Sunday, November 11, 2007

The Value of Adding Value

As mechanisation has been a staple reality world over for the last couple of centuries, it has shaped our societies and cultures.

In honour of the industrial revolution, engineering became one of the most sought after professions that only the most brilliant could aspire to. Courses in civil and mechanical engineering initially held pride of place, but then gave way to electronics and electrical engineering, and now even these have become less popular than communications and software 'engineering' - courses that are now even found in the ubiquitous 'Arts College'. The professions have tried to keep pace with cultural developments.

The agricultural revolution and rapid advances in medicine have also combined to make the world's huge population explosion just barely manageable. Of course, out of 6.6 billion people only 1 billion live well. Of the rest, around 25% are in abject poverty and in danger of starving (that's about 1.65 billion people). In absolute terms compared to a century ago, the percentage of poor has declined by half but the absolute number of the very very poor has gone up by about 40 million!

It is argued quite successfully (on paper) that the way to deal with poverty is not to give handouts but to give a hand-up. In other words, bring the poor of the world into the mainstream of production, and poverty will be licked. Is this realistic? Is it even possible? What jobs can we envision creating for the billions of poor?

In 2006, it was calculated that if a real U.S. dollar value were to be placed on the per person share of the entire world's economy (per capita on the world's GDP), it would work out to about $6,600 each. Such figures are heavily disputed by economists, mostly depending on where the economist hails from and what turf they are seeking to protect, so I take this as merely illustrative. The plain fact is that this is well below what an American or a European would consider the barest minimum subsistence level. In other words, if one were to pay an American $6,600 a year, they would starve to death. The poverty level cutoff in the U.S. last year was over $13,000 per annum. On the other hand, in India or China or in Africa six and a half thousand dollars would support a whole family of four at a 'middle class' level for a whole year.

Another little illustration that might illustrate the difference is that a good Medical Transcriptionist (MT) in the U.S. would earn about 65 cents a line. An average MT may pull in about 45 cents a line. The same work, when outsourced to the Philippines or India will earn the MT there, anywhere from 2 cents to 3 cents a line. In both types of economies this would constitute a middle class occupation.

The difference lies in the ways in which "value" has been added to products and services in these developed economies. People eat, they wear clothes, pay rent, they go to and from work, their kids get educated... all over the world. But in the 'developed economies', it costs a heck of a lot more to live even in this basic-needs sort of way.

Marketing and management have become the most honoured professions. The highest paid of all professionals in the world are the managers of large corporations. Now knowledge is the key to money and power. The knowledge that is most valued is the alchemical secret of value addition. It has to be done insidiously and so effectively that the consumer will consume both the product and the mythical value and feel pleased. Now, that's MAGIC !

Is it all worth it? The corporations think so and to tell the truth the answer is that without the layers upon layers of value addition, these developed economies would collapse.

Big business absolutely relies on the inflationary effects of exploitable, value addition, in order to pump profit margins up to a level where there remains little connection between what a goods or service costs to perform/produce and what the end user ends up paying for it. The value addition is self justifying also because it is the primary means of distributing "wealth" or more accurately earnings in the strictly trickle down economy.

Now, these economies want the developing world also to faithfully follow the same route. Everyone should buy-in to the concept of breaking the connection between the real value and what we collectively end up paying for anything after value addition.
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