Arthur,
Thanks for pointing us to Stephen Roach's articles. I have only dwelt on
the second one here. Maybe someone else will discuss the first.
I regard Stephen Roach, Morgan Stanley's chief economist and Director of
Global Economic Analysis, as one of the best economists writing today.
I've frequently noticed shoals of imitative articles by various economic
journalists following from some of his big pieces -- and that, as they
say, is the sincerest form of flattery.
The following article, found from somewhere recently by a member of this
list, is a good example of Stephen Roach's writing. Its chief concern is
what is being increasingly termed the "jobless recovery" of the
US. My main problem with it is that in listing what he calls the three
"mega-trends" that are affecting America (and also the rest of
the developed world) there is a degree of double-counting. To explain,
let me summarise them here using his key sentence in each case:
1. "A powerful confluence of three mega-trends is driving the global
labor arbitrage -- the first being the maturation of offshore outsourcing
platforms." (What he calls 'global labor arbitrage' is the current
predilection of business to outsource some of their labour to places with
lower wage rates.) (What he calls 'offshore outsourcing platforms' means
principally factory workers in China and telephone call-centre workers in
India.)
2. "E-based connectivity is the second new mega-trend behind the
global labor arbitrage."
3. The new imperatives of cost control are the third key ingredient of
this equation -- in effect, the catalyst that brings the global labor
arbitrage to life.
I would suggest that there's only one megatrend here. He is
'double-counting' when citing No 2 above. E-based connectivity has
already happened. It is just that certain sorts of businesses are taking
advantage of the existing internet to outsource call-centre jobs. There's
some more way to go in the further outsourcing of these types of jobs but
this will never be big sector. The internet will no doubt become cheaper,
more versatile and more widespread in the coming years, but the present
level of call-centre outsourcing is not likely to grow much larger. After
all, most of this call-centre sector has only recently developed anyway.
It is very much an appendage to existing businesses such as financial
services, utilities, retailing, etc. and these are not going to move
abroad because they depend on their customer base staying where it is
already -- within the source country.
Where e-based connectivity is likely to become a mega-trend is when
brand-new sectors of a significant size are developed that are totally
independent of their geographical sources and destinations. The two
really big ones I can think of are: (a) educational packages delivered
anywhere in any language and capable of distance-learning for anybody (of
normal intelligence) from the age of about 5 years of age to graduate
level; and (b) manufacturing packages delivered anywhere in any language
enabling recipients to set up and control manufacturing operations. In my
book, Introducing Computer Assisted Learning (Chapman and Hall
Computing, 1984) I thought that we'd have the beginnings of (a) already.
But I was premature. Apart from some pretty poor quality
distance-learning packages of limited scope, this new technology has
hardly started. As to (b), I can't see this happening until we have
new types of manufacturing which can, in fact, be widely dispersed around
the globe -- in other words, solar-based genomic methods of energy and
goods-production.
I would also suggest that No 3 is not a mega-trend. Cost control has been
going on ever since there has been significant economic growth -- say,
for the last 250 years. There's nothing new here, just a continuation of
the steady rationalisation (re-engineering) of costs that's always
ahppened. In view of greater international competition in the production
of mass consumer goods, cost control is more important than ever before,
but it can't necessarily be accelerated for that reason.
So we're back to Stephen Roach's No 1 megatrend, and there I have no
quarrel with him.
But let me now dwell briefly on his final paragraph:
"In the end, the choices are stark -- to look inward and protect the
“old way” or to look outward and encourage the “new way.” I would dare
say this dilemma is quite comparable to what farmers faced in the late
1800s as the Industrial Revolution blossomed. The same would have
probably been true of sweatshop workers when confronted with the assembly
lines of mass production in the early 1900s. The “rusting” of Smokestack
America in the early 1980s is a more recent example. At each of these
earlier critical junctures, there were no clear answers at what would
drive the next wave of job creation. America’s model -- one that fosters
flexibility, entrepreneurialism, innovation, technological change, and
investment in human capital -- always found that answer. The global labor
arbitrage forces the US and the rest of the developed world to rise to
the occasion once again."
