Who Wins and Who Loses as Jobs Move Overseas?

(Longer Version)

ERIKA KINETZ / NY Times 8nov03

Erika Kinetz: How big an issue is job migration?

Stephen Roach: Offshore outsourcing is a huge deal. Twenty-three months into recovery, private sector jobs are running nearly 7 million workers below the norm of the typical hiring cycle. These are shortfalls we have never seen before.

In China foreign-invested enterprises employ about 3.5 million workers. That number has grown 3 to 3.5 times over the past decade. Add in the subsidiaries funded out of Hong Kong, Macao and Taiwan, you've got another 3.25 million workers. Employment in the informationa technology business in India is 650,000 right now and is supposed to go up another three to four times in the next five years. You've got a triangulation of evidence which suggests America is short of jobs as never before and the major candidates for our offshore outsourcing are ramping up employment as never before. So, yes, I think two and two is four.

Diana Farrell: This is a big deal in that we see something structural happening. But I would react to the notion that it is a big deal we should try to stop or recognize as anything other than the economic process of change. I think the bigger deal is the fact that we are going to have very serious curtailment of the working-age population.

Josh Bivens: I'm curious about Steve's assertion that outsourcing can explain the sluggish employment situation. If you just look at slow growth plus fast productivity, you've got the sluggish labor market right there.

Roach: A pick-up in productivity does not have to be accompanied by sluggish employment. There are countless examples, like the 1960's and again the 1990's, of rapid productivity growth accompanied by rapid employment. The point is that the relationship between aggregate demand and employment growth looks to me as if it has broken down. That breakdown reflects not just the rapid growth and maturation of outsourcing platforms in places like China and India, but also the accelerated pace by which these platforms can now be connected to the developed world through the Internet. These are brandnew developments. This is a huge challenge for service-based economies, like the United States.

Bivens: How much of the insecurity that people think is caused by servicesector outsourcing is in fact just the business cycle as usual? Every time there's a recession, people want to blame it on some underlying structural factor, when sometimes recessions are just recessions, shortfalls in demand that work themselves out. I'm still pretty agnostic as to whether most of the job loss is cyclical or if there is something deeper going on.

Roach: We had a China-style GDP growth in the U.S. in the third quarter of this year. In the September to November period, employment has turned up, but many of those jobs came from the temporary hiring industry. These are service jobs, contingent workers without benefits and significantly lower pay scales. We're getting the GDP growth, and by now any recovery in the past would be flashing green on the hiring front. This one isn't.

With all due respect, I don't know what you guys are talking about. This is a profoundly different relationship between hiring and the business cycle. And I think these jobs are, by in large, lost for ever.

Kinetz: Nearly 2.8 million jobs have been lost since George Bush took office in January 2001. In response, he has offered some fairly conventional economic medicine: tax cuts, deficit spending and low interest rates to jump-start a business recovery, which will ultimately create jobs. With the added element of outsourcing, is this kind of calculus still applicable today?

Farrell: Across countries, not just the U.S., the policies you describe are helpful on the margin. But the real engine of productivity growth, which leads to long-term sustainable GDP per capita growth, is innovation. That happens when you create the right competitive environment. Then you get the dynamic we saw in place in the U.S. in the 90's, where you had dramatic productivity growth and dramatic job creation.

That's what we should be focusing on as an economy: How we do ensure that those conditions stay in place, how do we not get frightened and move down protectionist paths, our panaceas for lowering wealth levels?

For 20 years or more, even in times when we've had big outsourcing in manufacturing, the U.S. economy has created 3.5 million jobs a year on average. Now this is a bad time, but I think it's easy to lose perspective about how dynamic this economy can be.

Roach: Fiscal monetary policy is such a blunt instrument, it can't touch this. Policies can stimulate demand, but they cannot redirect supply from offshore outsourcing back to domestic platforms. That dynamic is determined by a much more powerful arbitrage of labor costs, which macropolicy is unable to control.

Kinetz: How many jobs from the United States, Europe and Japan have been lost to offshoring? Is anyone keeping track?

Bivens: Not really. There are no firm numbers I've ever seen that convince me we're right even really to an order of magnitude.

Farrell: I don't think anyone has done a truly credible assessment. Roach: There is not going to be a government statistical gathering function in America that's going to even come close to capturing this.

Kinetz: Who wins in offshoring and who loses?

Farrell: It's a global wealth creation story overall. The Indias of the world are certainly benefiting. We see that in terms of job growth, which is dramatic; we see it through the rise in consumption, which is showing up as demand for our goods, which is not as rapid as it might be. And it's ultimately a global wealth story for ourselves. We are getting huge savings we can redeploy in positive ways. We're getting demand for our products. Earnings for the activities being done in India by U.S. companies are repatriated. If we have faith in the job creation opportunities of this economy -and that's at some point a open question -we have the ability to redeploy that labor to more productive and higher output use. The framing of this debate as a zero-sum gain is false. This is a win-win gain.

