Globalise or Die?

I don’t know if he had Europe specifically in mind, but this is the message from Singapore’s finance minister Lee Kuan Yew in this interview in the latest issue of Yale Global Online. As he puts it:”If you’re not driven by profit, and do what the communists used to, which means price equals cost plus, then your economy will collapse.” Is this message being heard here in the EU? If the comments my posts on Indian outsourcing are anything to go by, it isn’t. And if the results of the survey mentioned in my last post are well founded, the consequences of this neglect may not be long in making themselves felt. To give a measure of where we may be on this one, France currently has China at number 16 on its list of trading partners, behind Peru. Turning your back on global supply chains won’t save your job, it will only completely finish it off.

The globalization of manufacturing has led to a massive redistribution of work around the globe, in the process turning China into the world’s factory. Similar developments are underway in the service sector, with jobs migrating to India, China, and other parts of the developing world. The disappearance of white collar jobs from the US has now added a new voice in the protectionist cry. The first impact was felt late last month when President Bush signed a bill that forbids certain parts of the federal government from outsourcing work to foreign companies. Many Asians are alarmed by the latest signs of creeping protectionism in the US. But Singapore’s wise-man-in-residence, Senior Minister Lee Kuan Yew, shrugs it off as a passing phase. Measures like this, he says, will make American companies uncompetitive and will force them to change. Protectionism may slow down the economic integration of the world, but economic forces make integration unstoppable. …
Under pressure from white-collar workers’ unions, state legislatures are currently drafting a dozen pieces of legislation banning outsourcing. On January 23 President Bush signed into law a provision that forbids the federal government from sending jobs overseas.

Asked about the impact of such a policy, weeks before it became law, Lee said outsourcing of jobs was unstoppable. “Suppose the Americans forbid this – ‘You can’t outsource’ – but the Japanese, Germans, British, French outsource, so their goods and services are cheaper. If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business. I see this opposition as a roadblock to slow it down, but it is unable to stop the forces that drive the economy. Economic forces are let loose and are not stoppable unless all the developed countries agree they will not outsource. Why should they agree?”

Lee adds that if one state prohibits outsourcing, “business will migrate to the next state,” because of how economic forces work. “So long as you are driven by profit to sell your goods at the lowest possible cost and to sell the maximum number of goods or services, how can you stop it?” But this focus on profit is precisely what many anti-globalization protesters complain about: in their race to the bottom, companies show a lack of social conscience. Lee’s response is simple: “If you’re not driven by profit, and do what the communists used to, which means price equals cost plus, then your economy will collapse.”

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

17 thoughts on “Globalise or Die?

  1. To give a measure of where we may be on this one, France currently has China at number 16 on its list of trading partners, behind Peru.

    so glad we’ll be able to save Peru from extinction by bringing it into the global fold…

  2. I would rather trade with people from Peru than people from communist China with all it’s human rights violations. All anyone in my country cares about is money. I admire the Euros for caring more about their employees than other parts of the globe. I am rooting for them to bring some much needed humanity to the business world.

  3. Ok, I too am happy for Peru if France can lend them a hand. But it is the future of jobs and living standards in France which I was pointing too. If France is ‘out’ of China, this is going to be important.

  4. Edward,
    I don’t seem to recall France having a dearth of ‘Made In China’ products from the last time I returned there…

    Do you suppose that all those products might be coming through another E.U. country and therefore not directly reflected in the France-China trade balance ?

  5. I don’t know what is the background Patrick. I think more than products the products you directly buy in Leclerc or Auchan etc, we are thinking here about what the Alstom’s, Vivendi’s, Alcatel’s, Thompson’s etc of this world are up to. But then again, I seem to have read stuff about at least two of these being in China.

    We are also talking about selling to China. I don’t know how the list was created, I only know that it is there.

    Put this another way, is outsourcing to China and India a big issue right now in France? If it isn’t then something is up. You could work back from that. Because if it is happening big time, then someone will be complaining. And if it isn’t, then, like I said, watch out for your job.