This is an excellent parting shot. The only problem is that Stephen Roach
has no idea how America or other developed countries are going "to
rise to the occasion again". He mentions the previous adjustments
that were made but doesn't discuss the fact that what happened in
previous cases is that middle-skill jobs fell away each time, new much
higher-skill jobs were required and the broad mass of the working
population became less skilled than it was before -- despite appearances
such as better working conditions, etc. If there is to be a successful
adjustment by the developed world in the coming years as increasing
numbers of our normal consumer goods are made in the developing
countries, then more high-skill jobs will be required and even more
remaining jobs will be de-skilled (and with a growing under-class that
has to be supported).
But in case I seem too critical of Stephen Roach, let me dart to the
middle of his article and quote what I think is a quite brilliant aperçu:
"The asymmetrical impacts of the global labor arbitrage lie at the
heart of the great politgical debate now swirling in the United States
and elsewhere in the developed world."
In other words, the basic problem is that countries like China and India
will be able to supply large proportions of the needs of the western
world long before they are prosperous enough in their own right to be
able to buy the next generation of consumer goods and services (which,
presumably, the developed world is expected to supply by conventional
economists!)
Keith Hudson
<<<<<
THE GLOBAL LABOR SHORTAGE
Stephen Roach
A US-centric global economy is waiting with baited breath for sustained
cyclical revival. Central to such a growth spark is the time-honored
vigor of the great American job machine. That’s been missing up until now
but there are hopes this piece of the macro puzzle is finally falling
into place. Those hopes are not likely to be realized, in my view. At
work is a new “global labor arbitrage” -- a by-product of IT-enabled
globalization that is now acting as a powerful structural depressant on
traditional sources of job creation in high-wage developed countries such
as the United States. America’s jobless recovery could well be here to
stay.
There is a critical dichotomy between those who accept this premise and
those who don’t. At one end of the spectrum is the angst of the American
body politic. Consumers and their elected political representatives
remain deeply concerned about the persistent perils of a jobless
recovery. As a result, the very real and worrisome risks of a
protectionist backlash are mounting in the US Congress. At the other end
of the spectrum are increasingly frothy financial markets that believe
the worst is over and that hiring is now set to resume. The theory is
simple: A policy-induced stimulus to aggregate demand will eventually
require the supply of new labor. The September labor market survey has
given investors great encouragement that such magic is back in the US
business cycle and that the carnage on the job front has finally run its
course. I couldn’t disagree more. Employment growth of 57,000 is puny
when compared with hiring spurts of the typical cyclical recovery that
often run in the 200,000 to 300,000 range. Moreover, with nearly 60% of
the September gain in payrolls traceable to increases in temporary
staffing -- the fifth month in a row of solid hiring in this industry --
it’s a real stretch, in my view, to conclude that the days of this
jobless recovery are now nearing an end. Instead, I would argue that
America’s increased emphasis on a relatively low-cost contingent
workforce is emblematic of a new relationship between aggregate demand
and domestic employment that lies at the heart of the global labor
arbitrage.
A powerful confluence of three mega-trends is driving the global labor
arbitrage -- the first being the maturation of offshore outsourcing
platforms. China personifies the critical mass that has now been attained
in new manufacturing outsourcing platforms. Built on a foundation of
massive inflows of foreign direct investment -- China is now the world’s
largest recipient of FDI -- and domestically funded infrastructure, the
Chinese factory sector has become a critical ingredient in the global
supply chain. Fully 65% of the tripling of Chinese exports over the past
decade -- from US$121 billion in 1994 to US$365 billion in mid-2003 -- is
traceable to the outsourcing dynamic of Chinese subsidiaries of
multinational corporations and joint ventures. Of course, China is hardly
alone in the outsourcing business. Similar patterns are evident elsewhere
in Asia, as well as in Mexico, Canada, South America, and Eastern and
Central Europe. Outsourcing is hardly a new phenomenon. But today’s
offshore outsourcing platforms now offer low-cost, high-quality
alternatives to goods production and employment on a scale and scope the
world has never before seen.
