Mats Alerius, PA IT expert, explains why Western economies are in danger and outlines what they need to do to counter the challenge from developing countries.
Two numbers – 135 and 12 – explain why European economies are stagnant or shrinking. The first number, in US dollars, is what the average worker in the West earns per day; the second is what the average worker earns in urban China.
This inequality in pay is the main reason why Western economies are in danger. What entitles the rich world's 500 million workers to salaries that are more than ten times higher than those of the 1.1 billion workers in the cities of developing countries? And why should Westerners earn almost 100 times more than the 1.3 billion adults who live in rural poverty in developing countries?
In the 1950s, General Motors was the world’s most successful company (by market capitalisation). In 1955, the company had nearly 500,000 employees in America and 80,000 employees in other countries. Today, the world's largest company (again, by market capitalisation), Apple, employs just 4,000 people in America and more than 700,000 workers elsewhere.
Furthermore, wages for the jobs that have stayed in America are under heavy pressure. Americans who do not continue to higher education earn less in real terms than their grandparents did with a similar length of training.
Fifty-five years ago, after World War II, the annual increase in jobs in the Western world was about 2 per cent. Real wages increased by about 3 per cent, year on year. The idea that we would all earn more without having to work harder, and that there would be jobs for our children, became a democratic ’right‘. But the trend is now in reverse. Growth in jobs, wages and GDP in Western economies has been, with few exceptions, negative.
The West cannot compete with developing countries on wages. Do we have other advantages that will protect our standard of living? Higher education? More creativity? Unfortunately not. In 1995, the global patents granted to China represented 0.5 per cent of all patents. In 2010, China's share reached 9 per cent, and it continues to increase exponentially. What developing countries do not create, they can also copy.
The central problem today is that we consume more and invest less. Chinese investment has risen to almost half of GDP, while in the West it stands at about 15 per cent and is falling. The truth is that Western countries have been living beyond their means. Many states are deep in debt
So how should the West get out of this mess? First, we must live according to what we have. And governments must prioritise spending that leads to growth. Studies by the Organisation for Economic Co-operation and Development (OECD) show that funds directed to education and infrastructure have the greatest impact on long-term growth. The OECD has also said that taxes should be shifted from corporate and income taxes to taxes on consumption and property.
But over the next few years a lower standard of living is almost inevitable. Our calculations say that a reduction in living standards of about 15 per cent is needed to balance the Western economies. Many households have already made cuts. But as public spending is so large, private cuts are not enough.
It's bleak, but we must face the truth. For our economies to recover, cuts are required. To grow, we need to invest.
To avoid the same fate as Greece, developed countries must shrink public spending. Capitalism works by creating surpluses and investing them productively. Not by borrowing money and wasting it on consumption.
Mats Alerius, country head Sweden, PA Consulting Group
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