  6. Edward,
    Enough with the pseudo-economic scaremongering already.

    You might want to read Robert Cringely’s series on IT outsourcing, which he explores the issues rather more rigorously than you have, if not strictly from an economics perspective.

    1,
    2,
    3,
    4.

    I think he’s got a point that Outsourcing IT companies will probably end up shifting the world’s center for IT development from the U.S. to India to their own detriment.

    From an economic trade perspective, that means that as the U.S. buys more of India’s IT services, it will have to sell India more American products and services, or its currency will devaluate compared to India’s currency (making Indian I.T. services more expensive to the U.S.) or both at once.

    The U.S. could potentially profit from that, but that’s more of a long-shot than a forgone conclusion.

    I think outsourcing should be regulated so that the costs of retraining/redeploying cast-off employees should be borne by the companies doing the outsourcing. So that they aren’t profiting by externalizing their costs to be absorbed by a diminished local tax base.

  7. “world’s center for IT development from the U.S. to India to their own detriment”.

    I agree this is what will happen.

    “rather more rigorously than you have”

    Maybe, but I have got quite a bit on this on the Bonobo site, and over at living in India. Check out my India an Area of Darkness series.

    “it will have to sell India more American products and services, or its currency will devaluate compared to India’s currency”

    In the short term the Indians are more likely to fulfill their industrial needs in China, so this means the Indians will end up like the Chinese buying US and European (don’t forget this will apply just as much to Europe) debt.

    Then of course the euro and the dollar will need to come down mightily, and, if we haven’t thought of any other way of doing this by then, the Rupee will become the reserve currency.

  8. Good, I got back in to criticise my last comment myself before anyone else saw the seeming flaw in what I am saying.

    I went to bed last night and woke up with that ‘OH MY GOD’ feeling.

    You see I am saying OTOH that if you don’t accept outsourcing you lose your job.

    And OTOH I have just conceded to Patrick that, if there is outsourcing to India, guess what, you also get to lose your job.

    Well no. This isn’t exactly what I am saying.

    Firstly, I think there is an enormous ethical issue here. We in Europe and the US are being such awful hypocrytes if we keep pointing the finger at the third world, and crying poverty, while at the same time not giving them the possibility to find a remedy.

    India is finding one, and good luck to her.

    What does this mean for us in the EU? Well, despite what David says, I am not entirely gloomy. We have opportunities, if we embrace them. I am only ‘gloomy’ since I don’t see our current leadership ready to embrace very much that is really imaginative, and really interesting.

    We need to accept with dignity – balding with grace – that the current distribution of income, weath and power cannot continue. In accepting this we need to look for a coherent transition towards a different world order.

    In accepting the inevitability of the globalisation process, we are in part embracing that future. To survive we need to accept globalisation on two levels: opening up the supply lines, so we both give the third world a chance, and avail ourselves of cheap products into the bargain, and at the same time opening up our frontiers to the free movement of labour, which will enable our economies to better resist the shock of ageing populations.

    This way our economies can continue to maintain some dynamism, and we can improve our real standard of life. Having cheap information products from India and cheap industrial ones from China can, and should, be seen as a boon.

    The only real catch in all this is related to what happens to the relative values of the respective currencies, plus the impact of relative prices (deflation in the OECD).

    Here the only advice to young people would be not to get too much into debt, since it is endebtedness, not outsourcing, which may turn out to be the problem that drags you down, if relative prices fall, but the debts remain constant.

    This is all hellishly complicated. The issue is really whether we get a soft or a hard landing. But I hope that makes what I am trying to say a little bit clearer.