A comparable trend is now emerging in the labor-intensive services
providing sector. Long dubbed as “non-tradables,” services are typically
perceived as having to be delivered in person, on site. That’s no longer
the case. Rapid growth is also occurring in the offshore outsourcing of
services. Such activities span the value chain -- from low-value added
functions such as transactions processing and call centers to high-value
added activities such as software programming, engineering, design,
accounting, actuarial expertise, legal and medical advice, and a wide
array of business consulting activities. Increasingly, service sector
outsourcing is shifting to intellectual capital -- heretofore thought to
be the sheltered mainstay of economic activity in the wealthy developed
world. India personifies the critical mass that has now been attained in
offshore services outsourcing. One study estimates that India’s
IT-enabled services exports will increase by ten-fold between now and
2007 -- rising from US$1.5 billion in 2001-02 to US $17 billion by 2008,
making it one of the fastest-growing major industries in the world (see
The IT Industry in India: Strategic Review 2002, published by
India’s National Association of Software and Service Companies in
conjunction with McKinsey & Co.). Nor is India alone. Services
outsourcing is increasingly prevalent in places like China, Ireland, and
even Australia.
E-based connectivity is the second new mega-trend behind the global labor
arbitrage. This is the first business cycle since the advent of the
Internet. Say what you want about the Web, but I believe it has been a
transforming event on the supply side of the global macro equation. For
manufacturing, it puts new meaning into the real-time monitoring of
sales, inventory, production, and delivery trends that drive the
logistics of global supply chain management. And it provides a new
transparency to the price discovery of factor inputs and upstream
materials and supplies -- offering efficiency breakthroughs never before
attainable. For services, the Internet enables outsourcing to penetrate
an entirely new realm of economic activity. The intellectual capital of
research, analysis, and consulting can now be transmitted anywhere in the
world with the click of a mouse. For example, a systems problem in New
York can be fixed by a software “patch” written in Bangalore. The results
of processing and analysis functions can be fed into real-time
information systems from anywhere in the world. The instantaneous
connectivity of the Internet has become the new pipeline for the global
information flows that drive the service sector supply chain. It allows
the knowledge-based output of information workers to be exported
instantaneously around the world. That permits well-educated,
hard-working, relatively low-wage offshore knowledge workers to be
seamlessly integrated into global service businesses, heretofore the
exclusive domain of knowledge workers in the developed world.
The new imperatives of cost control are the third key ingredient of this
equation -- in effect, the catalyst that brings the global labor
arbitrage to life. In an era of excess supply, companies are lacking in
pricing leverage as never before. As such, businesses must remain
unrelenting in their search for new efficiencies. Not surprisingly, the
primary focus of such efforts is on labor -- the bulk of production costs
in the developed world; in the US, for example, worker compensation still
makes up more than 75% of total domestic corporate income. And that’s
just the point: Wage rates in China and India range from 10% to 25% of
those for comparable-quality workers in the US and elsewhere in the
developed world. Consequently, offshore outsourcing that extracts product
from relatively low-wage workers in the developing world has become an
increasingly urgent tactic for competitive survival by companies in the
developed world. Mature outsourcing platforms, in conjunction with the
Internet, give new meaning to such tactics. General Electric’s so-called
“70-70-70” credo says it all: One of the world’s most successful
companies has the publicly-stated goals of outsourcing 70% of its
headcount, pushing 70% of that outsourcing offshore, and locating 70% of
such workers in India. With 16,000 workers currently in India -- about 5%
of its global workforce of 313,000 -- GE has only just begun to exploit
the global labor arbitrage as a means to achieve new efficiencies in
today’s intense competitive climate. Examples such as this suggest that
the arbitrage is only in its infancy.
These mega-forces are largely irreversible -- especially the first two,
mature outsourcing platforms and the Internet. The imperatives of cost
cutting could diminish once global supply and demand are in balance. But
in my view, that won’t occur for some time. In the meantime, the
resulting global labor arbitrage continues to have a profound impact on
job creation in the United States. Fully 22 months into economic
recovery, private nonfarm payrolls remain nearly 4.3 million workers
below the hiring trajectory of a typical economic recovery. The shortfall
has been spread equally between manufacturing and services; inasmuch as
the manufacturing sector accounts for only 13% of total private payrolls
in the US, America’s factory sector workforce is bearing a
disproportionate share of the pain. Some of this is undoubtedly
attributable to the post-bubble sluggishness of US domestic demand. But
there can be no mistaking the footprints of accelerated outsourcing. For
example, an 11.4% surge in real goods imports growth over the first six
quarters of this so-called recovery is far in excess of what might
normally be expected in the context of an anemic 4.2% increase in
domestic demand over that same period. In the case of the US, rising
import propensities and the concomitant outsourcing of jobs are the
functional equivalent of “imported productivity,” as the global labor
arbitrage essentially substitutes foreign labor content for domestic
labor input. In my view, that could go a long way in explaining the
latest chapter of America’s fabled productivity saga.
