Duh!
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"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
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