Today's date:
Winter 2008

Globalization Bites Back

Spring 2004

Jamnagar, India — Lenin, as usual, had it wrong. He thought that imperialism was the "highest stage" of capitalism. In fact, imperialism spawned an array of competitive capitalisms, most notably in East Asia— Japan, the Tigers and now, especially, China.

Similarly, globalization is turning out not to be the enemy of the poor countries but their main route out of poverty. Despite the loud protests from Porto Alegre to Mumbai, liberalized trade, though it has exacerbated inequality, has lifted more people out of poverty than all the post-colonial revolutions of the 20th century combined.

According to AT Kearny, between 1980 and 1990 alone, global poverty rates fell by more than half—from 34 percent to 17 percent—as a single decade of economic progress lifted 573 million people above the absolute poverty line. At the same time, the middle class worldwide saw its median income rise by roughly 15 percent.

The most substantial gains occurred in Asia, where China's continued development added significantly to per capita income growth. By 1990, 8 of every 10 people in the region lived above absolute poverty, up from only 5 in 10 a decade earlier. Over the same period, the poorest tenth of Asia's population saw median income rise by 58 percent.

This reality was noted in a World Economic Forum study group chaired by Jagdish Bhagwati and Ernesto Zedillo, the former president of Mexico, in 2001. They reported a "great reversal": those in the poor countries were beginning to see globalization in a positive light while those in the rich countries were becoming anxious.

However, the real turning point came just last year. With China's entry into the World Trade Organization, the balance of global economic power has shifted, as witnessed by the "failure" of the Cancun meeting when China, India, Brazil and South Africa joined together to frustrate the European and American agenda. As one result, agricultural subsidies in the United States and Europe are under great pressure to be removed while opening of markets to financial services has been put on the relative back burner.

The insistence on a fairer regime of liberalized trade by the new players is turning the tables. It is now a two-way street.

The now spotlighted shift of outsourcing from manufacturing to white-collar professional services to India and elsewhere shows that higher value jobs can also be globalized.

In short, globalization has come back to bite its Anglo-Saxon free market sponsors. The global middle class promised by wired globalization and liberalized trade barriers is in the making.

WAL-MARTIZATION AND OUTSOURCING | The birth of this global middle class, however, coincides with a relentless squeeze on the American middle class. The internal American restructuring which has swept away industry in the "rust belt" and sent manufacturing jobs abroad for 20 years has fairly decimated the union-wage middle class in the American heartland.

Waves of technological innovation and downsizing over the past decade and a half have already destroyed the security of life-long white-collar employment in one career and one corporation that John Kenneth Galbraith thought the stable norm nearly half a century ago.

In the wake of these changes, both parents have been pushed into the workforce to maintain a single middle-class standard of living. Without broad unionization or reliable long-term corporate employment, health care and retirement benefits also are being lost or threatened. Thirty percent of all Americans now lack health benefits in a system where costs are rising daily. And this at a time when Federal Reserve Chairman Alan Greenspan tells baby-boomers now on the verge of retirement age that their Social Security will have to be cut even though they will live longer than any of their ancestors.

Marketing innovations by the giant retailers of globalization such as Wal-Mart are tightening the squeeze. They sell low-priced goods from abroad out of vast warehouses staffed by ill-educated, non-unionized low-wage workers with few benefits.

This Wal-Martization of America (it is now America's largest company) places heavy downward competitive pressure on well-established retailing industries. In California, 70,000 unionized supermarket workers went out on a costly five-month strike to keep health benefits from being cut, which their employers said was necessary because Wal-Mart, which is opening 40 new stores in California, was outcompeting them on prices. In the end, the union was forced to concede current-level benefits for future workers.

Now comes the outsourcing of software and telemarketing jobs, most prominently, to India. Though small in proportion to overall job loss the issue has become a lightning rod against globalization. The impact on India may also be limited. By 2015, Forrester Research estimates 3.3 million jobs will be outsourced, mostly to India. Yet, 9 million people come into the job market every year there.

Americans had assured themselves, with support from that compelling apostle of globalization, Bill Clinton, that no matter how many unpleasant jobs they lost, their economic future was secured by their competitiveness in IT and services. If that future, too, is no longer secure, then for many it is the last straw.

During the Democratic Party primaries over the past few months, as a result, the two main perceived threats to economic security were uttered in nearly the same breath: Wal-Mart and outsourcing to India.


