The Rube Goldberg economy

Development economics is infested with acronyms. There was the BRIC – Brazil, Russia India and China, and now the BRICS - the BRIC with South Africa added. The BRICS are driving the supercycle that is driving the price of metals up and making miners rich. And, of course,  mining drives the mining supply and service (MS&S) industries.Mining goes wherever the ore is, but what determines where the MS&S industries go? Will they move to the BRICS or will they stay in the old developed countries of Japan, America and the European Union – the JAEU?The answer depends on whether the Dutch Disease gets us before factor price equalization gets China. The world economy has turned into one of those Rube Goldberg machines that do simple things in incredibly convoluted ways. In a Rube Goldberg machine, you pull a string that pokes a parrot that squawks and wakes a dog that bangs a a hammer that breaks an egg into a frying pan that cooks you breakfast. People loved Goldberg’s cartoon machines so much that by 1931 “Rube Goldberg” was an adjective in the Merriam Webster dictionary.

The Rube Goldberg machine is actually a pretty good description of how today’s economy works. Here in Sudbury, Rastall Nut & Bolt Corp. makes a screw that goes in an MTI machine that scoops some nickel that goes to Korea to make a stainless steel frying pan that comes back to cook your eggs for breakfast.

In the Rube Goldberg economy, the BRICS now drive the wheel of trade. Every click of the wheel sends containers rolling off to all the other parts of the world like marbles. IOUs go rolling into the BRICS.  Returning the IOUs sets other marbles rolling to the BRICs.

The marbles rolling out of the BRICS are foods and manufactured goods, clothing and electronics. The BRICS have a lot of people and low wages, so they tend to specialize in industries that use a lot of people. A lot of marbles rolling into China are natural resources. This seems to be good news for the Canadian MS&S industry. We supply the people who supply the marbles flowing in, so we should be getting rich.

The big question is whether MS&S industries produce the marbles that roll out of the BRICS or out of the JAEU.  Can mining suppliers in the JAEU compete with suppliers in the BRICS?

The answer depends on two other questions: “How bad is our Dutch disease?” and “Have they passed the Lewis point?”  We have the Dutch disease because we ship out oil and gold at high prices. The dollar always goes up when we hurry to sell off resources. A high dollar always squeezes out other industries. The Dutch disease could drive the MS&S offshore.

But the BRICS need technology and cheap labour to compete. At the moment the JAEU leads in technology. The BRICS lead in cheap labour. This is where Arthur Lewis comes in.

Sir Lewis won the Nobel Prize in Economics in 1979 for his work on economic development. One of his ideas was that, as countries develop, they pull unproductive workers from the countryside into the developing sector. This goes on until they reach the dreaded Lewis point. That’s where the supply of cheap labour dries up. Once a country passes the Lewis point, wages rise.

Many economists believe that China passed the Lewis point in about 2004. Like postwar Japan, China is now on its way to becoming a high-wage economy. And so are the rest of the BRICS.  The future of MS&S in the JAEU depends on whether we can hold our lead long enough for wages in the BRICS to catch up. Nobel prizewinner Paul Samuelson’s Factor-Price Equalization theorem says they will – but it doesn’t say how fast.

Canada’s big domestic market for MS&S is a major advantage.  Our biggest disadvantage is oil exports driving up our dollar and giving us the Dutch Disease.

Where the MS&S industries end up in our Rube Goldberg world economy depends on whether the Dutch disease is faster than factor price equalization. And on how fast we run.  And on how smart our public policies are. Our policy senility could be even worse than our Dutch Disease.