Jobless Recovery Or Job Loss Recovery? Experts Discuss I m pact of Em ployer "Off Shoring" Trend at ULI s Fall Meet ing

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1 Jobless Recovery Or Job Loss Recovery? Experts Discuss I m pact of Em ployer "Off Shoring" Trend at ULI s Fall Meet ing For m ore inform ation, contact: Trisha Riggs (202) or E-m ail: priggs@uli.org WASHI NGTON (Novem ber 5, 2003) -- The m uch-reported j obless econom ic recovery m ay becom e a j ob loss recovery, in that m any of the j obs now going overseas m ay not be replaced, according to econom ists and industry analysts speaking at the Urban Land I nstitute s ( ULI ) recent annual fall m eeting in San Francisco. However, rather than im posing strict protectionist policies to try to stem the j ob loss, the United States would benefit from finding ways to capitalize on the growth elsewhere, particularly in China, the experts said. The outsourcing, or "off shoring," by U.S. em ployers of white-collar j obs such as engineering and accounting to other countries was discussed throughout the m eeting; the topic was also a m aj or concern expressed by survey participants in the Em erging Trends in Real Estate 2004 report, j ust published by ULI and PricewaterhouseCoopers LLP and released by ULI during the event. Several references were m ade during the m eeting to a report from Forrest er Research predicting that as m any as 3 m illion service j obs could be sent overseas by 2015, resulting in as m uch as 500 m illion square feet of office space that m ay no longer be needed. Most speakers concurred that the United States can best m itigate the negative im pact of j ob outsourcing by finding m ore ways to integrate its econom y with econom ies overseas. According to Kenneth Courtis, vice chairm an of Goldm an Sachs Asia in Tokyo, the dom inant global econom ic occurrence of this century will be the extraordinary growth of China's econom y, m uch as the dom inant econom ic event of the previous century was the explosive growth and productivity of the United States. Several fact ors - including a large working-age population, a shared desire by both the citizens and the governm ent to m odernize, and a willingness t o attract foreign investors - are setting the stage for long-lasting growth, Courtis said. "The issue is how t o integrat e the econom ies, how t o engage China's econom y into the global econom y and participate in that center of wealth We will gain from econom ic growth in China m ore than we will lose t o j obs going over there," he said. "The fear of having everything transferred abroad is a false fear." Paul Saffo, direct or of t he I nstitute for the Future in Menlo Park, Calif., pointed out that the service econom y is shrinking in the United States due t o advances in inform ation technology that m ake working anywhere, anytim e, a reality. "I n cyberspace, there is no distance. The m om ent work is touched by a com puter, it can be done anywhere," he noted. Saffo and others expressed concern over efforts since the Septem ber 11 terrorist attacks t o tighten rest rictions on im m igrants in the United States. Such efforts, while aim ed at deterring terrorism, could backfire, in term s of t riggering an exodus of highly-trained, educat ed foreign workers living in the United States, and keeping workers overseas from m oving into the country. "There is no reason for them (foreign workers) t o com e here when they can work in their own countries and m ake West ern wages," Saffo said. Continuing econom ic globalization and inform ation technology have created "m any choices in where to live and work on t he planet," he

2 said. "The best way t o deal with this is to be m ore open m ore willing to listen to the rest of the world, if we are going to continue to com pete in the brain race." According to Em erging Trends in Real Estate 2004, "at a m inim um the (off shoring) trend underscores the country's growing struggle to find a new econom ic engine." However, the report says, "The country's advantages - wealth, strat egic location, labor m obility, huge m arkets, stability, rule of law, and educated workforce outweigh current concerns and doubts about em ploym ent generators and global com petition. But clearly the solution isn't m ore discount store sales clerks or airport security guards." I nst ead of fretting over j ob losses and losing its com petitive edge, the United States should focus on developing a new catalyst for econom ic growth, said Luis Belm onte, executive vice president of AMB Property Corporation in San Francisco and a participant in the Em erging Trends in Real Estate 2004 report. "We should find som ething that we can do bett er than anyone else, and sell it to them," Belm onte said. I n the years ahead, several likely drivers of the U.S. econom y will be defense spending, the healthcare industry, technology ( despite the dot-com bust), biotechnology, echo boom ers entering the workforce and the retirem ent of baby boom ers, said Kenneth T. Rosen, chairm an, Fisher Center for Real Estate and Urban Econom ics, Haas School of Business, at the University of California at Berkeley. Rosen cited several fact ors contributing to the current econom ic recovery, including the for-sale housing sector and hom e m ortgage industry ("I f you can fog a m irror you can get a m ortgage"), defense spending, retail sales, sales of leased real estate, the financial stim ulus from tax cuts, som e im provem ent in the stock m arket, and continued low interest rates. However, factors t hat are draining the econom y include rising unem ploym ent, st ate and local governm ent fiscal woes, the rising federal governm ent budget deficit, slum ping office m arket, slum ping telecom m unications industry, weak sales of unleased buildings, global outsourcing and trade deficits, he said. Weighing the positive influences against the negative ones shows a likely overall U.S. econom ic growth rat e of 2 percent to 3 percent for next year, Rosen said. "We are predicting slow growth I f we don't creat e j obs for m ore people, we will not be able to sustain growth rates of m ore than 2 t o 3 percent," he said, calling the recent econom ic growth spurt "an illusion." Metropolitan areas showing the m ost prom ising em ploym ent growth are Atlanta; Las Vegas; Phoenix; Riverside, Calif.; and Washington; while the least prom ising are San Jose, Bost on, Denver and San Francisco, he not ed. The Urban Land I nstitute ( is a nonprofit education and research institute support ed by its m em bers. I ts m ission is to provide responsible leadership in the use of land in order to enhance the total environm ent. Each year, the I nstitute honors an extraordinary com m unity builder through the Urban Land I nstitute J.C. Nichols Prize for Visionary Urban Developm ent. Established in 1936, the I nstitute has m ore than 18,000 m em bers representing all aspects of land use and developm ent disciplines.

