EconSouth (First Quarter 2000)


REGIONAL FOCUS


THE PRODUCTIVITY GAINS BROUGHT ABOUT BY TWO ASPECTS OF THE NEW ECONOMY — NEW TECHNOLOGY AND GLOBALIZATION — HAVE BENEFITED MANY BUSINESSES IN THE SOUTHEAST. NOT ONLY HAVE NEW HIGH-TECH FIRMS SPROUTED UP THROUGHOUT THE REGION, BUT EVEN SOME OF THE SOUTH’S OLDEST INDUSTRIES ARE EMBRACING ASPECTS OF THE NEW ECONOMY AS TRADITIONAL SOUTHERN COMPANIES STRIVE TO SURVIVE IN TODAY'S COMPETITIVE BUSINESS WORLD.

South's Oldest Industries What would Erskine Caldwell think? The author of such early 1930s novels as Tobacco Road and God’s Little Acre, Caldwell perfected literature’s southern misery genre. His characters were the archetypal dirt farmers and hardscrabble laborers, toiling away at barren land and in broiling sweatshops, expecting little and earning even less.

Even accounting for artistic liberties, Caldwell’s stories resonated with a ring of truth. The South, generally, was poorer than the rest of the country, and the rural South was destitute. The economy was, in a word, old — mostly natural resource-based and highly dependent on unskilled labor. The region’s economy was the envy of no one.

At the turn of the 21st century, the South has come a long way. The region led the nation in job growth throughout the 1990s as investors from the United States and abroad, including auto manufacturers, high-tech firms and service-related industries, poured hundreds of billions of dollars into the Southeast. All those new jobs translated into a better standard of living for Southerners both in absolute terms and in improvements relative to other Americans. Between 1970 and 1998, the national per capita personal income ranking of every Southern state improved except for Mississippi and Florida, which remained 51 and 20, respectively. During these years, Alabama’s ranking improved from 49 to 41, Georgia’s from 38 to 24, and Tennessee’s from 42 to 34.

To be sure, the South generally remains poorer than the rest of the United States. And just as certainly, Caldwell himself would recognize the pockets of desperation that remain in some areas of the Southeast.

Still, compared to Caldwell’s day — and to even just 30 years ago — the South is new. In that sense, the South’s new economy is analogous to, say, Asia’s, with its millions of workers progressing from the most rudimentary forms of natural resource processing to basic manufacturing and on into sophisticated manufacturing and knowledge-based services. This transition occurred mostly because both regions are relatively cheaper places to conduct business and have had a relatively abundant supply of workers.

But what else is new about the South’s economy? Four old Southern industries — peanuts, short-line railroads, textiles and apparel — offer insights into how some companies are changing to remain competitive in today’s business world.

Getting your arms around the new economy
There are varying opinions about and definitions of the new economy. Business Week Editor in Chief Stephen B. Shepherd was among the earliest and most enthusiastic proponents of the new economy. In a 1997 editorial (see the sidebar), Shepherd defined the new economy as two relatively new and broad trends.

The first, Shepherd noted, is the globalization of business; the second is the revolution in information technology. These simple but far-reaching trends provide a standard, although not universally accepted, definition of the new economy.

AT THE TURN OF THE 21ST CENTURY, THE SOUTH HAS COME A LONG WAY. THE REGION LED THE NATION IN JOB GROWTH THROUGHOUT THE 1990s AS INVESTORS FROM THE UNITED STATES AND ABROAD ENTERED THE AREA.

Something old, something new
If there is a staple — or, perhaps, an official snack — of the Old South’s old economy, it surely is peanuts. For more than 50 years, peanut farming has been among the nation’s most protected industries — prices and domestic tonnage have been dictated by the descendants of New Deal-era agricultural programs, and imports of peanuts and peanut-containing products have been essentially prohibited.

Without a doubt, as U.S. growers adopted higher-yielding seed varieties and implemented other production improvements, peanut growers’ productivity improved. In fact, American peanut growers have been the most productive in the world, although the United States ranks far behind India and China in total production.

Nevertheless, because imports were prohibited and manufacturers paid the same price for raw peanuts, there was almost no competition where it mattered most — on the supermarket shelves — except from peanut substitutes. On the peanut aisle, at least, the declining unit costs brought by improving productivity showed up only partially.

All of this began to change with the more recent introduction of foreign competition. Under provisions of the North American Free Trade Agreement and the Uruguay Round of the General Agreement on Trade and Tariffs, imports of peanuts and peanut paste (roasted, ground peanuts) were authorized for the very first time. Granted, imports comprise a small fraction of all peanuts consumed in the United States — well below 10 percent. Still, even this small amount was enough to bring some measure of competition to the peanut industry, and in 1996 the statutory price for American-grown peanuts was reduced for the first time in the history of the peanut support program.

