Bottom-Up Economics of the 21st Century


Part One: Driving Forces and Consequences

I wish to use the term “bottom-up economics” to describe the new economic order of the 21st century, which is enabled by new technologies, especially the Internet and the mobile phone. This new development is quickly eroding the traditional trickle-down order. Furthermore, it opens up vast business opportunities for those taking advantage of this new transformation, as shown by the success of companies like Google, Facebook, Twitter, Apple, EBay, Paypal, and many others.

The name bottom-up implies two things: a grassroots origin, and the empowerment of the masses. What are the forces that drive this new development? What will be the consequences?

The forces that drive the bottom-up economic order come from human instincts. These instincts have been suppressed one way or another for so long due to culture, religion, education, and politics specific to each country and society. What are these instincts? They simply involve what you want out of life. The following questions will invite a yes answer and show what people really want:

Do you want to think objectively without being brainwashed?
Do you want to know the truth without being misinformed?
Do you want less strict rules to govern how you should behave in society?
Do you want more freedom to conduct your life in pursuit of opportunities?
Do you want to be your own boss instead of working for somebody else?
Do you want to share your talents, insights, and emotions with other people?
Do you want more and better interactions with other people?
Do you want to freely express yourself without fear of retribution?

The above represent what people want wherever they live on earth. This creates a huge demand worldwide for satisfying those wants. The level of demand of course varies from place to place. Even in America where more freedom exists, the demand seems to be endless. Imagine how great will the demand be in more conservative or oppressed societies.

Throughout human history, these demands have not been satisfied in most places due to various factors especially culture, religion and politics. Now comes the electronics revolution with the Internet and all the rest, which has proven to be a game changer.

The key to this new development is competitive low price, which ordinary people can easily afford. How can the companies in this business survive with a price squeeze? They survive very well on market size . They have successfully overcome low prices by expanding the market. For instance, Google makes only a tiny income for each click on an advertisement. But how many million people access Google in just one day? And how many are likely to click on the ad? You figure out the math.

The combination of low price and mass market is a potent force. Even conventional low-tech companies can achieve great success if they adapt to this new business model. For instance, how much does it cost to buy a can of Coke? How big is the existing market? How big is the potential market in Asia, Africa and South America where Coke has yet to penetrate more? We are talking about billions of consumers here. Coke is low-price carbonated sugar water that easily appeals to the masses. The company is investing heavily in improving its distribution and enhancing its brand name to deepen its market penetration. The potential seems endless.

The same business model applies to McDonald’s and other fast food chains. It was reported that McDonald’s plans to open 20,000 more restaurants in China alone. Think about the potential of selling hamburgers even though many people find them tasteless and unhealthy. To a certain extent, this model works for Costco, too. Note that these companies were less affected by the deep recession beginning in 2008.

On the other hand, some  conventional industries find it difficult to survive in the new bottom-up economic order even though their business fits into the low-price mass-market category, notably newspapers, magazines, television news, music, books, and movies. Why? The Internet has thrown them off balance because the masses can now obtain news/information, and music/movie downloads inexpensively or even illegally for free. How can one fight the Internet revolution that spreads like wildfire? If one cannot beat them, one must join them. It’s impractical to go against a natural and powerful trend that cannot be reversed.

What are the consequences of the new bottom-up economic order triggered and facilitated by the electronics revolution? They can be summarized as globalization of business, ideas, and all other human activities. The major ones are unfolding before our eyes:

* Low-wage manufacturing industries move from the developed to the developing world.
* Low-price products move from the developing to the developed world.
* The developed world has lower rates of inflation but higher rates of unemployment.
* The developing world has higher rates of inflation but lower rates of unemployment.
* Consumer demands grow faster in the developing world, thus attracting more investments from the developed world.
* Conservative and oppressed societies are forced to open up and liberalize.
* Dictators and authoritarian regimes find themselves under siege. If they don’t adapt, they will face a people’s revolution.
* The developed world continues to blame the developing world for stealing their jobs. Those jobs will never come back. The only way for the developed world to survive is to innovate out of their difficulties, and specialize more on higher-wage production.

Part Two: Challenges for the Developed Countries

Millions of low-pay manufacturing jobs have disappeared in the West due to their own corporations moving factories overseas. Outsourcing low-wage jobs will continue as long as there exist a significant difference in wage and living standard between the developed and the developing worlds. In addition, as the latter gains more expertise, higher-pay jobs will start to leave too. This is putting a persistent squeeze on the employment situation in the developed countries.

