'Low-Cost' Economies Not So Cheap

Once a full account is taken of unit labor costs output per worker across economies, the advantage is narrowed.

The low-cost allure of emerging economies such China, India and eastern Europe for Western companies is overdone once the meager productivity of their workers is factored in, the Conference Board said Oct. 3. Bart van Ark, director of the Conference Board's international economic research program, said the report was a "critical lesson" to Western companies seeking to take advantage of lower costs in emerging economies. "Productivity gains from new technology and innovation have to keep pace with often fast-rising wages of skilled and semi-skilled workers, or the 'cost advantage' begins to erode," he said.

"The key for emerging economies is to promote productivity through technological change and innovation to match wage increases which will undoubtedly happen in a rapidly growing economy," van Ark added.

Billing the study as the first by a private-sector group to analyze standardized labor costs globally, the Conference Board said that Mexico, for example, loses nearly all its competitive advantage if productivity is factored in. Mexico's total wage costs were 11% of the average U.S. level in 2002. But because Mexican workers produce 10 times less than Americans per hour, the unit labor costs came out nearly the same.

India and China enjoy the biggest comparative edge because their wages are so low -- less than 3% of the level paid to U.S. workers in manufacturing. Even with lower worker productivity factored in, unit labor costs in India and China are on average 80% lower than those in the United States. But the report also noted that those averages were for all manufacturing companies. U.S. and other foreign companies typically pay their local workers much more than domestic ones.

Newer and poorer entrants to the EU as the Czech Republic, Hungary and Poland have seen their comparative advantage wane as wages have risen faster than their workers' productivity. In Poland, for instance, industrial workers earn about 13% of the average U.S. salary but their unit labor costs come out much higher at 73%.

"These differences underscore the challenge that even very low-wage countries have in fostering productivity growth that keeps pace with or exceeds rising wage levels to preserve their relative global competitive position," van Ark said.

Copyright Agence France-Presse, 2006

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