Keith,
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!)
arthur
"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!)
arthur
Spot
on. Maintaining effective demand will become all important. (whether
this can be done given energy, environmental constraints is another
matter.)
-----Original Message-----Arthur,
From: Keith Hudson [mailto:[EMAIL PROTECTED]
Sent: Friday, October 31, 2003 11:11 AM
To: [EMAIL PROTECTED]
Cc: Cordell, Arthur: ECOM
Subject: A critique of Stephen Roach (was Interesting think piece/report)
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>