Several points need to be made about this backlash:

  • Pro-free trade economists argue that goods and services produced from abroad by outsourcing raise the productivity of companies and lower the price to the consumer, thus equaling a wage increase. This is true as far as it goes, but it ignores the fact that along with the outsourced job goes health and other benefits (indeed a key motivation of moving professional jobs abroad is to limit the hefty health care and pension costs, not just pay lower wages).
  • What the backlash ignores is what economic studies have shown for decades: Most jobs are lost to technology, not trade. This should also be a warning for Indian insourcers: Outsourcing—by its nature suited to standardized services, not personal services—is only a waystation to the technological replacement of jobs. Inexorably, any task that can be standardized will be performed more cheaply by technology.
  • US census data shows that household income increased by 1/5 since 1980. This is true, yet the high-ticket non-tradable items that dominate household budgets—housing, health care and college tuition—more than doubled in that same period. A family income of $96,000 a year is needed in California now to purchase an entry-level home, the median price of which is approaching $400,000. Savings on cheaper electronics and other consumer goods from the tradable sector pale in comparison to the increasing costs of these key items.
  • Studies by Rafiq Dossani of Stanford's Asia Pacific Research Center show that outsourcing to India is really better described as "cross-sourcing" because of the mutual leverage involved. Higher end software customization jobs in Seattle or San Jose rely upon and are enabled by lower end standardized programming work done in India on a 1 to 2 basis. And 52 percent of Infosys investors, for example, are from abroad, outside India.

While Americans complain about outsourcing, Indians complain about brain drain. All those doctors and software engineers gone to work in the US are a result of Indian public investment. In this sense, the diaspora professionals from India are a form of direct foreign investment in the US.

But it doesn't end there, as some Indian diaspora professionals in the software field are moving back to India, or investing in Indian companies. Microsoft is just about to open a new campus in India comprised mainly of Indians relocating from the Redmond, Washington, facility. This manner of reverse outsourcing is really brain-drain recycling.

INTERMESTIC REALITY: SOCIAL POLICY AS FOREIGN POLICY | So far, the mainstream Democrats have not focused on protectionism per se, but on keeping jobs in the US, through training programs, "wage insurance," advance notification of outsourcing plans, prohibitions on outsourcing by federal contractors and elimination of tax breaks on overseas profits. And, in reality, costs are so much lower abroad that little can be done to keep them in the US in the long run.

Even Robert Reich, the former labor secretary, says free trade means more jobs, just a different mix. Bill Clinton, like British Prime Minister Tony Blair with New Labor, really did transform the Democratic Party to ideologically accept globalization as essentially beneficial.

Democrats, in other words, want both globalization and more jobs through some kind of adjustment strategy.

By making jobs and the economy nearly equivalent with foreign policy during his first term, Clinton instinctively sensed the intermestic nature of globalization. Thinking of social policy as foreign policy is the next step.

Indeed, adjustment to globalization must mean more government for America, not less. The alternative to protectionism is a set of policies that answer the anxieties of the middle class. That means first of all a broader safety net (universal health insurance, solvent Social Security, etc.) and a new round of public investment in education and infrastructure, such as deep broadband penetration, as the platform to keep America innovative and competitive. Most Americans trust the entrepreneurial culture to take care of the rest.

It is scandalous that South Korea has a deeper broadband penetration (more than 50 percent of households) than California, the home of Silicon Valley and the information revolution.

California, for example, needs a new wave of public investment similar to that undertaken in the late 1950s by Gov. Pat Brown, who built the university-community college system, the freeways and the pharoanic-scale canals that brought water from the north to the parched Central Valley and south. It was that infrastructure that formed the takeoff platform for the last 40 years of prosperity.

This is far easier said than done. Not only are there federal deficits as far as the economic eye can see, but the rise of the tax-averse short-term fixation of consumer democracy bridles at the very notion of collective investment in the future.

As Seoul wires up broadband to every house, Bangalore builds business parks and China lays millions of miles of roads and raises state-of-the-art regional airports, California is raising the community college fees for the children of Mexican immigrants trying to move up the value-added ladder in order to cut the car tax for SUVs that guzzle gas. That is disinvestment, not investment.

Not to prepare for the future will leave no political alternative but protectionism when the crunch comes. If it comes to that, a middle class rising in India through outsourcing and other benefits of globalization will surely be one of the victims.