Globalization: Where to from here? - Rogue Economist Rants

Summary:
Rogue Economist argues that global inflation is the result of the type of globalization that we witnessed in the past three decades, a very different from kind of globalization from what we have seen in previous periods in history. Whereas before, globalization was really nothing more than global trade among nations, in the last 30 years it also involved the outsourcing of businesses activities, from manufacturing to back-end processes. Initially this led to increased productivity for the developed nations: increased profitability for the firms, and lower prices for consumers. Newly created wealth looking for investments led to bubbles such as the sub-prime crisis. More recently, the outsourcing of back-end process led to higher pay for workers in developing countries, creating demand for the same goods (previously unaffordable). Governments started to invest trade surplusses in much needed infrastructure projects. Both the increased demand and the increased number of infrastructure projects led to globally inflationary prices. Developed countries have become consumerist economies, where outsourcing has led to stagnant wages for many. So far that has been mitigated by lower prices of goods. (Published: 20/08/08)

Notes:

• globalization of last three decades very different from kind we have seen in previous periods in history
• before: really nothing more than global trade among nations
• nations with a comparative advantage in producing one good exported a surplus to other countries, in exchange for goods where these other countries had a comparative advantage
• this increased the diversity of products available in all countries that participated, not to mention enriched many parties who facilitated such trades
• past three decades: the distribution and outsourcing of business processes of large corporations into different countries
• i.e. it is not the physical trading of end products, but the parceling of different corporate activities of single corporations into different locations
• mainly to arbitrage differences in cost, expertise, and logistical practicality
• was the next logical step in the globalizing of business
• companies that traded in different localities would, in the process of conducting their businesses, discover different ways to enhance profitability, productivity, and to differentiate themselves from the competition
• in the process of doing so, major activities were uprooted from their home countries and transferred to other countries that could offer lower input labor costs
• first to be outsourced were basic manufacturing processes
• then it led to the outsourcing of more complicated production processes
• eventually to the outsourcing of the back office work that facilitated the corporate administration of the business itself
• latest to be outsourced has included even the more expensive research, analysis, and design of the products of these companies

• outsourcing of manufacturing
  
• outsourcing of corporate activities to countries where they could be done more cheaply has led to huge increases in the productivity of the outsourcing companies
  
• were able to lower the selling price of their products
• thereby making them affordable to a larger number of consumers in their home countries
• lower cost likely also led to significant increases in profitability of these same companies
• translated into newly-created wealth for their shareholders
• increased productivity and lower prices
  
1. led to new wealth in the developed countries
• these became funds that could be released for new ventures and businesses
2. because the prices of goods were going down in these developed countries, excess discretionary income was created for the consumer
• led to opportunities for newer businesses
• created new jobs and new opportunities for the locals
• many who would otherwise have wallowed in poverty working in the farm now found work in the new industrial sites being set up
• globalization has been a boon for countries with rapidly growing populations
• these population increases would have been catastrophic had it not been for globalization
• only so much work to be done in the farm
• many of these people would be unemployed if not for the new factories
• low-cost labor was therefore in plentiful supply for the outsourcers
• for as long as new people arrived to staff new capacity, these outsourcers could secure a continuous outflow of cheap goods
• but: has had a lot of enemies from countries from both sides of the deal
• the ones that lost the jobs
• significant portions of their population lost jobs, and continue to be displaced by this phenomenon
• but: influx of new businesses likely created new jobs for many of the displaced
• these new businesses likely were not as labor-intensive as before, but rather smaller, and tended to focus on the small niches created by rising discretionary income
• but: because of the downward effects of the globalization of processes, many of the displaced and existing workers in the developed countries could no longer demand increasing wages from their employers
• because much of the work they did could now be standardized, codified, and therefore, be done in any other place in the world, this constrained their ability to negotiate increasing amounts of compensation
• for a while, the decreasing cost of goods mitigated this stagnation in wages
• and the ones that got them
• because labor was plentiful, they were never paid the same as they would have been had they been in the companies’ home country
• was the point of locating the factory there in the first place, so they could secure cheap labor
• result: no significant market arose in the developed markets for the very products these factories and companies were creaking out
• but: began to change when relatively more middle class range of services began to be outsourced:
  
• the back office work

• new wealth
• corporate shareholders continued to enjoy increasing profits
• whether they invested in developing countries directly, or indirectly, through their companies that outsourced to those countries
• much of this new-found wealth needed to be re-invested
• not everything was re-invested in the same business or to the developing countries
• needed to diversify
• so they invested some in their own countries
• but: fewer investing opportunities available to them domestically
  
• because much of the capital-intensive production facilities were already being set up in developing countries
• fewer business opportunities than available funds
• therefore: money began to flow to speculative assets
  
• stocks, property, financial instruments, etc
• for as long as new money poured into these assets, they increased in value
• seemed to be sensible thing to do
• bubble after bubble therefore arose in many of these assets.
• froth
• once a significant froth develops in an asset, there has to be a correction
• these investible funds have grown exponentially
• both because of continuing profitability of the globalized businesses
• and because the continuing profits in assets that appreciated in value created more funds
• because of the current size of the outstanding investment, the froth has lately become very big, and very speculative
• e.g. sub-prime capital market that recently burst in the US
• a market for an asset class invested in by funds in other developed markets looking for yield
• this latest contagion has the potential to undermine the rest of the other-wise still humming economies of these developed countries
• because of the size of the losses, and the growing inter-connectedness of the financial markets in the developed economies

• global inflation
  
• outsourcing of back-office jobs
• paid more than the traditional factory work
• was a boon for the next generation of Third World workers
• i.e. the ones who had gone on to higher education, thanks to the money earned by their parents or older brothers and sisters employed in the industrial factories
• demand was created for more of the middle class luxuries previously unaffordable there
• this increased demand led to inflationary prices for these goods
• because these goods were marketed globally, this led to global inflationary prices
• trade surplusses enjoyed by governments
  
• nations whose manufactured goods were affordable in many developed nations, but had a citizenry who could not afford much of what was being produced elsewhere
• ringing year after year of trade surpluses
• much needed infrastructure developments projects got under way
• too many countries investing in infrastructure projects, all at the same time
• leads to inflationary prices for all input costs
• this is where we are in the world right now

• developed countries have morphed into consumerist economies
• have enjoyed years of increasing productivity gains due to outsourcing
  
• outsourcing may have led to stagnant wages for many
• but the declining price of goods immediately resulting from it has pretty much mitigated its effect
• have an investor class increasingly bowed by an increasing pile of liquidity and cash
• but not enough useful investments to put them into
• much of this wealth will probably be invested in low-yielding placements, or worse, in investments that will lose significant value
• developing nations
• people are only now beginning to afford First World luxuries
• but: not in significant enough numbers as to replace the loss of business with a major trading partner
• increasing global inflation
• due to the slowly increasing number of people demanding the same products
• driving up the scarcity of certain commodities