    On taxation, Patrick, I don’t see any special need for regulations about outsourcing. Obviously I think goverments do have (and always have had) responsibilities to try and ease the transition to new forms of work. But in the end the issue as to whether we do high value or low value work depends more on us than on governments. Setting up your own personal MNC has never been easier than it is now in services. Just go and get on with it. That is the message and the change of mindset we need here in Europe. But I guess this is at the root of the “who is responsible for what” debate I just had with Laura in my last Parmalat post.

    Meantime you might like this postof mine on Bonobo:

    http://www.livingontheplanet.com/bl/archives/000153.html

  9. On taxation, Patrick, I don’t see any special need for regulations about outsourcing.

    I think that outsourcing for the sake of a wage differential is a faulty, risky strategy that should be discouraged. Not unlike cigarettes being taxed to discourage smoking.

    Obviously I think goverments do have (and always have had) responsibilities to try and ease the transition to new forms of work.

    That’s an assumption that doesn’t seem to have a historical basis.

    But in the end the issue as to whether we do high value or low value work depends more on us than on governments.

    As I’ve spent more than half my life in publicly-funded and government-regulated schools, I can’t say I agree.

  10. “I think that outsourcing for the sake of a wage differential is a faulty, risky strategy that should be discouraged. Not unlike cigarettes being taxed to discourage smoking.”

    I think it’s clearly a business decision that should be left up to the individual managers in question. In some cases it makes a great deal of sense, in some it amount to chasing after a momentary advantage or throwing away human capital. In neither case, however, is a bureaucrat at arms-length or a cookie-cutter policy of discouragement the appropriate response. If the managers blow it, they’ll hang for it soon enough and their non-outsourced competitors will benefit.

    Bernard Guerrero

  11. Bernard,
    Just like smoking should be an individual’s decision because Individuals will not make choices that are adverse to their own health. And those that do, they’ll die from it soon enough and non-smokers will benefit (from the social security benefits that smokers wont be collecting, no doubt).

    Obviously, the arms-length cookie-cutter bureaucratic policy of taxing cigarettes sky-high to discourage smoking is an inappropriate response.

    Have you by any chance read Rubin/Weisberg’s In an Uncertain World?

  12. “more than half my life in publicly-funded and government-regulated schools”

    Maybe it’s time to get out, before the fiscal crunch really hits you. Just a thought.

    “doesn’t seem to have a historical basis”

    Having a responsibility, and doing something about it are two different things.

  13. Patrick,

    “Just like smoking should be an individual’s decision because Individuals will not make choices that are adverse to their own health. And those that do, they’ll die from it soon enough and non-smokers will benefit (from the social security benefits that smokers wont be collecting, no doubt).”

    My point exactly. Long live the RP-2000, and let the devil take the hindmost! (Falling behind due to a hacking cough, no doubt…)

    “Have you by any chance read Rubin/Weisberg’s In an Uncertain World?”

    Can’t say that I have. I’ll look it up, though if the main point is that I should worry about bad individual outcomes as long as they are not to my own personal detriment, I imagine the authors will have their work cut out convincing me.

    Consider the case of MCI, for instance. Ugly accounting and bad business decisions (not entirely unrelated phenomena, BTW), a bankruptcy, the shareholders get wiped-out and now the competitors are whining about how unfair it all is. Tough noogies, business isn’t fair. As a consumer, I’m perfectly happy to see further pressure put on the remaining competitors to lower prices because they have to compete with the new MCI. Justice has been served, the ultimate owners got crushed for not paying more attention to the folks they hired to run their business, Bernie E. is gonna go to jail along with some cronies, and I get a cheaper phone bill. All’s well that ends well…

    Bernard Guerrero, non-smoking individualist

  14. Edward,
    Maybe it’s time to get out, before the fiscal crunch really hits you. Just a thought.

    It’s a matter of timing.
    At the risk of participating in my own
    Greater Fool Theory demonstration:
    If the fiscal crisis happens within the short-term (1 to 2 years), I can’t get out ahead of it.

    Beyond that, assuming Bush loses the election, the risk hinges on how effective Bush’s successors will be in fixing the damage before the Baby Boomer load crunches the Social Security system.

