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Archive for the ‘Labour Issues’ Category

• Huge Migration of Service Jobs to Developing World Looming

Posted by Ron Robins on December 9, 2010

By Ron Robins. First published September 1, 2010, in his weekly economics and finance column at alrroya.com

A wave of service jobs leaving US and European shores for the developing world might hit soon. The big impetus would come from a prolonged recession. And some leading economists including Nobel economics laureate Paul Krugman, believe a new long recession could start in the months ahead. How will the US and Europe, particularly, respond to the possible exodus of millions of service jobs while their economies go south?

Companies, especially in the US, have often increased profits in the past two years by laying off many workers at home. They have cut labour to the bone. Another prolonged recession would again create inexorable profit margin pressures. Companies will ask: who else can we cut—or move?

One answer will be to move formerly untouchable key administrative and service functions to lower cost regions of the world. These functions have usually been considered unmovable as management felt some responsibility to keep them in their home town or country. However, in light of further difficult competitive conditions in a slumping economic environment, this reticence may be shattered.

The developed world’s large multinational companies already employ executives and managers from all over the globe. They are no longer one nation companies. This now allows them to think increasingly globally and employ labour wherever in the world they see fit.

Furthermore, they are ever more motivated to move activities and functions to areas of the world where their revenues are rapidly growing. Obviously, that is not to America, Western Europe or Japan.

Interestingly, there has been little media coverage in recent years of the ‘offshoring’ of corporate functions and jobs. And that is probably how multinational companies prefer it too. But in most of their organizations offshoring continues apace.

According to The Economic Times of India on July 27, “Transnational technology majors are moving more jobs to offshore locations… The offshore [employment] for firms like IBM, Accenture & EDS, [in] front-end delivery staff in offshore centres as a percentage of workforce, has risen from 25-30 per cent in 2007 to 35-40 per cent in 2009, Everest Research Institute says in a report on global sourcing trends… the average ratio can go up to the 38-42 per cent levels during 2010, Eric Simonson, managing principal of Everest Research, told ET… “

Furthermore, “the average number of countries where these firms have delivery centres has gone up from 13 in 2007 to 15 in 2009.”

Making offshoring of service functions increasingly easy and likely is the development of high speed broadband internet and videoconferencing. India, as the world’s biggest supplier of offshore services has certainly found this to be true.

For developing countries, the jobs gained by companies offshoring their service functions to them can offer a shortcut to modernity and provide higher growth than from manufacturing. This is a reversal of traditional economic thinking where the superiority of manufacturing had become perceived wisdom.

According to Ejaz Ghani, an Economic Advisor at the World Bank in an article, “the service revolution in India,” February 25, said, “India’s experience shows that growth has in fact been led by services, that labour productivity levels in services are above those in industry, and that productivity growth in service sectors in India matches labour productivity growth in manufacturing sectors in China. Furthermore, services-led growth has been effective in reducing poverty. India’s growth experience suggests that a ‘services revolution’ – rapid growth and poverty reduction led by services – is now possible.”

Mr Ghani continues, quoting Alan Blinder, “service-led growth is sustainable because the globalisation of services is just the tip of the iceberg.” Also, since around 70 per cent of global gross domestic product (GDP) is related to services compared to 17 per cent for manufacturing, the opportunity presented to developing countries by the massive offshoring of service functions might easily surpass that of manufacturing.

Of course not all service functions can be offshored. Garbage still needs to be picked up locally and doctors still need to examine patients directly—at least for now.

Service jobs offshored to India and other developing countries have been found to pay better than in other industries too. Mr. Ghani states that, “the wages of Indian BPO [business process outsourcing] workers are nearly double the average wages in other sectors of the Indian economy, according to the study titled ‘Offshoring and Working Conditions in Remote Work.’ In the Philippines, BPO employees earn 53 per cent more than workers of the same age in other industries.”

Such data offers great encouragement and inducement to Africa and other under-developed regions to participate in this new world of services’ offshoring. They may also benefit from the situation in India. There, skilled service sector labour and individuals with executive level competencies are sometimes in short supply and drive up wages significantly. Other developing regions of the world can learn from, emulate and reap the rewards of their example. For Africa and other under-developed regions it is a question of how fast and inexpensively they can gear-up their educational systems, internet services, etc., to handle a portion of that 70 per cent of global GDP related to services.

Recession or not, the offshoring of service functions and jobs from the US, Europe, and other developed countries to the developing world is going to grow mightily. But its numbers and the controversy it causes will be magnified during a persistent recession. It will test everyone’s belief in freer trade.

If the developed world was upset about the loss of manufacturing jobs, the possible much higher service jobs’ losses might cause developed countries to institute draconian new labour restrictions. Hopefully, these will be avoided. After all, everyone realizes that the offshoring of factory work to China brought down prices of numerous products we enjoy and depend on while simultaneously taking hundreds of millions of people out of poverty. The offshoring of services might do the same—and even more.

