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Globalization round 2---offshoring « Previous | |Next »
April 24, 2006

In the 1990s globalization meant that developed-country economies, such as Australia's, faced threats to their manufacturing base with disappearing blue-collar jobs (factory workers). The political reaction fractured into left-wing antiglobalization advocates and right-wing isolationist/protectionist advocates.

The policy solution--and it made great sense at the time--- was for Australia to make the transition from the old economy based on manufacturing to a new economy with its service or IT base and its white-collar jobs that required higher skills and educational qualifications.

Globalization today means that the service or IT economy with its white-collar jobs is under fire.The Australians performing them will be in competition with people in Bangalore or Bangladesh who will do the same work for a whole lot less. As Joergen Oerstroem Moeller argues at Asia Times online:

Education, skills and even performance do not protect jobs from outsourcing....White-collar workers used to be the elite troops of globalization. For them it was almost entirely beneficial: no risk of losing jobs, but considerable gains from lower consumer prices. Now, these professional workers suddenly realize that their jobs may also be in danger.

White collar jobs ranging from call centers to software engineers to medical technicians are being "offshored" to say India. Suddenly, the programmers share the fate of millions of industrial workers, in textiles, autos, and steel, whose jobs have gone offshore.

No doubt we will begin to hear the high-tech horror stories -- the pink slips and falling wages--- in the corporate media and the prospects for Australian, the computer graduates prospects narrow as they peer into the future, the academics start talking about the disappearing middle class and many middle-class Australians, instead of looking ahead to a brighter future for the next generation, will worry about slipping down the economic ladder.

The solution. Retraining at great expense to become real estate agents and divorce lawyers. Or go work offshore.

| Posted by Gary Sauer-Thompson at 4:33 PM | | Comments (7)


I don't agree with that. The parts of those industries that can be commoditised may go off-shore but there are parts that are still provincial. In the US for instance, Dell has had to re-instate American call-centers for its business customers. Which is a provincial response to the needs of its provincial (ie American) customers.

In software if you can hold down the requirements for long enough to write a large system spec document then it is a candidate for out-sourcing. If a relatively static requirements document can be written it means the interface between business model and development team doesnt have to be real time. It makes little difference if the software is delivered a week in the future or a year.

If the business model isnt changing then it is not the mission critical or rate determining step in the business making money.

The thing to recognise is what is commoditised and what is not. Manufacturing got commoditised with SPC (Deming's satistical process control). It doesnt matter where the product is made as through SPC the quality level can be monitored to make provincial skills (training/education) irrelevant.

In the case of static software requirements it is the same thing. The requirements document determines the final interface and as long as that interface is met then it does not matter how it was achieved.

the last sentence was meant to be a joke or ironical.

Sure it is the more routine part that is off-shored? So the software that is going to be sent off shore whilst the design creative parts are kept in the developed economy--say Silicon Valley. Is that right?

But this report tells a more complicated story---an Indian Silicon Valley has already happened.

Doesn't that have implications for industry policy in the US and Australia.

The Chinese in particular understood that in order to attract foreign investment they needed to create an economic environment that western businesses and its managerial class would find too irresistible not to take advantage of - inexpensive and well educated compliant non-unionised labour, non existent pollution and labour laws, cheap energy, good transport infrastructure, stable authoritarian govt. By pegging its currency to the US dollar it was able to fix the cost of its labour on the international market and protect its economy from foreign manipulation while it industrialised.

In a free market system, when an industrialising country like China prices it's labour well below the labour of other nations how do these nations compensate for the enormous wage differentials that lead to businesses and jobs moving offshore?

There's no easy solution to this dilemma. Some nations will try to make their own economic environment more attractive to capital through measures that reduce wages and other manufacturing costs. Other nations will look towards nationalist policies such as protectionism, competitive currency devaluations and other measures of economic warfare. It's possible that Chinese labour will at some stage organise to seek better wages and living conditions, as did their western counterparts in the late 19th century.

I fear that we maybe slowly descending into a period of dog eat dog capitalism. I'm not talking about the laissez-faire capitalism of the 19th century that saw robber barons send child labour down mine shafts because the free market labour laws of that time allowed them to, but workers constantly under pressure to work longer hours and for less pay. Trying to stay ahead in an extremely competitive domestic and international labour market. Offshoring of technological jobs such as IT, medical research, engineering, biotech, etc is often discussed from a company cost cutting point of view, however it also serves to reduce wages making labour here in Australia for instance, more cost competitive in the global arena.

With the advent of offshoring, IT wages in Australia have remained fairly flat for the past 5 years, meaning they have fallen in real terms. Govts, and I guess quite a few IT professionals would agree that it's better to retain jobs at lower wages then to lose them altogether. In tight labour markets offshoring can also become a viable alternative to skilled immigration as a way of keeping the lid on wages. Offshoring has been popular with large corporations, however for small and medium businesses the setup costs are at this time are too prohibitive.

A negative effect of IT job offshoring has been a 35% drop in university IT enrolments, no doubt that this has led to the loss of teaching jobs. Creativity and ingenuity cannot obviously be offshored, this is one area that the west will seek to maintain its lead by spending more money on education and research.

