The Dull Compulsion of the Economic (#2)

by Chris Sturr | June 06, 2007

A series of blog entries by D&S collective member Larry Peterson.

About a week and a half ago, the Wall Street Journal ran a cover story (it was subscriber-access only at the time, but you can get the whole story here) which reviewed recent research suggesting that greater economic openness in general, and outsourcing in particular, have, while increasing the incomes of the poor in developing countries, led to greater gaps in incomes between the wealthy and the poor in both rich and poor countries. Moreover, the article noted that the gaps look to widen, rather than contract, in the future. That seems to suggest that foreign investment and technology have rendered the Kuznets hypothesis (that increased openness—and the industrialization that follows from it—may lead to a wider divergence of incomes at the beginning of the process, but that such differences will contract just as swiftly as it proceeds) somewhat inapplicable. Perhaps this is because ever-cheaper but more powerful foreign technology, able as it is to provide a check on the mass substitutability of cheap labor for capital, both restrains wages from keeping up with a rising demand for unskilled labor and increases the premium enjoyed by those who can command and control such technology, both in host and investor countries; the article really doesn’t say much beyond mentioning technology as the likely culprit. And the fact that capital liberalization and technological advances enhance the mobility of productive operations, allowing companies operating even in hyper-low wage countries to threaten to pack up and move elsewhere in a heartbeat, certainly amplifies this trend.

The article is remarkable inasmuch as it speaks of differential macroeconomic effects of outsourcing. It goes far beyond, say, the non-debate between Alan Blinder and Jagdish Bhagwati on the subject a few weeks ago. And while Anatoly Kaletsky has mentioned one of the most important macro impacts of outsourcing (namely, that multinationals tend to outsource the most volatile parts of their operations—production—while retaining more profitable ones—design and marketing—at home, and that this has the macroeconomic effect of stabilizing the developed countries’ economies and increasing economic vulnerability in the poor world), the Journal article notes ways in which the same phenomenon can affect different classes in fundamentally divergent ways. For example, it discusses Volkswagen’s Mexican operations, which switched producing cheaper vehicles for the domestic market for exports to the US in 1998. The fact that more discriminating US buyers constituted the bulk of demand meant that the company had to increase its contingent of well-paid engineers at the same time as it had to cut its relatively unskilled workforce. Cheap and easily—financed technology no doubt assisted in this process, and also helped to drive down the average wage—by deskillling the labor formerly involved—by a factor of a third; and this, in turn, allowed VW to pay its new engineers and yet retain its profitability and price advantages with US consumers. The macroeconomic pattern corresponding to the VW case seems to be the following: by massively cutting their unskilled labor bill (both in developed and undeveloped countries), multinationals can use the proceeds to employ a far smaller number of educated people, who, given the power and cheapness of available technology (which is made available by trade and capital liberalization), can implement further efficiencies in production, which will slow any wage gains that might emerge from increased demand. Given that engineers in emerging economies are paid a fraction of what they are in fully developed countries, keeping them in their jobs with relatively modest pay rises can be achieved (assuming the fact that they aren’t allowed to emigrate to the rich countries) by cutting down on the unskilled labor force in both undeveloped and developed countries. And this would contribute to the increasing gap in incomes in the rich countries themselves: there will even be money left over for obscene CEO payouts given the massive capacity for labor arbitrage that exists in a ruthlessly globalizing world.

The article goes further and discusses the roles played by the underground economy, emigration and remittances in income dynamics. It notes that a good number of the workers displaced by the VW cuts found themselves working in the informal sector, as unlicensed taxi drivers and so forth. Since it is much more difficult to achieve productivity gains in the informal sector—you won’t invest much in your taxi if you can have it taken away by a policeman at any moment, and many improvements simply can’t be implemented if the business involved isn’t registered and doesn’t pay taxes—basic economic logic, if nothing else (loss of any company benefits, etc.), suggests that the fact that more workers will end up here will mean that income standards (which are supposed to reflect productivity gains) will diverge all the more. But there is a way out, of sorts: illegal immigration. As the factor of production unaffected by trade liberalization thus far, it is only fitting (if dangerously so) that Mexican workers are seeking refuge in the same market which originally honed in on and exploited their comparative weaknesses. The problem is that large numbers of U.S. workers were targeted by the same processes, and immigration makes it more difficult to move to the service industries from deindustrializing industries, like the auto sector. But this is not the fault of Mexican workers. US and Mexican workers are to a not insignificant degree the victims of the same developments, and must come together to reshape the forces of technical advance and globalization for their own benefit, rather than for that of a class that is dedicated to a globalization that constantly promises unequivocal gains for the disadvantaged, but never seems to get around to delivering.

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