The fundamental problem with the world economy

… is that wages are sticky.

With increased globalization, it has become significantly cheaper to produce certain goods and services in countries that were hitherto “low income” or “less developed’ or whatever you call it. In the past, in part due to protectionism at various levels and in part due to high transaction costs (transport, communication, etc.) “developed economies” such as the US or Europe had got adjusted to a reasonably high wage structure. In fact, it is possible that in the absence of trade with the rest of the world these countries might still be able to support that structure.

However, with the walls of protectionism and transaction costs falling, these traditionally high wage economies haven’t been able to compete with the up and coming economies where production costs are significantly lower. And because wages are sticky, i.e. it is impossibly hard to cut wages across the board, this has resulted in unemployment. Worse, a lot of other benefits (such as Social Security or Medicare in the US) have been set based on the high wage structure these countries used to enjoy.

And then you have unions, which makes it even tougher for you to cut wages which might make you competitive. It’s a combination of sticky wages and unionism that the various austerity measures in Greece haven’t managed to go through (of course, Greece has another set of problems in terms of law enforcement and tax collection).

And so, in short

1. Wages are sticky. Even though your current wages are not competitive enough, you can’t cut wages

2. That leads to high unemployment

3. That leads to lower economic activity and thus depression

4. The government needs to spend more to “stimulate” the economy, but hasn’t collected enough in good times. And the “level” of the economic cycle itself has gone down now. And the government itself has other obligations linked to the high wage levels

And so it goes. One thing I can think of is “devaluation” (in these times of floating currency rates, that term has lost all meaning), but then now these countries import so much that will again not be a good idea.


PS: please note that this post has been filed under “Arbit”

Name mutilation

Like Bangalore supposedly became Bengaluru a few years back (when HDK was cheap minister), West Bengal is going to change its name to “Poschim Bongo” or some such thing. Now, unlike Bombay-Mumbai or Madras-Chennai, the thing with these name changes is that they are merely globalization of local names. Let me explain.

Bombay (bom bahia or good port in Portuguese) and Mumbai (of Mumba Devi) are fundamentally different. Madras (mad race? ) and Chennai (beautiful) are again fundamentally different. While I disagree with those name changes and still prefer to call those cities by their former names, I see that the change in those names at least has some merit. They wanted to get rid of their colonial British-given names (and i’m sure Tams wanted to prove they aren’t a mad race, though they might have achieved the opposite through this action) and chose local names in the local language.

When Bangalore’s name was supposedly changed to “Bengaluru” a few years back, Kannada newspapers (I used to subscribe to Vijaya Karnataka back then) had a tough time explaining the name change. Because Bangalore has forever been known as “Bengaluru” in Kannada. Even now, when I speak in Kannada I say “Bengaluru” but I say “Bangalore” when speaking in any other language. While it might have been a noble intention by HDK and UR Ananthamurthy and others behind the name change to get the non-Kannadigas to use the Kannada name, the effect has been completely counterproductive.

Till date, I’m yet to meet someone who is not conversant in Kannada to pronounce “BengaLuru” correctly. First of all, most people can’t say the “L” sound and instead pronounce it as “l” (in Kannada that can make a profound difference. for example “hELu” is “tell” while “hElu” is “shit” ). Next (this is the problem with most North Indians), people have trouble pronouncing the short ‘e’ sound. Finally, it’s hard for people to figure out that the first U in Bengaluru is to be pronounced long and the terminal u should be pronounced short. The combination of all these means horribly messed up pronunciation, which makes one wonder why they bothered to “change” the name at all.

West Bengal doesn’t seem to have learnt from this experience of Bangalore. They want to call themselves “Poschim Bongo” it seems. Not being a bong, I’m going to have major difficulty in pronouncing that name, and I might end up pronouncing it in a way that makes most bongs cringe. I really hope they see sense before they make this name change official and opt for a saner name, if they want to change their name at all that is.

One thing they could try would be to knock that “west” off their name (I believe the Times of India has been campaigning for this). West Bengal was the primary reason that I got my directions and geography horribly wrong till I was some eight years old. I used to assume that “West Bengal” was at the western edge of India! Especially since Bangladesh is no more called “East Bengal”.

Given that they are mostly commie, one thing they could try is probably to go the East Germany or North Korea way, and name themselves “Democratic State of Bengal” or some such thing.