Update on Globalization’s Flows: Part 1, Human Capital

Stephen DeAngelis

May 03, 2011

Results of a Washington Post poll released in January indicated “that A growing number of Americans consider the accelerating trend toward globalization a bad thing for the United States.” [“More in U.S. grow wary of globalization,” by Jon Cohen and Peyton M. Craighill, Washington Post, 29 January 2011]. Cohen and Craighill report, “Just over one-third of all Americans see the increasing interconnection of the global economy as a good thing.” They note that favorable feelings about globalization have continued to slide since 2001 when “six in 10 Americans said tightening economic ties were a positive development.” They continue:

“The decline in positive sentiment on globalization was broad-based but particularly notable among Republicans. The number of Republicans who see globalization as primarily beneficial decreased from 57 percent in 2001 to 27 percent today. The movement has been less dramatic – though still large – among Democrats and independents, down 22 points in 10 years.”

Traditionally, globalization has been defined by the relatively free flow of resources, capital, and people (i.e., human capital). Since the advent of the information age, the flow of information and ideas has also been added to mix. The visceral response to globalization really grows out of just one of these flows — the flow of human capital. At the heart of the matter are jobs. Perhaps the most heated debates are about undocumented workers and the jobs they fill in the countries in which they reside. In the United States, the debate is mostly about Latinos. In Europe, Middle Easterners and Africans are generally the focus. Xenophobic fervor has risen in almost every developed country in the world.

The other side of the debate is about jobs being outsourced to low cost countries. The recent Great Recession certainly did nothing to assuage critics on this point. Cohen and Craighill report that fewer and fewer American’s believe the U.S. has the “ability to vie successfully in the global economy.” It’s not clear whether this assessment is based on the belief that international competition is strictly about labor costs or whether it reflects a growing sense that U.S. workers are losing their productive edge. In either case, U.S. workers shouldn’t be so pessimistic. Rana Foroohar reports:

“Innovation, not how cheap or expensive labor is, [is what] determines whether a country will be successful in manufacturing. Contrary to conventional wisdom, manufacturing has not become a race to the bottom. That’s why the U.S. still ranks as the fourth-most competitive nation after China, India, and South Korea, despite vastly higher labor costs. Germany, Japan, and Singapore also hold positions in the top 10. The skill levels of their workers more than offset their costs (U.S. workers are twice as productive as those in the next 10 leading manufacturing economies). Skills are particularly critical in the lucrative high-end manufacturing sector, which accounts for about half of all new innovation within an economy.” [“How to Build Again,” Newsweek, 10 July 2010]

A sliver of good news for Americans is the fact that “traditional ‘rust belt’ states have seen the largest gains in American manufacturing jobs over the past year.” [“America’s ‘rust belt’ states lead recovery,” by Ed Crooks, Financial Times, 1 May 2011]. Crooks continues:

“Michigan, the centre of the US motor industry, has been the success story, creating a seasonally adjusted 29,800 net new factory jobs in the past 12 months. It accounts for about 4 per cent of US manufacturing employment but about 15 per cent of the net job creation in industry over the past year. The encouraging jobs figures in these northern states have also been reflected in strong corporate performance of manufacturers based there.”

If Americans do perceive any benefits from globalization, those benefits are in the security rather than the economic arena. Cohen and Craighill report that most Americans believe that “closer ties among economies have a direct connection to … the durability of … global stability.” But a third of Americans also perceive “the fragility of the international economy … as the top threat to stability.” It, therefore, comes as no surprise that China is “increasingly seen as an economic threat.” Cohen and Craighill report that results from an earlier Washington Post-ABC News poll show that nearly two-thirds of respondents “saw China as a threat to jobs and economic security. Half as many saw China as an opportunity for new markets and investments.”

Fuel was added to the jobs debate when it was recently reported that “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home.” [“Big U.S. Firms Shift Hiring Abroad,” by David Wessel, The Wall Street Journal, 19 April 2011]. Wessel continues:

“The trend highlights the growing importance of other economies, particularly in rapidly growing Asia, to big U.S. businesses such as General Electric Co., Caterpillar Inc., Microsoft Corp. and Wal-Mart Stores Inc. The data also underscore the vulnerability of the U.S. economy, particularly at a time when unemployment is high and wages aren’t rising. Jobs at multinationals tend to pay above-average wages and, for decades, sustained the American middle class. Some on the left view the job trend as reason for the U.S. government to keep companies from easily exporting work overseas and importing products back to the U.S. or to more aggressively match job-creating policies used in some foreign markets. More business-friendly analysts view the same data as the sign that the U.S. may be losing its appeal as a place for big companies to invest and hire.”