    In a lecture I saw a few months ago via the web, Krugman thought that while the crunch would occur in 2010-2013, the Bond market would balk before then, at the point when they’re finally convinced that the crunch is inevitable, or nearly so. Perhaps 2008, perhaps later, perhaps sooner.

  15. Bernard,
    My point exactly.

    I was being sarcastic; People tend to overvalue the short-term biochemical effects of smoking, and undervalue their long-term health. High tobacco taxes are the economist-approved method of discouraging smoking, so as to lessen the 3rd-party externalities. And the evidence suggest that it works.

  16. Globalize or die? In response to the original post, I think that people in Europe need to accept that they are nothing special. Nor are the people in India or China. If you reflect about the word ‘human resources’ for a moment, it should become clear that we all take ourselves too seriously. In the economy, we are a resource, just as land and capital. We do not live in a void where the laws of supply and demand do not apply. To the contrary, we need to come to understand that we are just factors of production. Sure, personally, we are human beings with feelings and social contacts. But in the corporate world, we are merly a resource. Depending on whether you work in an office or on the factory floor, you either contribute to manufacturing overhead or direct labor.

    So, capital is mobile and markets are efficient. If companies are outsourcing to India and China, they have a competitive advantage by doing so. If you are afraid that your job will be exported, now is the time to specialize and get more education. Not all jobs in Europe will vanish so one might consider a career in a job that is unlikely to disappear soon. Let’s consider a few examples:

    1.) Not all manufacturing activity will disappear from Europe or the U.S. Construction activity, for example, cannot be outsourced offshore. Also, manufacturing in China confronts companies with longer lead-times, possibly variances in output quality, and import duties. Here, I think the competitive threat to European manufacturing comes by far more from Eastern Europe than from the Far East.

    2.) Some elements in a company’s value chain need to be locally present. They cannot be shifted abroad due to the basic laws of physics and cost/benefit assumptions. Shared financial service centers, for example, need to be locally staffed since you probably won’t find people (even in India) willing to do e.g. tasks in Accounts Receivable in night shifts. Also, marketing and sales need to be at least locally present, especially in the business-to-business market.

    3.) Almost all of the service-sector jobs are locally staffed. Your barber does not compete with someone in Shanghai. Same goes for your restaurant or your lawyer.

    So it is not all just doom and gloom around here. However, the next foreign languagen I will study will be Mandarin Chinese. If business becomes increasingly international, you better become too because otherwise, you are not a relevant resource anymore.

    These are just my thoughts, not a polished essay where every thought is expressed to the deepest and clearest extent. However, I do invite everyone to share their thoughts with me. We can only expand our knowledge and extend our views by communication.

  17. The real problem is that the US dollar is overvalued. If it weren’t overvalued, we wouldn’t have the huge trade deficits that we do.

    If the dollar falls 50% relative to the rupee, the Indian programmer just got 100% more expensive. If the dollar falls 50% relative to the yaun, those Chinese imports now cost twice as much. If the dollar kept falling, at some point, Americans would cost as much or less than the Indians and Chinese.

    Countries like China can play stupid currency games by buying dollars. This changes the situation, because now instead of a rising currency making their exports more expensive, an overheating economy and inflation make their exports more expensive. Either way, their exports get more expensive.

    Why will the dollar fall? Supply and demand. The US is flooding the world with dollars with its 500-600 billion dollars a year trade deficit. More outsourcing will increase the trade deficit.

    Some have argued that the US will export all of its jobs. The US cannot export all of its jobs to outsourcers. At that point, the US would be producing nothing and the value of the dollar would be worthless. At that point, the US companies could not afford the then infinitely expensive Indians and Chinese.

    Outsourcing will eventually go away as an issue. Outsourcing and the trade deficit will lead to a falling dollar, which will make the Indians and Chinese a lot more expensive than they are now.

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