During the last two decades, many countries have followed a more stable monetary policy, cut marginal tax rates, deregulated labour markets, reduced tariffs, eliminated exchange rate controls, and attempted to expand trade through membership of the WTO and through FTAs.

I recall reading an article a couple of years ago regarding a meeting of EU economists. The Brit economists stated that Germany, France and Italy needed to whole heartedly embrace these neo-liberal economic policies as pursued by the countries of the Anglosphere in order to boost economic growth and avoid economic and social decline. The French economists retorted that these policies might have boosted economic growth in the short term, but at the cost of increased private debt and trade deficits. What they were saying was, in effect Britain's growth had been fuelled by increases in consumption that was financed by debt. Britain recorded a 114 billion dollar trade deficit for 2005 (6% GNP), and it would have been worse without north sea oil exports.

Both US, Britain and Aust have in the last 15 years experienced a massive increase in real estate prices fuelled by debt and speculation, which in the major capital cities, has priced most low income workers out of the housing market. Also much of the debt accumulated over this time has not gone into plant, equipment and business ventures, but into financing consumption of goods and services. These policies have also lead to a significant redistribution of wealth away from labour towards capital.

In Australia our answer to our increasing current account deficit has been to dig more holes in the ground and to attract more students and tourists to our shores. We're increasingly having to rely on mining, agriculture and tourism to pay for our consumption. We have a massive trade deficit with the US in technological and cultural (TV, film, internet) goods and services - the free trade agreement was a dud. I'm saddened that the last film produced here that attracted any international interest was Shine, and that was over ten years ago.

This is not a case of self-loathing, I'm just pointing out that our shift to neo-liberal economic policy over the past 20 years hasn't exactly been a shining success story. The debt itself isn't a negative; it's the ability to service the debt that is the issue. Many Australians (particularly those that have recently acquired mortgages) will be in financial trouble if interest rates continue to move upwards to reflect the current account imbalance. The situation isn't being helped by the increasing price of crude oil, given our reliance on imports.

Good post Gary and good comments Steve. It's easy to fall into simple positions with this and it's not a simple situation at all. As I've commented before, the people who make the policy decisions are not the ones who bear the brunt and we do not have a solid tradition of transitional support schemes in this country. With the exception of some investment to support commodities exports, most of the 'investment' in Australia is going into residential housing which is unsustainable long term.

The interesting bit will come as China and India climb the development ladder and their costs of production start to approximate those costs elsewhere. Already manufacturing investment in China is heading to the less developed western parts as the coastal centres become too expensive.

It's about whether the neo-liberal Washington Consensus model holds in the longer term without a reversion to full-blooded protectionism. I don't know the answer.

India is not the only place where White collar jobs are heading. Pakistan and Phillipines are catching up very fast too and now China is also getting serious to have a share in the pie. Well, Nearly 800 Americans are working or interning at information technology companies in India, and may be Australians will follow too.

you may find this report by Steve Roach interesting, even though it does not address the Australian situation. It says:

Billed as the great equalizer between the rich and the poor, globalization has been anything but. An increasingly integrated global economy is facing the strains of widening income disparities - within countries and across countries. This has given rise to a new and rapidly expanding underclass that is redefining the political landscape. The growing risks of protectionism are an outgrowth of this ominous trend.

We saw that with the rise of Hansonism.

Roach says that tt wasn't supposed to be this way:

Globalization has long been portrayed as the rising tide that lifts all boats. The surprise is in the tide - a rapid surge of information-technology-enabled connectivity that has pushed the global labor arbitrage quickly up the value chain. Only the elite at the upper end of the occupational hierarchy have been spared the pressures of an increasingly brutal wage compression. The rich are, indeed, getting richer but the rest of the workforce is not. This spells mounting disparities in the distribution of income - for developed and developing countries, alike.

It is what we are experiencing in Australia isn't it despite the continuing economic growth?

What is more the Howard government is fotering their growing income disparities through its IR reforms.

Steve Roach at Asia Times Online says that:

The Internet has forever changed the competitive climate for most white-collar knowledge workers. Courtesy of near-ubiquitous connectivity, the output of the knowledge worker can now be e-mailed to a computer desktop from anywhere in the world. That brings low-cost, well-trained, highly educated workers in Bangalore, Shanghai, and Eastern and Central Europe into the global knowledge-worker pool. That's now true of software programmers, engineers and designers, as well as a broad array of professionals toiling in legal, accounting, medical, actuarial, consulting and financial-analyst positions.

We should add Pakistan and Phillipines in the light of Razib's interesting comments. Roach then goes on to explore the effects of this in terms of real wage compression in the US:
Within this global pool of like-quality workers, a powerful arbitrage acts to narrow wage disparities. As a result, real-wage compression in open economies such as the United States has moved rapidly up the value chain - sparing an increasingly small portion of those at the very top of the occupational hierarchy. In short, the IT-enabled global labor arbitrage is a guaranteed recipe for mounting income inequality

My guess is that this is also happening in Australia.