UK’s Grocery Manufacturing Industry

Less than two months into 2006 and the UK’s grocery manufacturing industry is already notching up a growing list of casualties: Leaf UK is considering whether to close its factory in Stockport; Elizabeth Shaw is shutting a plant in Bristol; Arla Foods UK is pulling out of a site at Uckfield; Richmond Foods is ending production in Bude; and Hill Station is shutting a site in Cheadle. […] The stories behind these closures are all very different. But two common trends emerge. First, suppliers are being forced to step up the pace of consolidation as retailer power grows and that means more facilities are being rationalised. Second, production is being shifted offshore as grocery suppliers take advantage of lower-cost facilities. [2]

This excerpt observes that food processing that used to be carried out in Britain is being shifted to poorer Eastern European countries, such as Poland. When factories close in Britain and open in Poland, it is as if physical capital—factories and machines—is moving from Britain to other countries. If the amount of capital (relative to labor) were the only factor determining investment, we would expect to see massive amounts of lending going from rich countries to poor countries. Yet we do not see this. The rich United States, in fact, borrows substantially from other countries. The stock of other inputs—human capital, knowledge, social infrastructure, and natural resources—also matters. If workers are more skilled (possess more human capital) or if an economy has superior social infrastructure, it can obtain more output from a given amount of physical capital. The fact that the United States has more of these inputs helps to explain why investors perceive the marginal product of capital to be high in the United States. Earlier we explained that even though migration could in principle even out wages in different economies, labor is, in fact, not very mobile across national boundaries. Capital is relatively mobile, however, and the mobility of capital will also tend to equalize wages. If young Polish workers move from Poland to England, real wages will tend to increase in Poland and decrease in England. If grocery manufacturers move production from England to Poland, then real wages will likewise tend to increase in Poland and decrease in England. In fact, imagine that two countries have different amounts of physical capital and labor, but the same amount of all other inputs. If physical capital moves freely to where it earns the highest return, then both countries will end up with the same marginal product of capital and the same marginal product of labor. The movement of capital substitutes for labor migration and leads to the same result of equal real wages. This is a striking result. The result is only this stark if the two countries have identical human capital, knowledge, social infrastructure, and natural resources. [3] If other inputs differ, then the mobility of capital will still affect wages, but wages will remain higher in the economy with more of other inputs. If workers in one country have higher human capital, then they will earn higher wages even if capital can flow freely between countries. But the underlying message is the same: globalization, be it in the form of people migrating from one country to another or capital moving across national borders, should tend to make the world a more equal place.