Copyright alrroya.com


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• The Coming 21st Century Global Trade War?

Posted by Ron Robins on December 9, 2010

By Ron Robins. First published August 6, 2010, in his weekly economics and finance column at alrroya.com

A ‘long depression’ is starting in the US unless massive new stimulus measures are taken to increase consumption and China forced to mark up its currency. This is what renowned Nobel economics laureate Paul Krugman believes. Since any new massive stimulus action is unlikely soon, and if we are to believe what Mr Krugman is saying, then with a depression occurring the ranks of American unemployed could swell by millions more. They, together with the uproar of US unions and politicians, will blame China and others for their woes.

The US Congress would then enact trade tariffs and restrictions beginning round one of the 21st Century Global Trade War!

But have we not learned from the 1930s that a trade war can lead to a depression? Mr Krugman disputes that finding. In a July 10 New York Times post he says that it was not the trade restrictions of the Smoot-Hawley bill that created the depression. The depression had already started and, “protectionism led to falling exports! Indeed. Also falling imports. It’s not at all clear what effect all this had on overall demand. Insofar as it did, it was because tariffs were a form of tax increase — but in that case you should be focusing on the whole range of fiscal actions, not just the tariff hikes.”

As indicated, currently there is little likelihood of Mr. Krugman’s proposal of enacting massive new stimulus measures—he mentions around $1 trillion—as well as for China marking up its currency significantly against the dollar. However, he may still get his way if unemployment or economic stagnation—or worse—takes hold.

If the stimulus is enacted it is highly debatable if it would work any better than previous ones in firing up consumption and investment. Already over the past two years or so, the US government and the Federal Reserve have poured about $4.5 trillion into the American economy. In rough figures, this comprises about $3 trillion in US government deficits and over $1.5 trillion from the Federal Reserve as it bought bonds and other assets to increase cash in the financial system and promote lending. Then there are of course the trillions more in guarantees to various financial and industrial entities such AIG, GM etc.

However, the Federal Reserve also says it stands ready to act should the economy weaken further. Would it spend another $1, 2 or 3 trillion? If the trillions spent so far by it and the US government have not worked, how much more will be needed?

Furthermore, the additional government deficits and Federal Reserve actions might alarm holders of US dollar denominated assets about America’s solvency, encouraging them to sell such assets. In fact, China’s new debt rating agency Dagong says the US government is already insolvent.

So, additional stimulus actions might also crash the US dollar. If that were to happen, it would cause dramatically rising prices for oil and other goods. A significant increase in living costs amidst high or growing unemployment will promote social unrest and add further impetus to growing calls for protectionism.

A dollar crash would create conditions for ‘competitive currency devaluations.’ In 2009, when the euro was trading as high as $1.50, Europeans became alarmed. Henri Guaino, right-hand man of President Nicolas Sarkozy remarked, “the euro at $1.50 is a disaster for the European economy and industry… ”

Would Europe stand idly by and see their euro go into the stratosphere as the dollar crashed against it? Would the European Union then enter into a currency war with the US? Would Japan be silent seeing its currency rise substantially against the dollar? Of course Japan is famous for intervening in currency markets to lower the yen’s value against the dollar in previous difficult times. Unfortunately, competitive currency devaluations would add fuel to a trade war.

Already Global Trade Alert counts 650 protectionist measures implemented between the advent of the financial crises in 2008 and the June 2010 G20 Toronto meeting.

According to the International Business Times, the G20 communiqué “included a ritual promise to ‘refrain from raising barriers or imposing new barriers to investment or trade in goods and services.’ But missing from the final declaration… was a sentence reportedly included in an earlier draft of the communiqué: ‘Where any protectionist measures have been enacted in the context of the economic crisis, we agree that these should be lifted.’ Somehow that sentence, pledging a rollback of protectionist trade barriers erected during the Great Recession [2008 to today], disappeared sometime between when the draft declaration was leaked to the media by Greenpeace and when the final declaration was released to the press with solemn summit fanfare.”

Furthermore, the G20 in Toronto took off its agenda setting a further date for completing the vital Doha round of global trade talks that have been stuck in neutral for several years. Perhaps the US already staked out its real position – remember the ‘buy American only’ clause in its $787 billion stimulus package.

The woes of the US stem from failing to see its years of over consumption were a problem. Now, economists like Mr Krugman want even more money from their financiers like China, so they can further increase consumption, while blaming China for their overconsumption.

Unfortunately, an extended double dip down recession-depression is increasingly probable and with it rising unemployment. In a few weeks or months, the pressure for more action to stem the economic decline could impel the US government and the Federal Reserve to spend more, much more—and to what effect? The alarm of all this might cause holders of dollar assets to sell, culminating in a dollar crash—and further incite a 21st century global trade war.

Copyright alrroya.com

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