Multiple Economies, Same Geography
Note: This blogpost was started 3 years back in 2018. I somehow managed to not finish it and it went unpublished. I revisited this idea recently after listening to a podcast and finally managed to finish it :)
Life changed in myriad ways when I moved to Canada from India couple of years back. There were, of course, improvements in living standards, but also typical challenges in settling in. One of the major adaptations required was modifying certain mental models built over the years; something like getting used to the sunset before 5 pm in winter or removing mental link between sunshine and temperature (it can be sunny but -20 C)! But one of the key mental model which was disrupted was the price points for various goods and that lead me to this article.
Price point of goods vary across countries or even within countries and immigrants often compare prices with the home country while making purchasing decisions. Some prices such as commuting or street food were anchored at very low levels and it got time in getting adjusting to higher levels here. On the other hand, prices of meal at regular restaurant or clothing were comparable and in some instances even cheaper (though there was not much variation like in India). Anchor points often determine the choices one makes while spending — One can spend more on the things perceived cheaper, while one can be conservative spending on things perceived expensive. This outsider’s perspective made me realize that there is a fundamental difference in the price levels in most of the developed countries. Capex and opex prices are at comparable levels! Let me explain.
There are two main types of costs. Capex, costs for purchasing long term capital items which are consumed over long time - clothing, house, something which is consumed over a period for multiple times. In the balance sheets, they are typically amortized. And there are Opex, costs for purchasing short term expenses, which are consumed/used immediately- something like food, transportation. Keep in mind we are not talking about luxury or discretionary expenses.
I was always used to opex being much lower compared to capex — A bus ride or a snack at a restaurant will be at a fraction of the cost of buying clothes or furniture. This mental model was based on the fact that something to be used over a longer time is expected to cost more than something which is used immediately. However, in most developed countries the costs of one snack and the cost of one shirt can be in the same range or even cheaper. What could be reasons for this?
Has it to do with the nature of expenses, i.e., opex or capex? My friend Aditya pointed out that the differences are not because of the nature of expense itself, but it has to do with the “Ability to Outsource”. The expenses which can easily be outsourced to poorer countries or can be mass produced will be cheap, while those which cannot, will be expensive. Consider two opexes — Restaurant versus grocery. So labour cost in a restaurant in a developed country cannot be outsourced, but say production of grocery can be outsourced to developing countries. Hence, cost of grocery will be comparable in developed countries and developing economies. But since restaurant costs cannot be outsourced, they will remain high. Most capexes such as cloths or furniture can be outsourced to poor countries and hence are low cost.
This idea can be extended further to the developing economies like India — one can argue that multiple economies exist in the same geography in India, which enables one to outsource even opexes. There is an economy of poor (say Tier 2) and another economy of middle/upper classes (say Tier 1). Effectively I , being a middle class was outsourcing my stuff to the poor economy and thereby enjoying lower cost for things like transport, restaurant food, etc. This is one of the reason one can easily get maids in India. This Tier 2 economy has its own consumption points, which is also the reason for diversity of prices in India. e.g. you can have a complete meal in less than a dollar (which people from Tier 2 economy often access) and even at $100 at expensive restaurant (meant for Tier 1+).
This coexistence of economy has important implications on the way services are offered. Take an example of Uber. In developed country, the Uber driver has economic status similar to that of its rider. In fact, middle class people also drive Uber during hardship or to earn extra money. In India, Uber drivers are mostly from Tier 2 economy and hence, their income expectations are lower than say if a middle class Indian starts driving Uber. Hence, the incentives and cost structures for Uber drivers in India would be very different from developed countries. I wonder if any businesses (or Apps) are making conscious efforts to tap this outsourcing market, just like outsourcing from developed countries to developing countries has given rise to many business opportunities. One can think of say food delivery. But that it my opinion is just like Uber — changing cost structure of an existing business model. I wonder if there could be any business models which harness the advantages of 2 economies at different levels coexisting in the same geography.
Of course, this coexistence is possible because of income inequality, which most Governments would try to reduce. But in the meantime, people from Tier 1 economy will continue to reap the benefits of coexisting with an economy where they can outsource.