There is an assumption by protectionists that these jobs are going somewhere else and all this money has been pocketed by CEO's who take it home. A little more sophisticated version is: It's being pocketed by companies in form of profits. One step further and you say those profits are either going to go as returns to the investors in those companies, or they're going to go into new investment by those companies. Those savings enable me, if I am an investor, to consume more and therefore contribute to job recreation, and if I am a company, to re-invest and create jobs. That's important because I agree that we are migrating jobs away, some of which will never return, nor should they.

Bivens: Within nations, trade tends to redistribute a lot of income. People were worried about the effects of trade on the U.S. manufacturing sector in the 1980's, and some now look back and say, ''Well, since the 80's we've created lots of jobs, we've had impressive GDP growth in the aggregate, so all those fears were groundless.'' I don't think they were groundless. We saw a staggering rise in income inequality in the U.S. during that time, a chunk of which was driven by international trade.

The gains get pretty concentrated in the pockets of capital owners. The people who lose out are the blue-collar workers. Now you've got this class of middle management white-collar workers who are much more insecure about their job prospects, and their labor market bargaining power is being undermined. It doesn't mean we need walls all around the economy, but it does mean we need to get really serious about making sure all these gains are distributed.

Edmund Harriss: Look at what's gone on in China over the last ten years. There are 300 million people in those Eastern coastal provinces who have seen an extraordinary pick-up in their standard of living. And you're seeing an economy that is just about ? if it hasn't already ? to take wing because you now have consumers who were never able to participate in the economy before. Now it is people in the developed world who are being left behind. That is very difficult to resolve.

Kinetz: One key piece of the win-win theory seems to be that displaced workers will find new jobs. What does history teach us about how well displaced manufacturing workers have been reintegrated into the work force?

Bivens: The best research on what happens to people displaced from manufacturing is that they eventually find a new job, but they take an average wage cut of 13 percent to 14 percent. The people who are hit hardest are older workers. Also, it's not just the worker who is directly displaced from a sector that is hurt by international trade, it is also every other worker in the economy who has a similar skills profile.

Kinetz: So for labor, is outsourcing a race to the bottom?

Roach: It's a race to the bottom if we spend all our energy trying to protect existing sources of job creation, as the politicians in the U.S. Congress are inclined to do.

The problem is that globalization is growing asymmetrically, so initially it creates more supply than demand. We're living through that asymmetry right now, and that has caused a potentially dangerous political backlash. The Chinese, for example, are reluctant to transform their habits from savers to consumers because they're losing jobs through the reform of their own economy, and they don't have a safety net. They don't have social security or retirement. As China puts its own infrastructure place that converts savers into consumers, over time there is a rising tide. But the political process is not that patient.

Kinetz: If protectionism is the wrong answer, explain how the market will solve this. Does government need to intervene at all?

Roach: This is classic election-year posturing by a Congress that is basically responsible for the problem itself and doesn't want to admit it. We have trade deficits with China and Japan because Washington is running the most reckless fiscal policy we've seen in the United States since the late 1960's. They are the problem. It's not the Chinas and Japans and Indias of the world.

Moreover, there are a lot of assumptions being made, especially by political leaders, that the rapid growth of Chinese exports and production is the smoking gun of the threat to traditional sources of job creation. About twothirds of the export growth China has realized over the last ten years has come from Chinese subsidiaries of multinational corporations headquartered in Japan, the U.S. and Europe and their joint venture partners. These are our companies. It's us; it's not necessarily them.

Bivens: It's all about innovation and productivity. As long as we maintain those two engines, we'll continue to have a very high standard of living. What kills me is people in the U.S. apparel industry moaning that these jobs are going away. They are jobs nobody wants, which are just trapping people in a cycle of poverty. There's a transition cost, but trying to hold onto those jobs is misguided.

Eric Johnson: Out in the San Francisco Bay area, we see what look like high-paid, sophisticated IT jobs going offshore, but really they're not that sophisticated. What is happening, for example, with Accenture, is that the role the consultant plays is changing. Low-skill jobs like coding are moving offshore and what's left in their place is the need for far more advanced project management skills.

Farrell: We will require different services, medical devices, all kinds of things to support an aging population. Fifteen years ago, you would not have been able to fathom a large number of the jobs that exist today, technical jobs that didn't exist for equipment that didn't exist in facilities that didn't exist.

Kinetz: How is outsourcing changing Asia?

Harriss: There are two Chinas. In the cities, there is a youth culture, a bar culture, pop music, and a freer flow of information. But anybody over the age of 45 remembers starvation. When they were kids, it was grey, bleak, power shortages, Mao suits, eating grass and roots.

