Globalisation: The great unbundling(s)

Yesterday I mentioned a new series of papers on globalisation published by the Economic Council of Finland: The challenges of globalisation for Europe. The central paper is by Richard Baldwin of Graduate Institute of International Studies, Geneva: Globalisation: the great unbundling(s) (PDF). It's a thought provoking read, tackling the key isue of whether we are just experiencing 'more of the same' (old globalisation paradigm), or something fundamentally different (new paradigm):

The new and old globalisation paradigms fit together most naturally when thinking of globalisation as two great unbundlings. The cost of moving goods, people and ideas has, since the dawn of human civilisation, tended to result in the geographic clustering of production and people. Rapidly falling transportation costs - a trend which has been going on since the late 19th century - caused the first unbundling, namely the end of the necessity of making goods close to the point of consumption. More recently, rapidly falling communication and coordination costs have fostered a second unbundling - the  end of the need to perform most manufacturing stages near each other. Even more recently, the second unbundling has spread from factories to offices with the result being the offshoring of service-sector jobs.

In a nutshell, the first unbundling allowed the spatial separation of factories and consumers. The second unbundling spatially unpacked the factories and offices themselves. The old paradigm - essentially traditional trade economics - was useful for understanding the impact of the first unbundling. Understanding the second unbundling (which has variously been called fragmentation, offshoring, vertical specialisation, and slicing up the value-added chain) may require a new paradigm, especially when it comes to the offshoring of services.

Before the second unbundling, firms and sectors were the finest level at which globalisation’s impact was felt. More open trade spurred the fortunes of some firms while spiking the fortunes of others but the firm was the finest level of disaggregation worth looking at. Since most firms in a sector stood or fell together, the type of labour used most intensively in the sector typically shared the fortune of the firms and thus labour groups were a useful aggregate for analytic purposes. In the EU, the first unbundling systematically spiked the fortunes of unskilled-labour-intensive industries and spurred the fortunes of skill-intensive sectors, so unskilled labour found the first round impacts of globalisation to be highly negative while skilled workers found them to be  favourable.

As the second unbundling opened up firms - viewed as black-box package of ’tasks’ in the old paradigm - global competition came directly into factories and offices; global competition occurred on a task-by-task basis rather than firm-by-firm or sector-by-sector basis. The new paradigm helps us understand the impact of globalisation when international competition plays itself out at the level of tasks within firms. This trade-in-tasks versus trade-in-goods has subtle but important implications for policy.

Comments

[A. PERLA]

"This trade-in-tasks versus trade-in-goods has subtle but important implications for policy."

Take the example of a car, which is an "assembled" product. Its various components come from a great diversity of producers, each of which is competing furiously within its component niche. However, pricing is typically a matter of volume, so Volkswagen will get a cheaper car seat (since it orders a million of them) than will Fiat that orders only half a million.

But, does it really change the price of the finished product? No, not really. If one looks at cost breakdown, one sees most of it concentrated in assembly line manpower. Comparatively, the seat sold to VW and the one sold to Fiat will not change the competitive advantage of one versus the other. VW will remain more expensive.

Either VW dislocates ENTIRELY the production of the car, or not at all. In most cases, this is what it has done ... which is why Eastern Europe has seen such a rise in assembly line jobs. (Even if most of the motors are still made by a relatively better-skilled worker in Western Europe.)

How about the services sector? Can one break down the cost of a bank account into its components and dislocate them? Yes, if one thinks that an on-line account has a talking head as well as account data processing dislocated from the customer in some other country (that speaks the same language as the customer). But, these service components are NOT competing with anything back in the customer's country. The bank has account personnel that cannot be dislocated, since they are dealing with "face to face" service situations. Asset managers typically have a face-to-face relationship with their clients, since clients value such "personalisation". (Barbers enjoy the same level of intimacy with their customers, which is why these jobs have not been dislocated. ;^)

The dislocation of tasks means what it has always meant. If a task is sufficiently "menial" it can be subcontracted offshore to a lower skilled person. But, it depends upon the product or service. This is no universal law and will never be. Here are some examples where terms-of-trade will favour local production:
• Jewellery will be made by master craftsmen in Paris because the required intrinsic artistic talent is fostered by French culture, which French artisans mine heavily for new designs.
• Glassware will be an export product of Finnish manufacture because the “art” of manufacturing fine glass is maintained internal to Finnish producers.
• Atomic energy plants will continue to be designed by French engineers because France made the necessary technological investments to garner a hold on the knowhow necessary – even if the plants will be constructed by local workmen in foreign countries.
• Similarly, the investment in the design of large body aircraft will give American and European firms since the edge necessary to service the aircraft (even in foreign countries employing local technicians) and even replace the aircraft when it comes to the end of its product life-cycle.
• An American brain surgeon will likely do brain surgery in Russia by means of a robotic mechanism that allows the surgeon to operate from a dislocated point.

And, in a western society, where services are rapidly becoming the dominant sector of economic activity, then the continued reinvestment in developing knowhow will assure that the design remains local even though manufacturing is offshored.

Manufacturing products that are outsourced typically have the design knowhow elaborated in the country of origin. Yes, this also means that the country of manufacture will inevitably be able to copy and reproduce the design. But copy the knowhow?

That is considerably more difficult. But, not impossible.

[camille roy]

this paper asserts that the workers whose tasks stay in the 'home country' will increase their productivity and that means their wages will increase.

wrong! wages are dropping, despite productivity increases. The authors should strive harder to be reality based.

Also there is no attempt to calcuate the impact of 20% of american jobs being offshored.

[Arthur Eckart]

Camille, it looks like U.S. nominal wages increased at a 2.8% annual rate over the past five years. So, U.S real wages have been flat. Also, employee benefits increased over 5% annually in the past five years. However, if you measure real wages as the amount of goods & services that can bought with an hour of work, it looks it increased sharply over the past five years. Also, I suspect, lower U.S. interest rates increased living standards. There's an inverse relationship with wage growth and corporate profit growth. The data seem to suggest U.S. corporations have benefited more than U.S. workers, over the past five years, although both benefited. Also, I may add, the U.S. unemployment rate is 4.7%. So, there may be some wage pressures soon.

[A. PERLA]

Roy: "Also there is no attempt to calcuate the impact of 20% of american jobs being offshored."

There is no need to. To whom is the benefit to know that the manufacturing job at Moulinex (building kitchen gadgets) that one has lost has been replaced by driving a taxi around town - at half the original pay?

That person went from a manufacturing job to a service-sector job. That is all that is important to know. There is no sense lamenting about the job being gone. The state must simply prepare its citizens to understand what is going on and to help in the transformation.

This cycle of destruction and creation of economic activity has been well known for over a century. We just forgot that it could happen. It's happening.

There is no sense insisting that the state "should do something about it", because that is simply changing the rules in a game where global competition assures that the rules cannot be changed.

Whoever thought the post-war period from 1960 to 1990 in Europe, with its fantastic increase in wages and purchasing-power, would last forever was about as naive as one can get. Nothing lasts forever - not in economics and not in a global market mechanism that has become increasingly more free.

Anyone who believes that programming jobs in Silicon Valley at $75,000 salaries to inexperienced IT graduates is just over the horizon is hallucinating. That work has left for India. The US graduates must jump the technology competence scale significantly upwards to earn that salary in the future. And quickly.

C'est la vie.

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