The wealth of nations

The fundamental factor behind any country's economic growth is its quality of labour, says Gregory Clark, economics professor at the University of California and author of a new book on the subject.

In "A Farewell to Alms: A Brief Economic History of the World," Clark gives examples that show the importance of labour in economic development:

As early as the 19th century, textile factories in the West and in India had essentially the same machinery and similar transport costs.

Yet the difference in cultures could be seen – although Indian labour costs were many times lower, Indian labour was far less efficient at many basic tasks.

For instance, when it came to "doffing" (periodically removing spindles of yarn from machines), American workers were often six or more times as productive as their Indian counterparts.

Importing Western managers did not in general narrow these gaps, and as a result, India failed to attract comparable capital investment.

In today's terms, Clark's argument implies that the current outsourcing trend is a small blip in a larger historical pattern of diverging productivity and living standards across nations. Wealthy countries face the most serious competitive challenges from other wealthy regions, or from nations on the cusp of development, and not from places with the lowest wages.

And with an emphasis on foreign aid to the poorest countries, there is little hope for economic improvement, says Clark. The problem is that while advances in sanitation and medical care, for example, save lives, they drive down the well being for the average person. Rising populations in countries with low living standards will make improving the quality of labour, and the resulting economic growth, all the more daunting.

Source: Tyler Cowan, What Makes a Nation Wealthy? Maybe It's the Working Stiff, New York Times, November 2, 2006.

For text (subscription required): http://www.nytimes.com/2006/11/02/business/02scene.html

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 07 November 2006