generous by the PAP govt and one has to applaud them for overcoming their ideological constraints to give out this sum of money. However, how far does it go help them? You notice that there are limits to the amount given as they don't subsidise you to a minimum wage that is considered sufficient to live in Singapore....so if you make $800 a month you will get to $883 a month since the maximum you can get is $1000 per year under the Workfare scheme. The low wage worker cannot survive properly compared with the past due to the emergence of cheap labor from China, various govt policies and changes external to him. In every society, we have people who are not cut out to do higher paying jobs ...half our population is below median intelligence by definition!..and there will always be a bottom 20%. I'll come to what can be done a little later.

Foxconn and Honda workers very quickly received 30% increase in wages once labor problems surfaced. Really it shows how much wages have been repressed and increasing it hardly causes a dent to the profits of companies. Today company profits as a share of GDP is at a record I don't think Apple is even 1% less profitable if they double the salaries of workers in Foxconn. The Foxconn & Honda troubles are just signs of larger changes that will be coming. Foxconn workers who make the iPhone cannot afford the iPhone...who buys them? People in developed countries with higher income.....demand comes from places where jobs are lost to China. Not only that if you plot the growth of productivity vs wages, you will see a big divergence in the past 20 years...more goods are produced today relative to the wage growth i.e. demand for goods come from wages but since wages lag the amount of goods produced where did the additional demand come from? The answer is debt. Debt supplemented wages to provide the additional demand - sovereign debt, consumer and mortgage debt ballooned in the last 20 years.

Are we seeing the end game of the strategy for the last few decades of economic growth? In China we are see rising dissatisfaction and social strife - Foxconn and Honda being their higher profile cases. Many people still believe the Chinese govt (communists) have full control of the economy and can steer the economy like they can a ship. Remember Vietnam two years ago? They had a small initial problem with a hot housing market, then inflation, then widespread labor problems and an economy that fell apart ahead of the rest of the world. The Vietnamese also had central control of the economy ...communists who modelled themselves after the Chinese. In Europe we see so many cracks at the same time, you don't know what to worry about. Many say that Greece is an exception because they were fleeced by rightwing leaders who cooked the books and run the country finances to the ground. If you look at Spain, there was no fraud, the leaders just ran a above average deficit for too many years building up too much sovereign debt and coupled with the bursting of the housing bubble resulted in an economy with 20% unemployment....that is roughly the unemployment level during the Great Depression of the 1930s. But high sovereign debt and housing bubbles were common place in developed economies during the last economic boom..you see Spain-like countries everywhere in the world and that is really scary. The Europeans are now trying to rein in their debt by implementing austerity measures and this will pose a big problem for the current economic recovery - the Europeans probably saw some light realising you can't keep propping up this economy with more debt and forestalling the inevitable. In recent elections, we see an increasing number of incumbent govts losing power - Japan, Greece, Britain...just to name a few, you can sense the widespread frustration with the current economic system. Until the changes come to bring about change in the global economic structure, imbalances will persist and the flux of labor unrest in China, high unemployment in Europe, high debt levels and recurring crisis in financial markets will continue.

In Singapore, we have CBF, increasingly regressive taxation (GST for the poor, tax cuts for the rich) and widening income disparity. CBF will not lead to higher standards of living and a better life for many Singaporeans. It will lock a segment of our populace in a cycle of stagnant or declining wages,, later (or never) retirement and rising cost of living which ultimately means a decline in living standards for many.

20 comments:

Anonymous said...

Dear My Lucky

Psst .. your idol Mr Buffett allegedly complained that he paid LESS tax than his PA ...

The chinese worker save about 30%(?) of his wages.
The average american worker is lucky if he does not need to get a payday loan.

In fact, the wages in Shenzhen/Shanghai are rising so quickly that SG could face a labour shortage! (Maybe the PAP will claim credit?)

Under the Great POTUS Obama ... US will have the largest budget deficit ever. Unemployment 10%. Underemployment probably just as high.

As Goldman would say, Obama is doing God's work.

Seriously ... the Obama administration is making PAP look good! If not for the wonderful stock picking skills of Ho Ching and GIC ...

Now obviously CBF is NOT the way. Everyone who is not a millionaire agrees with you. But what to do? There is no selfless atheist political party (other than LKY) to save us. Lets move on...

Anonymous said...

Dear Mr Lucky

Looks like Dow Jones had another one day rally?

When is the crash coming?
And what's the bottom.
4000?
Do share your expertise.

Anonymous said...

Due to various reasons, the western countries now in trouble cannot afford to have a gahmen and system like the PAP.

So PAP is great in this respect. They still have almost absolute political power with social peace despite no minimum wage, high living cost and low wages for many, hordes of low cost foreigners imported and million dollar salaries for ministers.

You tell me which other country, besides Zimbabwe with 1000% inflation, can achieve that? Isn't the PAP great? Or is it they they are lucky that they rule Singaporeans, most of whom are kiasi and kiasu?

Anonymous said...

Under the Great POTUS Obama ... US will have the largest budget deficit ever. Unemployment 10%. Underemployment probably just as high.

I think you are mistaken here, the Clinton administration left Bush with a budget surplus of hundreds of billions. It is under the Bush administration that things cork up and budget deficit.