Economist Matthew Slaughter, a professor at Dartmouth College’s Tuck School of Business, told Wessel that in the 1990s “for every one job that U.S. multinationals created abroad … they created nearly two U.S. jobs in their [U.S.-based] parents.” That is no longer the case. Wessel continues:

“The growth of their overseas work forces is a sensitive point for U.S. companies. Many of them don’t disclose how many of their workers are abroad. And some who do won’t talk about it. … Those who will talk say the trend, in some instances, reflects the rising productivity of U.S. factories and, in general, a world in which the U.S. represents a smaller piece of a bigger whole.”

Before simply declaring that the critics of globalization are correct, Wessel notes that “the Commerce Department’s totals mask significant differences among the big companies. Some are shrinking employment at home and abroad while increasing productivity. Others are hiring everywhere. Still others are cutting jobs at home while adding them abroad.” More than anything else, I suspect this trend reflects the fact that most companies see the tremendous upside of a growing middle class and are moving to position themselves in front of the capital they expect to flow from this powerful consumer group. (See for example, “A New Class of Consumers Grows in Africa,” by Peter Wonacott, The Wall Street Journal, 2 May 2011, and “GE targets Latin America for growth,” by Samantha Pearson, Financial Times, 1 May 2011). U.S.-based companies that want to get in front of the money need to understand what the new global market is going to look like and what its consumers are going to want. This is not an impossible task. As I pointed out in a previous, post Germany has remained the world’s largest goods exporter after China despite high labor costs and a strong currency.

The big shift that is taking place around the world requires a big shift in workforce flows as well. Such a shift will undoubtedly make xenophobes cringe, but Brian Groom reports, “A huge cross-border transfer of skilled labour needs to take place in the next 20 years, or an increase of almost 1bn in the global workforce will lead to higher unemployment and social unrest, according to a report.” [“Warning on cross-border flow of skills,” Financial Times, 12 April 2011]. Groom continues:

“The developing world will need thousands of engineers from the US and Europe, while there will a huge demand for health workers in the opposite direction, say Hays, a specialist recruitment company, and Oxford Economics, an economic forecaster. The working-age population will grow by more than a fifth, but all in the developing world – notably India, Africa and South America – as workforces in the developed world age and shrink. China’s workforce is set to level off and then decline. These patterns are likely to exacerbate a mismatch between supply and demand of skills. Shortages in engineering, information technology and healthcare are becoming acute.”

Groom insists that this shift in labor skills (i.e., flow of human capital) must take place or the consequences will be both significant and bad. The sooner that governments and policymakers start considering ways to deal with these tectonic movements of people the less disruptive they will be. He continues:

“India alone is set to see a rise of almost 250m in its workforce by 2030, according to UN projections, creating a huge demand for skilled staff as the population becomes more urban. Developing countries are producing more graduates but not fast enough to meet demand In developed countries, the US has a shortage of 1m nurses and in the UK ‘something like half of the National Health Service is due to retire in the next 10 years’, says Alistair Cox, Hays chief executive.”

Let’s be honest. Most countries won’t gladly welcome an influx of foreigners who could dramatically change ts character and culture. On the other hand, I suspect that most workers would be happy to remain in their homelands if they could find work at a livable wage (i.e., earn enough to permit some discretionary spending). As the world becomes more globalized, I believe that a great deal of this skill transfer will take place virtually. Globally integrated companies could very well be a significant part of the solution rather than a part of the problem (as now perceived). Certainly not all flows of skills can be virtual; but I suspect that smart people working for innovative companies will figure out something over the coming decades. Groom concludes that even with significant flows of skilled workers crossing the globe, developed countries will have to change domestic work patterns. He concludes:

“The developed world must do more to retain older workers, the report says, with shortages already in oil and gas, US aerospace and defence, and German engineering. Employment in financial services is expected to grow, with the UK seeing the biggest rise, followed by the US, Australia and South Korea. The rise in incomes in developed countries will create export opportunities for the developed world.”

Policymakers who think that they can isolate their countries from the globalization’s effects — either good or bad — are delusional. Globalization’s advance may come in fits and starts, but I don’t think it will be halted (for more on that subject, read my post entitled Is Globalization Retreating?). I have written in the past that I think the face of globalization will change as energy prices increase, global wages rise, and new consumers enter the middle class. I think there will be more regionalization found within the larger globalization framework. One can see the beginnings of this trend already. For example, the container carrier APL sees an increase in intra-Asian trade and has just announced that it has expanded its North Asia Philippines Express (NPX) feeder service to cover central China and Manila in the Philippines. [“APL Adds Central China, Manila to North Asia Philippines Express Service,” Supply Chain Brain, 25 April 2011]. Figuring out how to gainfully employ the world’s workforce and do it in a way that everyone benefits will be no easy task — either politically or technically. Nevertheless, it has to be done. Without workers there are no consumers and without consumers there is no business. I wouldn’t be in the business of helping optimize global supply chains if I thought the future wasn’t bright.