There is a tendency for the developed world to erect protection barriers such as import tariffs or quotas. Would this work? It won’t for one obvious reason: Does anybody in the developed world want to work in a factory for less than the minimum wage? No, but millions of people in the developing world are happy to do it. That’s why jobs are moving overseas. Furthermore, protection barriers will cause consumer prices to soar, thereby worsening inflation.

The developed world has to recognize that the low-wage jobs are gone forever due to its own rising living standard. Rather than hoping to bring them back, the focus should be on creating more high-pay jobs. What defines high pay? It means higher level of technology, design, artistic content, marketing, management, planning, services, and last but not least, higher satisfaction. In short, higher pay means more innovation.

It is ironic that people in the developed world accuse the developing world of stealing their jobs. At the same time, they also point out the poor working conditions of the low-pay jobs there. This is precisely the reason why low-pay jobs go overseas in search for willing workers. Low-pay jobs are for mere survival that the millions of unemployed have no alternatives but to accept. They don’t carry much satisfaction except better than being jobless.

The accusation of job stealing has happened many times before. In the 19th century when Europe was rich and powerful, it imported increasing amounts of textile products from the United States where the cost of labor was low and even slave labor was legal. This caused a lot of jobs lost in the European textile industry. During the first two decades after the Second World War, low-cost toys and other consumer products were imported from Japan to the United States. Low-quality Japanese goods were blamed for the collapse of the US toy industry. From the mid 1980s, China has become the biggest manufacturer of nearly all consumer products. As Chinese wage levels rise, some other countries in Asia, Africa or South America will be accused of stealing Chinese jobs, too.

The problem with today’s job loss is that it is happening so quickly. This creates a serious adjustment problem for the labor force. First, there are not enough job opportunities for the unemployed. Second, the new jobs require more technical skills than the old ones that were lost. The unemployed must be retrained fast enough to take advantage of new opportunities.

In the developed world, the shrinking manufacturing sector is replaced gradually by an expanding service sector. This sector covers a great diversity of opportunities including entertainment, government services, education, health care, law, computer programming, online services, finance, banking, insurance, design, arts, consultancy, etc. These jobs cannot be outsourced so easily like factory production. This is where the opportunities exist for the developed world.

Another great opportunity is self-employment and entrepreneurship where millions of people are engaged in. This is in fact the ultimate job where satisfaction is the greatest, because you are your own boss and control your own destiny. You reap all the rewards and carry all the risks at the same time. In addition, you serve the community where you work, and your job cannot be outsourced overseas.

While losing millions of low-pay jobs, citizens of the developed world should reflect on the quality of those jobs. Do we want boring factory jobs or better ones that give us more satisfaction? Perhaps we should ask: What is the meaning of work? Do we work for just three meals a day? Should we want something more in work to nurture the human spirit and enhance our happiness? If we focus more on improving the quality of work, we should be able to find a solution for overcoming the present job crisis.

Part Three: The Great Transformation

When the new bottom-up economic order arrives, it transforms the whole society in a dramatic way. Here in Part Three, I discuss this phenomenon as it happens in two populous emerging countries, China and India.

Not every country in the developing world is involved in this transformation. Only China and India have experienced a change so monumental. The consequence is that China is no longer a Maoist communist country where everyone is made equally poor. Being a latecomer, India’s trickle-down economics has been very slow to change but is gradually shifting to bottom-up. Since China and India together account for about one-third of the world’s population, bottom-up economics occurring there has brought plenty of opportunities to the poor masses of the world as never seen before in human history.

Simply put, this sea change is the result of the globalization of production, distribution, commerce, ideas, and communications, all being facilitated by the electronics revolution. The new technologies originated in the West first. They do not trickle down slowly, but spreads quickly worldwide.

Why does the bottom-up phenomenon bypass so many countries in the developing world? Besides civil wars and ethnic conflicts, the other reason is the stifling and oppressive traditions due to existing culture, religion, education, and government, which are aggravated by corruption. These traditions have hindered bottom-up economic progress for a long time because they heavily influence how people think, behave and work. Some examples are: women should not engage in business as men; people should not question those in authority; elders are always right; and so on. When people begin to ask why and why not, the society will experience an earthquake that will shake every belief and convention to the core. You may say this is rebellion like your children growing up. The fact is that progress cannot come without rebellion, and the rebellion does not have to be violent. One more fact, science would not have progressed to the present stage if nobody asked why birds could fly and why not humans.

China used to be enslaved by this kind of stifling and oppressive traditions. Since taking power in 1949, the communist regime has wiped out most of the ancient traditions, but replaced them with an oppression of its own. In the early 1980s, the communist regime began opening the country and relaxing the rules. It has since turned China into a capitalist country in fact, but communist in name and governance. China has been operating with this great contradiction for decades now. How can that be sustained? Well, the communist regime has no choice but to maintain high economic growth. Seeing their living standard and opportunities increasing, the people keep busy making money and let the communists keep their power. In fact, the rules have been relaxed to such an extent that one can do anything in China except criticizing the government. Will the people rebel after having achieved the basic necessities of life? I think so once the rules have been relaxed. We’ll see how the communists handle this challenge in the future, mindful that they badly messed up in the 1989 Tiananmen student protest.