Anonymous said...

So what if US has the largest budget deficit and unemployment of 10%, etc?

Obama will still complete his term or may even win another term. Just like Bush Jr. And continue to jet around in Air Force One.

America will remain a great democracy with its system intact, and the US dollar will still be the international currency.

Nothing will change, at least not in our lifetime.

DanielXX said...

What do you worry? Some con-sultants just came out with survey results that concluded that >10% of Singapore household are millionaires! And that's in US$ and excluding house assets! This was printed as the Page 1 headline! Even the World Cup merited less mention in our States Times today! Bravo! PAP forever! Boston Consulting for more garment contracts! ;-)

Anonymous said...

It's true lah. Singaporeans are very rich. And there are many of them. More than you think.

Of course there are poor ones too but they are a minority. And luckily they are law abiding too, except for some crazy foreigners who dare to rob and kill.

That is why overall our society is so peaceful and PAP so strong.

In fact the gahmen know better. Through their tax authority IRAS, they even know exactly how many SIngaporeans are rich.

And some of these rich can be anti PAP too, like in blogs. Or they will attend opposition rallies rather than PAP ones at elections. Hence huge crowds at opposition rallies and pathetic crowd at PAP ones. But you know who they will vote. That's why 66% for PAP is so consistent.

Anonymous said...

To put it simply, the global economy cannot be one where the China produces and the rest of the world consumes. In a free market, movements in currencies would have negated the cost advantages of producing in China and things will automatically be in equilibrium.

While I'm sure that you're on the right tack here, do bear in mind that the beneficiaries of the current system will attempt to keep the current system for as long as possible. You can see that in the transformation of wages -> individual debt -> sovereign debt.

On the fate of the majority - there's not much to worry about as unhappiness is largely about perception. Run a couple of sob stories about down-trodden workers in other countries and all will be well. People will be grateful for what they have when they see that others don't have what they have. Those in power are actually pretty clever (at least most of them). However, the only danger for them is the widening gap between perception and reality as these people are more 'ivory towered' than ever, and surrounded by nodding heads.

Thanks for sharing your insights on your blog. Great insight and wit. A must read for the powers there be. : )

Anonymous said...

"...do bear in mind that the beneficiaries of the current system will attempt to keep the current system for as long as possible."

That's right. But change for the better and equilibrium will take a long, long time, if at all.

Hence I foresee PAP will still remain in power for at least another 10 to 20 years, even if they continue the way they did.

Fox said...

"If you look at Spain, there was no fraud, the leaders just ran a above average deficit for too many years building up too much sovereign debt and coupled with the bursting of the housing bubble resulted in an economy with 20% unemployment...."

I believe in the 2000's, the national budget deficit for Spain was fairly small. They even had a small surplus for a couple of years before the financial crisis. It was the same for Ireland.

See: http://images.creditwritedowns.com/wp-content/uploads/2010/03/financialsectorbalanceseu.gif

Fox said...

Here is a BBC article on the budget surpluses ran by the Spanish government. They had the second largest budget surplus in the Eurozone in 2008.

http://news.bbc.co.uk/2/hi/business/7257999.stm

run road said...

Why would anyone be so bold as to predict PAP hegemony for the next 2 decades - 4 full electoral terms? The only real force holding the pack of cards together is an elderly, authoritarian octogenarian who will not be able to defy the ravages of time for too much longer, at best and being extremely generous, one final swansong term of 5 years.

After he turns up his toes, what then? Does a leader with an unfortunate tendency to stumble and who needs a dozen mini-PMs in the PM's office to hold his hand have the strength of political will and charisma to hold the fort? Who else in the lineup stands out as a potential chief? Please name one, just one will do. Old man has done well to exterminate all potential competition leaving only the grey and faceless. No, I think 'PAP Forever' will be a textbook example of famous last words.

Anonymous said...

Dear run road, I agree. Once the strongest pillar falls, the roof will come down and crush those who stay shelthered for so long.

Anonymous said...

with more affluent and increasing population, roads have to be expanded, better managed and maintained to ensure we do not create bottlenecks, congestions and kill the overall ride experience.
over the years, the authorities have built better roads, improved on city planning, diverted congestion, regulated road usage through charges,employed tech to collect and disseminate road information so drivers can better assess road situation and where necessary deploy manpower to maintain law and order. .
but all that amount to nothing when the people have a single track mindset, all headed towards the same direction at the same time.

I think that best describe our situation?

Anonymous said...

Dear Mr Lucky Tan,

I am amazed. With only one man (yourself), you are able to run a "business daily" with insightful writings.

I have nothing but admiration and thanks for you.

Your reader,

Anonymous said...

"but all that amount to nothing when the people have a single track mindset, all headed towards the same direction at the same time."

All should head towards church business.

Anonymous said...

CBF = chee bai face

They are scolding us.

Anonymous said...

yes, it's totally regressive. pap even scrapped estate tax, so that they themselves can pass on their wealth to their children.

hope they all make use of this twisted tax change soon.

Anonymous said...

one day, china n india will catch up and we will not have cbf workers. all people will want to get out of here.

site said...

It cannot have effect as a matter of fact, that's exactly what I suppose.