How does the expanding global services economy affect you? Will your high-end job be offshored to Asia?

1. How does the expanding global services economy affect you? Will your high-end job be offshored to Asia? • E. Wayne Nafziger • University Distinguished Professor of Economics, KSU • Presentation to Senior Seminar (Econ 580) at Kansas State University 11:30 a.m., 2.12.2010, WA329 Senior Seminar E. Wayne Nafziger How global services ec affects you

2. Increased services subject to international competition • Many Americans fear that their livelihood & economic security is at risk by the ever wider range of jobs subject to international competition (B. Friedman, Bhagwati, & Blinder, Offshoring of American Jobs (Cambridge: MIT Press, 2009) Senior Seminar E. Wayne Nafziger How global services ec affects you

3. What are the major changes that has increased international services competition • The widespread expansion of computers, software, electronics, & information & communications technology (ICT) has changed the global landscape • For the last one to two decades, exports of services, sometime sophisticated services, by developing economies such as India & China, have expanded rapidly. Senior Seminar E. Wayne Nafziger How global services ec affects you

4. 2 parts • 1/ discussion of future from the perspective of North America & other developed countries (DCs) • 2/ if time permits, examine the changes occurring in LDCs (less developed countries) Senior Seminar E. Wayne Nafziger How global services ec affects you

5. Computers, electronics, & information & communications technology (ICT) • Solow in 1987: “You can see the computer age everywhere but in the productivity statistics.” • Substantial time lag between discovery & widespread diffusion • True for most major innovations (steam engine, railroad, electricity, computers) Senior Seminar E. Wayne Nafziger How global services ec affects you

6. QUESTION Senior Seminar E. Wayne Nafziger How global services ec affects you

7. Tom Friedman, The World is Flat • Contacted economists, politicians, and Indian CEOs, asking: “Where were you when the world went flat?” (p. 418). • Flatness as a metaphor does not increase understanding • Friedman is writing “about a small world in which distance . . . doesn’t isolate your job completely from far-away workers.” • The proper metaphor for wage competition and reduced costs from containerization, “telecommunications, the Internet, e-mail, voice mail, and the cell phone” is a small or changing world, or level playing field, hardly a title for a best seller. • See http://www.k-state.edu/economics/nafwayne/ , 2nd line for more evaluation Senior Seminar E. Wayne Nafziger How global services ec affects you

8. Senior Seminar E. Wayne Nafziger How global services ec affects you

9. Relative income of Asian elites (top 10%) • Increased from 43% of rich countries’ median income in 1980 to 60% in 2000. • Indians & Asian elites expect a doubling of real incomes in a generation. • The middle classes of the U.S. and other industrialized countries are facing a collapse in growth (doubling incomes in 3 not 1 generation. Senior Seminar E. Wayne Nafziger How global services ec affects you

10. North America’s & Asia’s Relative Economic Development • During the years of globalization (expansion of trade and capital movements), 1980-2000, the growth of income of North America’s middle classes slowed to a crawl, only 1.2% yearly, a third of that experienced by their parents. • The growth of income of Asian elites (competing with NA’s middle class has been about 3% yearly. • This has been Asia’s Golden Age of Development Senior Seminar E. Wayne Nafziger How global services ec affects you

11. Globalization, Outsourcing & Information Technology • India & other Asian economies gain from economic growth and reform. • D’Costa (2003): of India “You have fiber optic lines running parallel with bullock carts.” • India’s and US’s worlds increasingly intersecting. • Globalized firms, searching for lower costs, are hiring Indians, Chinese, and other Asians to do their work in place of middle-class Americans, Canadians, Britons, and Swedes. • Asians are establishing enterprises that compete globally. Senior Seminar E. Wayne Nafziger How global services ec affects you

12. Asia’s competition & Western protests • Who protests at Davos, Porto Alegre (Brazil), International Monetary Fund/World Bank meetings or Group of Seven meetings of rich countries? Senior Seminar E. Wayne Nafziger How global services ec affects you

13. USD Billion 47.8 37.4 28.5 21.6 16.1 13.5 12.1 8.2 6.0 4.8 of GDP Direct Employment NASSCOM, India’s IT Industry Factsheet August 2007 Senior Seminar E. Wayne Nafziger How global services ec affects you

