Almost everyone these days is convinced that new post-industrial businesses have superseded manufacturing as the main driver of the world's prosperity. In few places is this view more widely accepted than in Ireland. But is it really such a good idea for a nation such as Ireland to deemphasise manufacturing as it rushes to embrace post-industrialism? Actually, no. Far from it.
Those who advocate post-industrialism overlook a crucial fact. In the main, the world's richest nations do not derive their wealth from the new postindustrial businesses lionised in the media, but rather from boring old manufacturing. Examples include Germany, Japan, Switzerland and Singapore, all of whom boast wage levels considerably higher than those the US, which is of course the richest of the post-industrial economies.
Japan is a particularly notable case. Despite all the financial difficulties its banks have suffered in recent years, its wages levels as translated at current market exchange rates run nearly 40 percent higher than US levels - and more than 50 percent higher than those of Britain or Ireland.
A key to understanding why manufacturing-based economies can produce a higher general level of wages than post-industrial economies is to remember that there are many kinds of manufacturing. The nations which top the world wages league table specialise in particularly high-value-added forms of manufacturing such as high-tech materials and components as well as sophisticated capital equipment. Japan, for instance, concentrates on such sophisticated activities as making the high-tech materials and components on which the world electronics industry depends.
Examples include everything from semiconductor-grade silicon to liquid crystal displays. Japan also produces key forms of capital equipment such as the lithographic machines which print lines on computer chips.
Manufacturing of this sort is so advanced that Japan has virtually no competitors anywhere. In the manufacture of silicon, for instance, Japan's only significant competitor is Germany.
Manufacturing of this sort scores in three important ways over post-industrial services:
1. Jobs. Manufacturing creates a wider range of jobs and thus makes the most of the talents of everyone from ordinary factoryfloor workers to the most capable managers and engineers. By contrast, post-industrial services are highly exclusionist in their hiring, generally providing jobs for only a narrow elite of workers - typically people whose IQ ranks in the top 10 per cent of the population.
2. Exports. Manufactured goods are generally highly exportable because they require little or no adaptation to be sold to people of widely differing cultures around the world. By contrast, post-industrial services are generally culture-specific, which can drastically impair their exportability. Many computer software programs, for instance, must be expensively adapted for foreign cultures if they are to realise their full export potential.
For the US in particular, the implications are highly negative. Even Microsoft, by far the US'sstrongest software producer, exports only 20 per cent of its total output - a far cry from export ratios of the 80 per cent or more routinely achieved by Japan's high-tech manufacturers.
3. Wages. Adjusted for the relative level of capability required of workers, advanced manufacturing generally pays higher wages than post-industrial services.
This is because manufacturing requires large amounts of both capital and proprietary production knowledge. Although such requirements may seem at first sight to be a disadvantage, they are really a blessing in disguise: remember that if a nation's exporters compete in fields that are difficult to enter, they will be largely secure from undercutting by lower-wage nations (which almost by definition are short of both capital and know-how).
By contrast, post-industrial services are typically easy to enter since they generally require minimal levels of both capital and proprietary production knowhow and thus in the longer run are wide open to competition from lower-wage nations. Hence the fact that competition is now increasing rapidly in, for instance, the computer software industry, where such low-wage nations as India, China, Russia, Latvia, and Poland have begun to make rapid inroads.
All this brings us back to the question of Ireland's commitment to post-industrialism. So far at least, there is no question that this commitment has proved a boon. Computer software in particular has clearly been a key force driving Ireland's spectacular economic growth in recent years. Moreover, as native speakers of English whose working hours overlap those in the US, Irish software workers are highly effective in serving the needs of the huge US software market. Thus Ireland is one of the few countries in the world which has built a major export business in computer software.
As long as wages remain somewhat lower in Ireland than in the US, the Irish software industry will probably continue to boom. But for the longer term, Ireland should watch out. For if US trade deficits continue, America will inevitably run into a major balance of payments crisis that could suddenly bring a dramatic devaluation of the dollar. Already in the last 15 years alone, the dollar has lost nearly 70 per cent of its value against the currencies of such manufacturing nations as Germany, Switzerland and Japan.
With Ireland now tied to the euro, the next dollar devaluation could easily eliminate the wagecost advantage the Irish software industry has hitherto enjoyed in exporting to the US. In an industry as labor-intensive as software, the effects of that turnabout could be immediate and devastating.
Eamonn Fingleton is a Tokyo-based economic commentator whose most recent book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, is the Key to Future Prosperity has been named one of the ten best business books of 1999 by Amazon.com