But if competition was just beginning to heat up in the U.S. peanut market, it was reaching full boil overseas. According to the American Peanut Council, an industry trade group, U.S. peanut exports declined from nearly 300,000 metric tons in 1995 to less than 200,000 metric tons in 1998. By 1997 India had actually surpassed the United States in peanut exports, replacing China, which increasingly consumes its own crop, as the leader, with Argentina close behind.

The United States’ competitive situation at home and abroad was compounded by public concerns about the high fat content of peanuts. The concerns contributed to an approximately 200 million pound decline — more than 10 percent — in total U.S. peanut consumption between 1992 and 1996.

The industry’s response to all of these developments was equal parts marketing and technology. The industry addressed health concerns with various research initiatives designed to show the nutritional benefits of peanuts. Individually, manufacturers introduced a variety of reduced-fat peanut products, which now account for as much as 10 percent of all peanut product sales.

Certainly, the domestic peanut market in no way resembles the information technology industry described by Shepherd earlier. As long as imports are limited and the price of peanuts is set by the government, it seems unlikely that PC-style price wars will ever break out in the supermarket peanut aisle.

Nevertheless, for the threat facing the peanut market in the United States, technology was an appropriate response. Productivity may not have necessarily improved, but value most certainly was added through the introduction of reduced-fat products and through a comprehensive marketing campaign by the industry. U.S. consumption, meanwhile, rebounded by nearly 100 million pounds between 1996 and 1999.

In export markets, U.S. peanut producers pursued a similar technology-enhanced, value-added strategy. The United States is not the low-cost producer of peanuts; it has instead positioned itself as the leading quality supplier to world markets by emphasizing those aspects of the American product that should appeal to candy and snack nut manufacturers: production research, seed development, and mechanization in shelling, manufacturing, warehousing and storage. In addition, the industry’s lot identification system and its aflatoxin detection and control initiatives have given it a certain advantage in markets with stringent quality regulations. It appears that all of these technological efforts contributed to a significant increase in U.S. peanut exports after years of decline, from less than 200,000 metric tons in 1998 to nearly 350,000 in 1999.

A VIEW OF THE NEW ECONOMY

In 1997, Business Week Editor in Chief Stephen B. Shepherd wrote about the new economy in an editorial titled “The New Economy: What it Really Means.” Shepherd defined the new economy as follows:

By the new economy, we mean two broad trends that have been under way for several years. The first is the globalization of business. Simply put, capitalism is spreading around the world — if not full-blown capitalism, at least the introduction of market forces, freer trade, and widespread deregulation. It’s happening in the former communist countries, in the developing world of Latin America and Asia, and even in the industrialized West — with economic union in Europe and North America’s free-trade agreement. For the United States, this means international trade and investment play a much greater role in our economic life than before....

The second trend is the revolution in information technology. This one is all around us — fax machines, cellular phones, personal computers, modems, the Internet. But it’s more than that. It’s the digitization of all information — words, pictures, data, and so on. This digital technology is creating new companies and new industries before our eyes....

[E]ntrepreneurial energy is transforming corporate America. You can argue about whether there is a new economy, but there sure as hell is a new business cycle. Housing and autos used to drive the U.S. economy. Now, information technology accounts for a quarter to a third of economic growth. And remember, this is an industry that pays very good wages. And it is an industry, bless its heart, in which prices actually fall every year. How’s that for noninflationary growth? Furthermore, information technology affects every other industry. It boosts productivity, reduces costs, cuts inventories, facilitates electronic commerce. It is, in short, a transcendent technology — like railroads in the 19th century and automobiles in the 20th.

No longer passing the time away
The arrival of the new economy is even more apparent in the short-line railroad industry. As the name suggests, short-line railroads make the final haul between the national Class I carrier, like CSX or Norfolk Southern, and the cargo customer. Considering that a short line may be singularly dependent on a big carrier and that the industry is more susceptible to truck competition, the viability of short-line railroads might be questionable. But instead, short lines are thriving. Their success is due in no small measure to the opportunities presented by technology and globalization.

Atlanta-based Railcar Management Inc. (RMI) was among the first companies to provide computer software to the short-line industry. Like most software, RMI’s packages are intended to improve short-line productivity by giving management better information. According to Paul Pascutti, vice president of strategic product development at RMI, “Our software is oriented toward backoffice functions, but it also provides management with the information it needs for day-to-day operational decisions,” including yard inventory, track movement history and car repair billing.

More recently, RMI has also begun to offer some of the same services online. So not only are short lines able to do more, they’re able to it with fewer people. As a result, these information technologies are having a direct impact on the profitability and competitiveness of short-line railroads.

But so is globalization. At first this seems surprising. Short-line railroads, after all, are defined by the local markets they serve. How can they compete globally? In fact, the answer has less to do with competition than with management.

