A rchive Date
[ 31-01-2006 ]
Category
[ International Relations ]
sub-Categoy
[ Economics ]
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[http://www.msnbc.msn.com/id/11081039/site/newsweek/
Global Investor: The Hollowing Ring of Davos
By Stephen Roach
Newsweek International
Feb. 6, 2006 issue - The world economic forum in Davos is the cradle of the modern globalization paradigm: the "win - win" proposition that the development of poor countries is a huge plus for rich countries. This consensus has often been challenged by street protests at Davos, and the summit has often worried itself over the impact of globalization on poor economies. But this time was different. Panelists from German Chancellor Angela Merkel to former senior Clinton economic adviser Laura Tyson raised tough questions about the assumed benefits of globalization... for rich economies.
This is a big shift, but not surprising. One of the "wins" in the win - win of globalization has failed to materialize. Job creation and real wages in the mature, industrial nations have seriously lagged behind historical norms. It is now common for economic recoveries to be either jobless or wageless - or both. That this has occurred in the midst of accelerating globalization is all the more disconcerting.
It was one thing for this to happen to the structurally impaired economies of Europe and Japan. But now it is occurring in the world's most flexible economy - the United States. Gains in U.S. worker compensation - by far the biggest component of overall personal income - have lagged while productivity growth has soared. As several Davos panelists stressed, this defies a basic premise of economics - that labor is always paid in accord with its productivity. Yet over the first 48 months of the current expansion, private - sector compensation in the United States has increased only 12 percent in inflation - adjusted terms. By contrast, over comparable periods of the past four business cycles, real gains in private compensation averaged 20 percent.
The Davos crowd is stunned by this turn of events. The recent high - profile layoff announcements in the global car industry only added to the grim realization. Of course, the hollowing out of manufacturing in the industrial world has been underway for more than 30 years. But in a year when the World Economic Forum is celebrating the emergence of China and India, their impacts on the global labor market are hitting home as never before. After all, if India is to services as China is to manufacturing, what does the future hold for high - wage workers in the developed world?
The toughest part of this story is that there may be no easy way out. That's because the Internet has changed the rules of engagement for globalization. It has revolutionized the logistics of supply - chain management, accelerating the diffusion of global manufacturing and making possible offshore outsourcing in once nontradable industries. The globalization of information services is migrating quickly up the value chain, from its start in call centers and data processing five years ago to software programming, design, medicine, accounting and other professions.
The speed of this transformation turns the win - win models of globalization inside out. And it puts knots in the stomachs of most free - market economists, including myself. For generations we harbored the belief that while painful, it was also understandable for rich countries to lose market share in manufacturing activities. This was never viewed as a serious threat because the developed world was blessed with a growing profusion of highly educated knowledge workers employed in nontradable service industries. Rich countries would be able to buy cheaper things from poor countries, thereby expanding the purchasing power of an increasingly knowledge - based work force. And as producers in the developing world turned into consumers, these new markets would provide nothing but opportunity for the industrial world.
Those hopes have now been dashed. Fears of the zero - sum game have crept into the discussions at Davos. This has taken us to the brink of a very slippery slope - the blame game. Middle - class workers and their political representatives are up in arms. Witness the outbreak of China bashing in the U.S. Congress. Yet I don't believe that global leaders would be so foolish as to repeat the all - out tariff battles that led to the Great Depression. The more likely danger is that a growing distrust of the Indias and Chinas will lead industrial nations to squander the greatest opportunities of globalization. For example, any U.S. move to discourage trade with China would amount to a cut in American consumer purchasing power, by redirecting trade to higher - cost trade partners, like Mexico. Like it or not, IT - enabled globalization has unexpectedly tilted the playing field. Labor markets in the industrial world have an increasingly hollow ring. And so did this year's debate at Davos.
ROACH is chief economist and director of global economic analysis at Morgan Stanley.
© 2006 Newsweek, Inc.
© 2006 MSNBC.com
 World Fact Book (CIA)]
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