Sunday, January 10, 2010

Thoughts on Globalization and Labor

Just read the article The Disposable Worker, which offers some really insightful ideas.  I'd like to offer some thoughts of my own.

Globalization in supply chain has meant that much value can be added using labor forces without having to worry about where the workers come from.  The natural consequence of this is firms will shift production of goods and services to laborers that cost the least. 

It is no secret that the wages of most of developed countries like America has been stagnating, or worse retreating, over the past few decades.  Not surprisingly, those few decades have also coincided with the integration of massive workforces from poorer regions of the world into the world economy. 

Economists like to say that the economy is not a fixed pie, or a finite resource.  We will always be able to integrate more people into our economies, i.e. find more job for more people to do, in more specializations etc etc.  While in the long term this may be true, I must argue also, in the long term we are all dead, and many people will be left out before they can enjoy the fruits of progress.

I think, what has happened in the recent past, and what is happening now, is that massive amounts of labor are joining the world economy in a constant basis, consistent with an increasing population and rise in working age demographics worldwide.  This process has overwhelmed an economy's natural tendency to balancing itself out.  The end result of this is a persistent glut in labor.  Now, when there is an excess of supply, simple theory predicts that price of labor must go down until the demand for labor evens out.  The fact that wages in developed countries are still as high as they are is due to the fact that developing countries are still catching up to the sophisticated organizational structures and skillset developed countries has.  However, if you look at how R&D and finances in China and India are growing, you will have to be convinced that sooner or later the difference of skills will even out, and jobs will move over there, all jobs, until the wages equalize.  The same services, that someone else can do more cheaply, will generally evetually be done by someone else.  This means a lawyer in Bangledesh and a lawyer in Idaho will eventually have roughly the same income and purchasing power, adjusted for cost of living. 

In a perfect world, this is not a bad thing.  Our wages goes down as their wages go up, and they equalize until everyone starts to do better, due to technological progress.  One problem, however, arises since this process has taken decades, and can still take decades more to play out.  Since there are a lot more people in developing countries than developed ones, the average wage decrease will be far more significance than the gains made from any increase.  Very few people are going to be kosher with the prospect of their income dropping to 40% of what it is now over the next thirty years.  Moreover, the incorporation of more human activity into the global system virtually guarantee a great degree of disruption to the natural world, and this will be felt disproportionately by the poorer populations in all countries, making the sting that much worse on people who perceive their suffering coming from those taking advantage of trends that make the majority financially worse off.

Secondly, perhaps more importantly, the developed world has been a consumer of a larger proportion of global resources than their population share.  The United States consume more than 20 percent of the world's petroleum even though its population is about 5%.  Resources like water, petroleum, and precious metals, unlike human ingenuity, are not infinite.  No amount of innovation is going to preserve the standard of living for the already-affluent if all people in the world claim an equal share to the world's resources.  This unfortunately is a zero-sum game.  One more SUV driver in Scandinavia means one less in Equador.  Some people might disagree.  There is a possibility that technological progress may preserve or even improve the way of life of rich countries on vastly smaller amounts of energy and other materials.  While I am open to that possibility, I remain pessimistic at this inflection point when many indicators points downward.

Economists, when they recommend a laissez-faire approach to economic policies are making a moral stand, meaning, benefitting most people involved over the long term.  However, the audience they're trying to convince, the middle classes in developed countries, are quickly losing faith in the proposition that they belong to the "most people" category that will benefit over the long term.  In fact, it is starting to feel more and more like they are really the minority getting the shaft as free trade make a few selected people ultra rich. 

Where does all this leave us then?  We can't turn back the clock.  Peak Oil is already here, and world commerce has picked up such momentum that it is impossible to unwind.  One thing is for sure though.  For a great many people, the direction of the future is not as bright as it used to be.