It's a huge country gradually coming into the mainstream. If a company like PetroChina wants to set up a gas station along a set of roads, there may be another company that wants to as well. What do you do? You make sure the other gas station goes away. How do you do that? You hire some people who have sticks and clubs. There's the glitzy world of Shanghai, where it's as Western as can be and there are young hip kids with MP3 players. And then there is another world, too.

Roach: Last year China received $53 billion of foreign direct investment, making it the largest recipient in the world. India got $2 billion. Services don't need FDI. Services just need people and Internet-based connectivity. The service sector outsourcing model is a totally different, radical opportunity for economic development. We've been hearing great stories about India for 35-40 years, and they've never borne fruit. This one seems to be working differently. I'm optimistic that it's a transforming event.

Farrell: A lot of the gains to developing economies, as to our own economy, are in the form of lower prices,

higher quality, and broader choice. Since the opening up of the car sector in China, there has been a 31 percent decline in prices. That's a whole year's worth of savings for somebody.

Harriss: There is not much new radical innovation in Asia of the kind we're looking at to create jobs in the U.S. Apart from a very few exceptions, what Asia does well is take the latest innovations and production techniques, invest in the most recent equipment and then bring in their powerful advantages in low cost labor, and start to produce. There aren't too many places in Asia where you can say these guys are seriously better than anybody else in the world, with the exception of the Taiwanese foundries, like Taiwan Semiconductor Manufacturing. They've surpassed the Japanese now. And Samsung Electronics could probably make that claim for, say, the production of flat panels. For the most part, the benefits to Asia are just going to come with more people coming off the poverty line and into the global economy.

Johnson: The low wage rates actually in some sense will always put a governor on their ability to innovate. If it's cheap to have a person do it, then you're never going to invest in innovation and create more productivity; you're always going to be throwing people at it.

Kinetz: What happens when China ceases to be an endless pit of poverty?

Roach: China for all practical purposes has an infinite supply of labor: 400 million in its urban population and another 900 million in the rural area. The average wage of a Chinese worker is still 2.5 percent to 3 percent of the counterpart in the high-waged developed world. Those are disparities that will be around for a long time.

Kinetz: Can China keep labor costs so low and still grow a critical mass of domestic consumers?

Farrell: You are still talking about a pretty significant critical mass of people who are now entering consumption-level incomes: $7,000 to $10,000 GDP per capita. Car sales in China are growing at 26 percent to 30 percent compound annual growth rates. Televisions, refrigerators, mobile handsets all have the same kind of J-curve. It's not as though you're going to have all billion people in India becoming major consumers, but you only need 10 percent of the population to have a critical mass of income. I think you can have your cake and eat it, too: a long-term labor arbitrage opportunity coupled with pretty demanding consumption growth.

Kinetz: How can investors take advantage of these trends? Harriss: The prospects for investing in China are looking better than they have for some time. With the arrival of the consumer on the scene, we're seeing companies that are able to participate in this growth and make money out of it. What investors may be worried about is that we've seen such strong growth recently, maybe it's excessive and maybe China will hit a rock, and we'll go boom-bust. But if the economy isn't as dependent as it was on government spending to keep it moving, then I think investors can be more sanguine.

Areas that have been doing well are basic materials (Anhui Conch Cement); electricity generation (Huaneng Power International); export manufacturing (Techtronic Industries, which makes power tools and supplies Home Depot); manufacturing for the consumer market, including automobiles (Denway Motors, which has a joint venture with Honda Motor), textile manufacturing; electronic goods (Compal Electronics in Taiwan); and in petrochemicals (CNOOC, an oil and natural gas producer.

I would set aside those stocks that have suddenly run up on the back of improved China sentiment. There are steel companies out there that shouldn't be.

Kinetz: What do you see as the main challenges for the future?

Bivens: Globalization is good at increasing the productive capacity of the world, but to make sure there are enough jobs for everybody, you need demand to keep pace with that increase in supply. That's where globalization presents a real challenge. Government's big roles in the future are to make sure global demand matches supply, and to provide social insurance schemes to make sure the living standards of the workers being left behind aren't sacrificed on the altar of global progress.

Roach: Our virtues lie in a flexible, open, risk-taking, entrepreneurial, market-driven system. This is exactly the same type of challenge farmers went through in the late 1800s, sweat shop workers went through in the early 1900s, and manufacturing workers went through in the 1980s. We've got to focus on setting in motion a debate that pushes us into new sources of job creation rather than bemoaning the loss of jobs to others who have the advantage of doing tasks that we're getting priced out of. There are Republican and Democrats alike who are involved in this protectionist backlash. They're very vocal right now, and they need to be challenged.