Specialisation isn't so special after all...

Robert Rubin, the former US Treasury Secretary, once commented in relation to economic policy-making that "I wish I could be convinced of something as much as some people seem to be convinced about everything". Modern society is based on economic theories around specialisation, trade and exchange. Employees specialise in given occupations, machines specialise in certain tasks, regions and countries specialise in producing particular goods and services. If people and other resources concentrate on things which they do relatively well, then everyone usually benefits. Specialisation results in an increase in output and well-being. Easy, uncomplicated - so happy days. Well, not really.

Individual specialisation has been pushed as the centrepiece of "how to get ahead", yet the conviction that economists have applied to specialisation seems overstated at best. At earlier and earlier ages children are being tested and pushed to make decisions about where to focus their energies; what subjects to take, what sort of qualification to go for, and ultimately what sort of career path to choose. Specialisation is seen as the way to differentiate oneself from the crowd, and consequently to have a skill that is in demand in an increasingly competitive world. There are obviously some clear upsides to this strategy, but the pressure to define these specialisations at an early stage is also potentially quite damaging. It's not OK, it would seem, to not know what you want to be when you grow up. I tend to keep it quite quiet that I still don't know what I want to do when I grow up.

Simple trade theory suggests that it pays individuals to concentrate on what they do best. If I can earn £10 an hour from writing this website and it only costs £8 an hour to have someone paint my house, then it will make sense for me to sit and write while the decorator paints. (On these terms alone, however, I probably shouldn't be writing this blog, as £10 per hour is £10 more per hour than I get, and there are some who read this who would probably say that I'm paid too much.) While the efficiency gains of specialisation are clear to see, I think there are dangers to this route that typically aren't considered. If the blogging world becomes oversupplied with outstanding work, then my competitive advantage would disappear pretty quickly, and in the meantime I have become inept at house painting. In a globalised world the speed at which competitive advantage can disappear is very quick. There are a heightened number of "circuit breakers" that could make my particular skill, whatever it is, redundant very quickly. In the current environment, these "circuit breakers" are unravelling the premise on which individuals, businesses and countries have established their economic situation. With hindsight in many cases it would have been helpful to have a fall-back, or to not have become "one trick ponies".

The world's farming community are a good case in point. Fifty years ago farmers in the area near to our house in Kent were considerably more diverse in what they farmed than they have been forced to be recently. Farms might have had a mixture of arable and dairy, and considerable diversity even within those two groups, and their export markets were literally within a radius of 50 miles, where they would sell their fare at country markets on a Saturday morning. Nowadays, specialisation, driven by the need to increase efficiency has meant that farms tend to be one dimensional - even just being an arable or dairy farm is too broad to compete. Their export markets are truly global, and they are competing on a global scale, which doesn't just create opportunity. We take it for granted that all year round we can buy bananas from Guyana or carrots from Guatemala in our local Tesco. From the consumers perspective, this is great progress, but the threat to producers because of specialisation can be underestimated, as they are sacrificing flexibility for efficiency. In some cases this is a healthy trade-off, but in many cases not.

I find it staggering when flying around over Manston airport in east Kent, to see Egypt Air jumbo-jets landing with great regularity, delivering the next load of exotic fresh flowers from Kenya. These flowers have been picked the day before, flown up to Amsterdam, repackaged and flown across to the UK for delivery onto shelves of supermarkets across the country all within 24 hours. How can it make economic sense to fly a jumbo-jet laden with fresh flowers all that way, to satiate an annual demand for what we no-longer consider a "luxury"? It clearly does make economic sense though - the cost of production in Kenya is sufficiently low, and scale sufficiently high, that this export market works. Nonetheless, the Kenyan farmers have an un-hedged, specialisation that could very easily become unsustainable quite quickly. If an effective carbon trading scheme is put in place, and an appropriate tax applied to the flowers to compensate for the carbon emissions created in their long-haul transfer from Kenya to Stockport, then the market for these fresh flowers could crash precipitously, and we would go back to buying our roses from the farm shop 5 minutes walk from our home. Specialisation, doesn't seem to allow for flexibility, as there is an assumed efficiency cost to that flexibility. It also means that the number of shock points to that market are higher than they would be without specialisation. The good times are good, and the bad times are awful.

In the unfolding mess that the world is suffering through, those who have followed the economic gospel according to specialisation are likely to be hardest hit. High-value added manufacturing is to Japan what financial services are to the UK. Both countries have most of their eggs in one basket. When the good times are rolling, specialisation works beautifully as the high-value-added sectors pull along the less efficient areas of the economy. The price for the high profitability is high volatility. Japan's banks, unlike those in the UK, were fairly conservative when it came to bank lending - being generally too cautious to dance the subprime two-step. Ironically, though they have fared worse on macro terms than the most cavalier of the world's advanced economies. Output in the fourth quarter shrank an amazing annualised rate of 13.2%, which will lead to the worst performance of the Japanese economy since the Enola Gay dropped the atomic bomb on Hiroshima. Japan's dire performance is almost entirely linked with the collapse of exports, which fell 35% in December and 46% in January. The free-spending trading partners for Japan, have suffered and consequently their consumption capacity is diminished, but Japan and others in a similar position, have been hit harder than all, even though they appeared more conservative than their trading partners.

Other "specialisation" basket cases include South Korea, Singapore and Taiwan. Taiwan in particular, is amongst the worst performing of advanced economies. Unlike Japan, they don't have many of their own brands, but were a really key part of the supply chains of other nations manufacuring processes - supplying the microchips and flat screens that Sony or Hitachi would use to make their TVs or computers. When trade is flowing, it has been an indispensible part of the global supply chain. Now that the end user is broke and trade has seized up, its economy is rapidly grinding to a halt. Taiwan's most recent quarterly GDP figures, point to a seasonally adjusted annual contraction of more than 20%. That's not good.

Ironically, it is at times like these that poorer, less sophisticated economies that have committed fewer resources to now-obsolete machinery breathe a collective sigh of relief. Workers in China or India for example can be sent back to their villages, in theory to a more subsistence-based rural economies, while the expensive machinery on a hire-purchase agreement in other countries remains obstinately in place. China is expected to grow at between 6-8% this year as the government piles its substantial cash reserves into make-work programmes. That's a decent drop from the double digit growth rates of the last few years, but certainly a more manageable situation that that of Taiwan. Similarly India, where human capital plays a disproportionate role, could grow by 7% this year. India is considerably less dependent on exports than China, though with less of a cash-pile with which to crank up domestic demand through fiscal policy.

All this is not to suggest that free trade, and the specialization that goes with it, is not in the best interests of all parties. The problem with the economics of it, though, is that the social consequences of specialization, are often not accounted for in the efficiency gain calculations. The urbanization that characterizes the developing world is part of the social cost or benefit that needs to be considered, for example. In India, and China, as the urban unemployed return to their villages the impact on the rural structures that they had left behind may not be that simple. Why should a rural farmer who had encouraged his son to take up his legacy, but was denied because of the appeal and opportunity of the urban environment, suddenly embrace his son now that the has changed his focus again.