14. Senior Seminar E. Wayne Nafziger How global services ec affects you

15. Top 10 countries by number of Internet users Country Number Pop % of users (m) __________________________ China 384 28.9% US 228 74.1% Japan 96 75.5% India 81 7.0% Brazil 68 34.0% Germany 54 65.9% UK 47 76.4% Russia 45 32.3T France 43 69.3% S. Korea 37 77.3% [EuropeanUn.312 63.8%] Source: http://www.internetworldstats.com/stats.htm Senior Seminar E. Wayne Nafziger How global services ec affects you

16. Questions • Does offshoring, the outsourcing of jobs out of the country, represent a new threat to the livelihood of US workers? • Does offshoring change economists’ views concerning the theory of comparative advantage and the benefits of free trade? Senior Seminar E. Wayne Nafziger How global services ec affects you

17. How the US benefits from the present international division of labor • In ICT (information & communications technology), US has comparative advantage in producing & exporting certain parts of the production process (high-value-added processor chips, innovative & complex software, & the fully assembled product). • US relinquishes parts of production process to other countries where that stage of processing can be completed more cheaply (memory chips, “canned” software, & most peripherals. Senior Seminar E. Wayne Nafziger How global services ec affects you

18. GPNs favor international division of labor • Global production networks (GPNs) enables output to be broken into discreet stages, each performed in countries best suited for the stages. • Frequently LDCs undertake production activities requiring low skilled labor, a low-tech component of a high-tech good. Senior Seminar E. Wayne Nafziger How global services ec affects you

19. In 1990s, ICT integrated into production • ICT investment complemented human capital, physical infrastructure, & other private investment • Total contribution of ICT to GDP per-capita growth in the US was 0.69 percentage points in 1974-90, 0.79 percentage points in 1991-95, & 1.86 percentage points in 1996-2000 (Crafts 2001); in 21st century perhaps 0.5-1 percentage points contribution Senior Seminar E. Wayne Nafziger How global services ec affects you

20. Labor division reduces US cost • US companies are able to reduce the cost of computers & communications equipment by about 10-30% by making the equipment in factories around the world. • Roughly 1/6 of the US’s growth in income per capita annually in the last 20 years has been from offshoring overseas (Mann 1999 adjusted for recent data). Senior Seminar E. Wayne Nafziger How global services ec affects you

21. Is “offshoring” a big deal? • “Yes” says Princeton’s Alan Blinder • New “industrial revolution that will force major changes in the US industrial structure & how Americans earn their living. • Labor force is no longer divided between skilled & unskilled labor but between personally & impersonally delivered services • Offshoring will continue for decades • 30-40 million jobs are in play, perhaps as many as 30% of US jobs (pp. 36-37) Senior Seminar E. Wayne Nafziger How global services ec affects you

22. Service offshoring may erode political support for free trade (Blinder) • Major magnitude that will create millions of losers in the US • Professionals – accountants, lawyers, editors, radiologists, etc. will find their jobs at risk Senior Seminar E. Wayne Nafziger How global services ec affects you

23. How do we prepare the US workforce of the future? • “Go to college” may not be the answer • Instead a more nuanced answer is: “Prepare our kids for the high-end personal service occupations that cannot be outsourced” (Blinder) Senior Seminar E. Wayne Nafziger How global services ec affects you

24. Question: is the service you perform prospectively tradable (& offshorable) or not? • Number of services that can be delivered electronically will expand greatly as technology improves • Thus the number of Indian, Chinese & other workers from developing countries who are capable of providing these services will only grow over time – perhaps explosively (Blinder, p. 24, in Friedman et al.) Senior Seminar E. Wayne Nafziger How global services ec affects you

25. Asia’s increased growth from GPNs • China & India have increased their share of GPNs by 3-4 fold since 1980 as a result of improved electronic technology & the expansion of duty-free access of imported intermediates. • This has facilitated Asian participation in GPNs Senior Seminar E. Wayne Nafziger How global services ec affects you