The 1990s saw the rise of a number of highly diversified short-line railroad holding companies. San Antonio-based RailTex operates short lines in New England, the Southeast, the Great Lakes and Canada. Greenwich-based Genesee and Wyoming owns services in several U.S. states, as well as Canada, Mexico and Australia. Boca Raton-based RailAmerica operates short lines in the United States, Canada, Australia and Chile.

By accumulating short-line holdings, holding companies are able to reduce costs by consolidating back-office functions and diversifying their commodity mix. Diversification helps make railroads “recession-proof,” as RMI’s Pascutti put it. “A company that is heavily dependent on steel can protect itself from a downturn in the steel industry by acquiring a line with a heavy agricultural commodity mix.” In this way, globalization improves costs and revenues.

WHILE THE LONG-TERM VIABILITY OF EVERY TRADITIONAL SOUTHERN INDUSTRY REMAINS TO BE DETERMINED, IT IS CLEAR IN THE SHORT TERM THAT GLOBALIZATION AND TECHNOLOGY PRESENT AS MANY OPPORTUNITIES AS BARRIERS.

Not always a cut above the rest
In one of oldest Southern industries, the new economy is doing to the South what the South did to New England decades ago. Employment in the apparel manufacturing industry has been falling across the South for years. In Georgia, apparel employment plummeted from nearly 58,000 in 1990 to fewer than 28,000 in 1999. Similarly, in Alabama apparel employment dropped from 52,000 in 1990 to 28,000 in 1999.

The decline in apparel employment is, of course, almost entirely a function of international wage competition. Apparel production is highly labor intensive, and as cut-and-sew operations have proliferated in low-cost labor markets, manufacturers in this extremely competitive market have not failed to exercise this comparative advantage. Today, most firms that remain are companies that rely on more automated processes or are niche product producers.

But it would be wrong to assume that the closely associated textile industry has mirrored the job exodus of the apparel industry because of globalization. While apparel employment may have plummeted since 1990, textile manufacturing in general seems to have stabilized. And, over the same period, carpet manufacturing employment has actually increased. The difference is most certainly technology. Unlike apparel, carpets and other textiles are manufactured in long production runs that lend themselves to mechanization and automation. And indeed, to visit the average Southern textile plant is to witness the very latest technology from Switzerland, Germany or Japan, managed by textile engineering graduates from Clemson, North Carolina State or Georgia Tech. Unquestionably, textile employment is not what it was a few decades ago — not even close. Nevertheless, the hemorrhaging caused by wage competition and globalization appears to have subsided, and the industry remains intact.

Long-run prospects for old Southern industries
In the 1990s, the new economy had a significant impact on many traditional Southern companies. While the long-term viability of every traditional Southern industry remains to be determined, it is clear in the short term that globalization and technology present as many opportunities as barriers.

What the New Economy
Means for Policymakers

In a January speech on the economy, Jack Guynn, president and CEO of the Federal Reserve Bank of Atlanta, discussed the new economy and what it means for policymakers. While acknowledging the new economy has various interpretations, he said that “its central principle is that globalization, productivity and any number of other things have dramatically extended the U.S. economy’s capacity for sustainable growth.”

What about the economy has not changed
Although he acknowledged that productivity has recently improved, Guynn said that policymakers still have a lot to learn about the various effects of globalization and its implications for conducting monetary policy. Personally, he said he particularly struggles with the idea that globalization has permanently rid the economy of inflation.

“Globalization does create relentless price competition,” Guynn said. “And yes, globalization has indeed played a role in keeping inflation low in the U.S. economy the last couple of years. But we need to keep in mind that the extraordinary loss of pricing power that many U.S. firms experienced was intensified by slack demand in many of our trading partners and an appreciating dollar.”

He added that while globalization can more quickly transmit a positive shock back to the U.S. economy, it can also transmit negative shocks that exert upward pressure on prices. “To what extent, I’m not sure. But it is entirely possible that globalization has not changed the economy quite as much as the last several years’ experience might suggest,” he said.

What has changed
Productivity has clearly increased, though, and that means that companies are working smarter, Guynn said. It also means that companies are empowering their employees to produce more goods more efficiently by investing hundreds of billions of dollars in computers, data processing networks, telecommunications and other equipment.

“The accelerated productivity seen since 1996, combined with labor force growth, does explain how the economy has been able to grow with negligible inflation over the last two years,” Guynn said. “And in my view, productivity gains show no signs of slowing down in the short run. In the long run, however, if productivity gains or labor force growth should slip, then the economy cannot continue to grow as quickly without a rise in inflation or a corresponding change in monetary policy.”

The importance of low inflation
Therefore, Guynn said, the labor market is at least as great a source of concern as the long-term sustainability of productivity growth. “Now while putting more people to work is surely one of the great dividends of the current expansion, there absolutely are limits. And when we finally are unable to bring new workers into the labor pool, growth will have to slow. Unless, of course, productivity can continue to accelerate. And it’s here where low inflation is absolutely vital.”

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