India is also a victim of similar stifling and oppressive traditions. The major difference is that India is a democracy and its educated class is familiar with the English language, both being legacies of British colonial rule. The democratic system enables the Indian people to vent their anger at the ballot box rather than in the streets. Since English is the business language of the world, the educated class in India gains a head start in attracting contracts outsourced from Western companies especially in the software business and telephone answering services. There exists one significant limiting factor, that is, the enmity with neighboring Pakistan. Since independence, India has been obsessed with its conflicts with Pakistan. Most resources have been diverted to an arms race between them that involves nuclear weapons. As long as they continue pointing nuclear missiles at each other, bottom-up economics cannot move as fast as it should.

Why does the term bottom-up carry so much meaning for both China and India? All you need to look at is the creation of the middle class and the pace of urbanization. In China for instance where everybody was made equally poor before 1980, a huge middle class estimated at 500 million has now been created consisting of factory workers, technical professionals, self-employed, and entrepreneurs. The migration of peasants to the cities in search for work is equally astounding, as known by the so-called floating population estimated at 200 million. You can see them everyday overwhelming major train and bus stations. This unprecedented development offers plenty of opportunities for business especially in construction, housing, energy and retails. It also brings chaos, environmental pollution, dislocations, and stress to the society.

Every big change carries high costs and risks like these. But if you want progress for society and benefits for the masses, you have to deal with these costs and risks, because progress does not come free. The only problem is that the change occurs so quickly that it creates a big challenge for the society as a whole.

There is one additional bonus. The creation and expansion of the middle class brings stability to society simply because the masses now have something to gain and something to lose. So they have the incentive to engage in productive work for a better future. On the other hand, conflicts and revolutions usually occur in a society where the middle class is almost absent. Then the poor masses have nothing to gain and nothing to lose. They will vent their anger at one another, or at the small rich minority who benefits at their expense. Since the bottom-up process involves building the middle class, it contributes to enhancing stability for the developing world.

Many people in the West view the bottom-up economics in the developing world with a combination of indignation (they steal our jobs!), jealousy (China rising as a world power), and concern (environmental pollution). Those are natural emotional reactions. Since economic progress causes pollution, bottom-up economics inevitably adds stresses to the environment because it involves more people achieving a higher standard of living instead of living at a subsistent level in the countryside. Moreover, pollution in the developing world quickly spreads worldwide due to its large scale. One example is the spread of diseases and unwanted animal/plant species due to heavy traffic of humans and cargoes. Another example is the air pollution in Los Angeles, some of which is carried over the Pacific by air currents.

Although a huge middle class has arisen in China, a wide income gap has been created between the rich who live in the cities and the poor peasants in the hinterland. The rich consist of, besides corrupt officials, the most successful self-employed and entrepreneurs who have taken advantage of the opportunities offered by the mass market. The poor peasants are those left behind by the bottom-up process for one reason or another. This anomaly can never happen in a communist country where everyone is made poor and therefore equal. If you ask the Chinese people whether they prefer to go back to the Maoist era, an overwhelming majority will say no. They want opportunities that always carry risks and dislocations. The previous communist model has failed to answer to their aspirations. Thus the unequal income distribution is a problem of success reflecting the unequal abilities between individuals. It is by no means a problem of failure. The former is easier to deal with than the latter, but both carry risks.

Finally, the biggest consequence of bottom-up economics is the adverse impacts on energy use. Energy fuels progress, and progress in turn fuels energy use. At present, the world is overwhelmingly dependent on oil and coal, which are the dirtiest fuels that contribute to global warming. A high-ranking Chinese official once said that if China continued consuming oil this way, there would not be enough oil for anybody else. In the meantime, China is frantically doing multiple things: securing oil supplies all over the world, building one coal-fired electricity plant a week, and investing heavily in solar and wind.

In the near future, environmental pollution will worsen and the earth will get warmer because of China alone, not to mention the biggest oil consumer like the United States. With the twin challenges of insufficient oil supply and global warming, the world’s economic progress and environmental wellbeing now depend entirely on how fast renewable energy can substitute oil. Can we achieve significant oil substitution quickly? There is no reason why we cannot if we have the will and the foresight. A Saudi oil minister once said, “The stone age did not end because we ran out of stones.”

(June 2011)

 

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