26. Will Asians climb the comparative advantage ladder to take US jobs? • Chinese & Indian workers at first were willing to work at jobs that were the early stages in the value-added chain • Increasingly, as Asian skills improve, Asians want to compete in the final production of goods & services Senior Seminar E. Wayne Nafziger How global services ec affects you

27. Why should Asians participate in a division of labor that gives so little reward to their vital services? Senior Seminar E. Wayne Nafziger How global services ec affects you

28. Senior Seminar E. Wayne Nafziger How global services ec affects you

29. Can ICT provide LDCs with short cut to prosperity by bypassing phases of development? (Pohjola 2001) Senior Seminar E. Wayne Nafziger How global services ec affects you

30. Sachs’s (2000) division of world • Technological innovators (Schumpeterian entrepreneurs) • Most of OECD plus Taiwan (15% of world’s population). • Technological adapters (Addison – LDCs’ imitation of DCs and increased education, major contributors to TFP). • Mexico, Costa Rica, Argentina, Chile, Tunisia, South Africa, Israel, most of India, Singapore, Malaysia, Indonesia, Thailand, coastal China, Baltic states, Russia (near St. Petersberg), East-Central Europe (50% of world’s population). • Technologically excluded (rest of world). Senior Seminar E. Wayne Nafziger How global services ec affects you

31. With some exceptions (not all blue are innovators, much of India is adaptive, etc.), blue-colored (high-income) nations are technological innovators, red & green (middle-income) nations are adapters, & yellow (low-income) nations are excluded Senior Seminar E. Wayne Nafziger How global services ec affects you

32. ICT & increased productivity ICT requires three new directions to benefit productivity. (David, 2001): 1/ availability of a growing range of purpose-built and task-specific information technologies (e.g. supermarket scanners and other data logging devices). 2/ networking capabilities and networked environment reconfiguring work organization. 3/ internet technology introduces a new class of organization-wide data processing applications. Senior Seminar E. Wayne Nafziger How global services ec affects you

33. Contribution of ICT to GDP per-capita growth in the U.S. (not counting increased TFP of non-ICT sectors from ICT-facilitated work reorganization & knowledge spillovers). • 1974-1990 0.69 percentage points yearly. • 1991-1995 0.79 percentage points yearly. • 1996-2000 1.86 percentage points yearly. Senior Seminar E. Wayne Nafziger How global services ec affects you

34. Low-cost ICT improves . . . • Allocative efficiency by minimizing input cost per output. • Technical efficiency by cutting costs by better access to factor and product markets (mobile phones reduce information costs). • Economies of larger-scale production by breaking labor & capital constraints. Senior Seminar E. Wayne Nafziger How global services ec affects you

35. Explosion of cellular phone technology • 4.6 billion cellular phones in the world • In India, telecommunications deregulation in 1990s facilitated growth. • In 2010, there are 460 million cellular phone users in India • India, China, & other LDCs can leapfrog Western landline telephone technology. Senior Seminar E. Wayne Nafziger How global services ec affects you

36. Sachs’ (2000) division of world • Technological innovators (Schumpeterian entrepreneurs) • Most of OECD plus Taiwan (15% of world’s population). • Technological adapters (Addison – LDCs’ imitation of DCs and increased education, major contributors to TFP). • Mexico, Costa Rica, Argentina, Chile, Tunisia, South Africa, Israel, most of India, Singapore, Malaysia, Indonesia, Thailand, coastal China, Baltic states, Russia (near St. Petersberg), East-Central Europe (50% of world’s population). • Technologically excluded (rest of world). Senior Seminar E. Wayne Nafziger How global services ec affects you

37. Rapid ICT growth • Moore’s Law: doubling of computer capacity & halving of computer & software prices every 2 years. • Pohjola: if auto technical progress were at the same rate as computer technical progress (1958-94), price of car today would be $5! Senior Seminar E. Wayne Nafziger How global services ec affects you

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40. ICT growth in Asia • Half OECD ICT imports from non-OECD countries, primarily in Asia, but largely from multinational corporations with headquarters in OECD countries. • However, Asian companies are beginning to acquire Western companies. • Innovators in Asia. • Cellular technology in Bangladesh benefits petty traders haggling with middlemen. Senior Seminar E. Wayne Nafziger How global services ec affects you