Globalization & IT

[Jim Devine <jdevine03@xxxxxxxxx>]

Globalization and IT: Setting the Record Straight [by Thomas Palley]

Over the last three years there has been an explosion of public
concern about the wage and employment impacts of global outsourcing.
As a result, worries about globalization have begun to move up the
income ladder, infecting white-collar middle-class workers. For
instance, a poll conducted in May 2004 for the Associated Press
reported that sixty-nine percent of Americans believe outsourcing
hurts the economy. Recognizing the potential threat this shift of
public opinion poses to corporate globalization, business groups have
been busy playing a game of catch-up seeking to allay these new more
broadly shared public fears.

Recently, the world renowned Washington DC based Institute for
International Economics (IIE) released a study praising the benefits
of off-shoring the information technology (IT) industry, titled
"Accelerating the Globalization of America: The Role for Information
Technology." The study argues that IT is good for the economy, and
globalization is good for IT. Ergo, globalization is good for the
economy. The only problem is that the argument does not stack up.

The IT industry provides an opportunity for observing the effects of
global outsourcing on a cutting-edge "new economy" sector. A close
inspection of the facts confirms the fears of the public, not the
claims of corporations. The IT industry is not the apparel or
shoemaking industry, which means the adverse effects of global
outsourcing cannot be casually dismissed as just the inevitable
shedding of outmoded industry.

The study's thesis is that IT investment yields a high rate of return
for the economy. Moreover, IT investment is very price sensitive, so
that lower IT prices yield a proportionately larger increase in IT
investment spending. Finally, globalization has driven down the price
of IT products. Putting the three pieces together, globalization has
been good for the economy by driving down IT prices, increasing IT
spending, and thereby spurring growth.

Sounds very reasonable. Unfortunately, there is little evidence that
globalization has caused lower IT prices, and without that the
argument crumbles. IT hardware prices are driven by two factors –
long-term trends and the business cycle. The long-term price trend
captures the impact of technological innovation, and the trend of
prices has been down for a long time. That trend is sometimes referred
to as Moore's law - after Gordon E. Moore a co-founder of Intel – and
it states that the unit cost of computing power halves every eighteen
months. Moore's law was coined in 1965, long before the current period
of globalization began, and there is no evidence that globalization
has accelerated the trend of computing power price decline.

With regard to the business cycle, there is clear evidence that the
price of computing power (DRAM or dynamic random access memory) is
related to the utilization of DRAM production capacity. Prices fall
when there is excess capacity, and they rise when capacity is tight.
That is standard supply and demand analysis, which rests on economic
principles that applied long before globalization. The only
contribution of globalization is that much DRAM production capacity is
now offshore because U.S. corporations have been building new capacity
offshore rather than at home.

All of this casts huge doubt over the claim that globalization has
benefited the economy by benefiting IT. However, whereas the benefits
are in doubt, the costs are not. One clear cost is that the U.S. IT
hardware industry has been significantly hollowed out. The U.S. used
to run an IT goods trade surplus. Now, it runs a huge IT trade
deficit, with many U.S. companies importing products made offshore by
their subsidiaries or under license by foreign producers. In 2005 the
U.S. trade deficit in information and communications products was
$83.2 billion. The deficit with China alone was $50.8 billion,
reflecting the huge off-shoring of IT production that has taken place.

With regard to jobs, there has also been a clear contraction in the
level of U.S. IT employment. In 1999 there were 4.9 million
technology-related jobs, but this had fallen to 4.6 million in May
2005 – a loss of 300,000 jobs. The bulk of these job losses were for
workers earning less than $30,000 per year, but there was also
significant job loss of 140,000 among computer programmers who made an
average of $67,400 per year.

With regard to wages, the average real wage for lower paid technology
related jobs was essentially stagnant between 1999 and May 2005. For
mid-level computer support specialists whose annual pay averaged
$43,380 in 2005, real wages actually fell 1.3 percent annually over
this six-year period. However, the real pay of higher skill tech
workers rose 1.6 percent per year. The bottom line is that global
outsourcing of the U.S. IT industry has not been good for workers in
the bottom half of the wage distribution. The IT sector therefore
appears to be following a similar path to manufacturing, confirming
the fears of working families about outsourcing.

An underlying claim is that outsourcing of IT hardware production has
been a boon to the U.S. economy because it leads to lower IT prices
from which the U.S. economy benefits. According to this logic, the U.S
could benefit from outsourcing of its IT R&D capacity and from
outsourcing its software industry. Indeed, these developments are to
be encouraged, and under current globalization policy they are. Yet,
this entire way of thinking has recently been challenged by Nobel
laureate in economics, Paul Samuelson. Samuelson has shown that when
the U.S. off-shores those industries in which it has historically held
a comparative advantage (such as IT), the U.S.'s future gains from
trade and standard of living can fall.

Changes in the structure of the U.S. IT industry are being driven by
corporations, which are intent on maximizing their own profits. In a
nationally based economy, such as was the case in the 1950s and 1960s,
profit maximization by companies tends to maximize national income. In
a global economy, that is not the case. Instead, profit maximization
promotes the maximization of global income rather than national
income. Companies are happy to outsource because they earn the profits
on outsourced production, but that does not maximize national income.
This fundamental insight is not yet appreciated within Washington
policy circles.

There is no disagreement that IT is good for the economy. There is
also agreement that globalization relies significantly on IT. However,
there are two dangers. The first is that opposition to the current
form of globalization gets misinterpreted as opposition to technology
– a misinterpretation that advocates of corporate globalization
encourage with charges that opponents are "Luddites". The second
danger is that globalization gets credited with the benefits of IT
because of its heavy reliance on IT - that's tantamount to a case of
bait and switch.

The debate over globalization is not about the benefits of IT, and
opposition to globalization does not mean opposition to technology.
Instead, the debate is about the character of globalization – the
absence of labor standards, the absence of rules for exchange rates,
the implications of outsourcing for workers, and changed power
relations that enable corporations to set economic policy and collar
productivity gains for their top management and owners. The lesson
from Moore's law is that the benefits of IT would have flowed
regardless of expanded globalization, and for working families they
might have been even larger under an alternative globalization.

A final generic lesson for policymakers concerns numbers and public
debate. The enormous resources of the business community means that it
can commission studies, launch them with fanfare, and then broadcast
their findings. In this way controversial calculations can quickly
become received fact. That is a problem for which there is no easy
solution. However, it does suggest that policymakers and journalists
be skeptical of studies about trade and globalization promising four
course free lunches.

Copyright Thomas I. Palley

--
Jim Devine / "To initiate a war of aggression, therefore, is not only
an international crime; it is the supreme international crime
differing only from other war crimes in that it contains within itself
the accumulated evil of the whole." -- Nuremberg Tribunal