Half way around the world, there are clear indications of complementary
adjustments in Asia’s huge reservoir of labor -- workers that are now
being actively engaged in the outsourcing activities of the global labor
arbitrage. In China, foreign-funded subsidiaries currently employ about
3.5 million workers -- up more than 3.5 times over the past decade.
Moreover, another 3.25 million Chinese workers are employed by
subsidiaries funded elsewhere in Greater China -- Hong Kong, Taiwan, and
Macao. Similar trends are evident in services outsourcing. India
currently has about 650,000 professionals alone employed in its IT
services sector -- headcount that is expected to more than triple over
the next five years, according to the McKinsey study cited above. Nor can
there be any doubt that increased staffing by Indian subsidiaries of
multinational service providers is being matched by headcount reductions
elsewhere in their global platforms.
Outsourcing and globalization go hand in hand. But in an e-based world
with instant diffusion of new technological breakthroughs, the rules and
role of outsourcing quickly get re-written. Increasingly educated,
low-wage work forces in developing nations only enhance the globalization
of supply chains. Nor are prices and costs the only considerations in
shifting to offshore production. The textbook analysis of outsourcing
also stresses a variety of additional factors such as quality, supply
flexibility, on-time performance, replenishment lead time, inbound
transportation costs, design collaboration capabilities, information
coordination resources, supplier viability, as well as exchange rates,
taxes, and duties (see S. Chopra and P. Meindl, Supply Chain Management:
Strategy, Planning, and Operation, Pearson Prentice Hall, Second Edition,
2004). In my view, enabled by the Internet, the Chinas and Indias of the
world can now compete favorably on all of those terms. The result is an
accelerated pace of globalization on the supply side of the macro
equation -- the essence of the global labor arbitrage.
Yet this phenomenon is not without considerable risks. As I see it, the
global labor arbitrage underscores a profoundly asymmetrical aspect of
globalization. Offshore outsourcing is, indeed, an unmistakable
first-round opportunity for low-cost developing nations to enter the
supply side of global commerce. But their demand response typically lags
-- and possibly by a considerable length of time. China is a classic
example of how these asymmetries of globalization play out. Its
production-based growth dynamic is obvious but its demand response --
especially domestic private consumption -- remains weak. That should not
be surprising. Chinese reforms of state-owned enterprises continue to
result in ongoing layoffs of 6-8 million workers per year. Moreover,
without well-developed national social security and retirement schemes,
China is still lacking a viable safety net for its work force. In the
absence of job and income security, the emergence of consumer cultures
understandably lags. Today, China is about supply. Tomorrow, it will be
about demand.
The asymmetrical impacts of the global labor arbitrage lie at the heart
of the great political debate now swirling in the United States and
elsewhere in the developed world. The resulting tensions underscore the
distinct possibility that jobless recoveries may remain the norm in
high-cost developed economies for some time to come. That’s not something
to take lightly. The threat to traditional sources of job creation
strikes right at the heart of economic security. That has given rise to a
political backlash in the US Congress that could prove quite
destabilizing for the global economy.
In the end, the choices are stark -- to look inward and protect the “old
way” or to look outward and encourage the “new way.” I would dare say
this dilemma is quite comparable to what farmers faced in the late 1800s
as the Industrial Revolution blossomed. The same would have probably been
true of sweatshop workers when confronted with the assembly lines of mass
production in the early 1900s. The “rusting” of Smokestack America in the
early 1980s is a more recent example. At each of these earlier critical
junctures, there were no clear answers at what would drive the next wave
of job creation. America’s model -- one that fosters flexibility,
entrepreneurialism, innovation, technological change, and investment in
human capital -- always found that answer. The global labor arbitrage
forces the US and the rest of the developed world to rise to the occasion
once again.
>>>>
Keith Hudson, Bath, England,
<www.evolutionary-economics.org>,
<www.handlo.com>,
<www.property-portraits.co.uk>
