Even artificial intelligence needs ores.

Market economy is in itself a?system which has the winners and the losers.

In the spotlight of this year`s events and awaiting what the next year holds in store for European economy, I?thought of one well-known statement which is as follows: Should you know what the future holds in store, just look back into the past.

This is a?case not from the view of historical events, but also from the view of economic development which is not somehow connected with the social and political development as one might think of.

During the last decades there prevailed an opinion or there still prevails an opinion that an economic development is shifting from a?low value-added economy to the one with a?high value-added product and a?part of economy which is perceived as awkward for western world is shifting toward countries which rank lower on a?hypothetical scale of economic development. And a?human ingenuity, work or invention contained in the product is deemed an added value.

In the last couple of years, this trend is hampered by a?one obstacle which being successfully ignored and that is the fact that even the most sophisticated and state-of-the-art product needs to be somehow physically manufactured and made of basic raw materials. Even Chat-GPT needs for a?proper functioning a?PC which needs microchips that are made of silicon when I?am even not speaking about the fact that anything needs energy.

Even the most sophisticated product needs to be somehow physically manufactured.

Market economy is a?system which has both the winners and the losers. I would argue for hours if it were wrong or right. However, this is undoubtedly a case for market economy. Production capacities are concentrated in the locations where a manufacturing is among the most effective one which basically means that the manufacturing is among the cheapest.

When we combine these factors together, basic raw material production capacities, which are necessary for each product and power generation, are heavily concentrated in the geographical regions outside the developed countries which are becoming more and more dependent upon them. This leads to?several crucial disadvantages. The most discussed one in today`s days is the one dealing with the comparison of strict environmental standards and regulations in the western countries with the ones where these regulations and standards are not so strict. I?do not mean that discussing this topic further is a?must. In the last year, numerous discussions were made, and numerous publications were issued dealing with this topic which primarily heads toward a worldwide social consensus. I would point out a vulnerability which developed countries had been exposed to, especially in the light of the last geopolitical conflicts we saw.

And here comes the view into the past which I?mentioned in the beginning, and which could foreshadow what could happen if we persist in the established trends. I?do not mean to waste your time with listing particular examples. However, to sum up, I could mention the economic thesis dealing with the concentration of added value in the supply chains. It says that added value is undoubtedly concentrated in the part of a supply chain which has access to the most limited resource used by the supply chain itself. In real life, it is simple. The most state-of-the-art automotive industry in the world is useless if, for a production of the car, you need a microchip which you are not able to manufacture and there are only a few producers of these microchips in the world. Sooner or later a part of your added value would be shifted toward the microchip supplier and this part will not correspond with the added value ratio. The same is the case for electric vehicles and batteries needed for their proper functioning. It is undoubtedly useless to have a gigafactory in each district if we would not be able to manufacture metals such as lithium, manganese, or cobalt. In case of any boycott or conflict, the only thing we would have, would be the storage & warehousing areas and we would have around three months to pick up a bicycle.

Of course, a?question arises: what now? Is there something which could be done with that? Honestly, I?do not know if it is too late and some deep change needs to materialize as it happened many times in the past to reverse this trend which literally means that a?far worse needs to follow to eventually be better. However, as I?am always cautiously optimistic, I?believe that we could still turn the page. We need to shift from the value-added economy to the one that is complex where we will have a?critical part of our complex resources at our disposal within one economic system to manufacture not only the most sophisticated products, but also the most basic ones. Unfortunately, today, I?do not see any social consensus on this change. However, should the consensus be built on a healthy, peaceful, and expert discussion, we would still be able to catch up with it.

Branislav Klocok, General Director, OFZ, a.s.