3 / know ledge.w harton.upenn.edu/ _ ss3.htm l W hen Back- Office W ork Moves Overseas, W hat Happens to W orkers I t m ay be good for business owners to shift back-office operations overseas, but is it good for workers? Advocat es of the off- shore strategy say yes. Contact centers and transaction-processing facilities in places like I ndia and Mexico can provide good j obs t o poorer countries, they argue, adding that U.S. em ployees who lose work m ay eventually find higher-skilled positions. Critics, though, don t buy that version of globalization. They say workers in the developing world can be exploited, and U.S. clerks, accountants and call center workers are by no m eans guaranteed a decent-paying replacem ent j ob. Especially given the slow pace of econom ic growth com pared t o a few years ago, m oving back-office work overseas will hurt the m ost vulnerable Am ericans, suggest s Jeff Faux, econom ist with the Econom ic Policy I nstitute. "I t s going to have an im pact on opportunities for people to rise up the econom ic ladder in the U.S.," he says. The debate isn t exactly new. I t follows disputes over the loss of m anufacturing j obs and, m ore recently, inform ation technology work to lower-wage nations. I n contrast to those earlier controversies, though, the labor issues involved in sending backoffice operations overseas haven t boiled over m uch into the public arena. Perhaps that s because a relatively sm all am ount of back-office work has been t ransferred away from the U.S. Last Oct ober, research firm Gartner found that j ust 5% of U.S. corporations with revenues ranging from $100 m illion to $4 billion outsourced, or had the intention of out sourcing, portions of their back- office offshore. And although m aj or nam es like General Electric, Am erican Express and Conseco have established their own back- office facilities in countries such as I ndia, China, Mexico and Jam aica, m any sm aller organizations have not j um ped on the bandwagon. But they m ay soon. The logic behind going global with accounting, data entry and custom er- service tasks is com pelling. While call center workers in the U.S. can m ake in the high $30,000 range or m ore a year, their I ndian counterparts m ight earn $4,000, or up t o $7,000 for a m anagem ent-level post. I ncluding other expenses, total cost savings of 30% to 40% are possible in m oving back-office tasks overseas. What s m ore, the quality of the work can surpass expectations. While clerical and call center j obs in the U.S. often are seen as m ediocre-paying dead-ends, t he sam e work is a relatively high-paying, high-status j ob in a developing country. That can translate into better- educated, m ore-m otivated em ployees halfway around the globe. Betting that m ore and m ore U.S. and European-based com panies will see this light, business process outsourcing outfits are springing up in I ndia especially. I ndia s National Association of Software & Services Com panies (Nasscom ) says the country s call center and BPO industry what it calls I T-enabled services grew by 70% during the period to a t otal of $1.46 billion in revenues. And Nasscom has a bullish outlook as well. I ndian revenues in I T- enabled services should j um p to $16.94 billion by 2008, capturing m ore than 10% of the global m arket, Nasscom predicts. I ndian em ploym ent in the field, Nasscom says, could rise from roughly 100,000 to 1.1 m illion people.

4 A study last year by London-based consulting firm Ovum found that call center capacity worldwide will nearly double within five years, growing from 7.3 m illion seats in 2001 to over 13 m illion early in Ovum also saw the call center industry growing particularly fast in Central and East ern Europe and in South and Central Am erica (including the Caribbean). Both of these regions share of global call center capacity will j um p from 2% of worldwide call center seats in 2001 to 7% in 2006 (a com bined increase t o 14% from 4% ), according to Ovum. But it s not clear the back-office overseas switch is ideal for workers in developing countries. Not all I ndian facilities are air conditioned, notes Vail Dutto, CEO of a U.S.- based contact center outsourcing firm. Dutto toured 20 I ndian sites earlier this year while seeking an I ndian partner for her firm I ntelegy. I n I ndia s tropical clim ates, lack of air conditioning all but guarantees a "data sweatshop" atm osphere. What s m ore, som e back- office facilities in I ndia have sm aller personal work space standards than offices in the U.S., says Chuck McDonough, director of accounting for the World Bank, which m oved som e back office operations to Chennai, I ndia last year. Besides the prospect of hot, cram ped offices, another concern is the ability of workers in poorer countries to organize independent unions, suggests Candice Johnson, spokeswom an for the Com m unication Workers of Am erica union. For exam ple, she says, labor leaders in Mexico have been fired and beaten up. "I t s still a very difficult thing to do to exercise your rights to organize as a worker," Johnson says. Gartner analyst Rebecca Scholl toured Philippine call centers and wondered about the toll taken on workers with late-night hours. Many em ployees lacked their own transportation, she said, which led them to stay several extra hours onsite until public transportation service began. Even though sleep room s and karaoke entertainm ent were available, Scholl questions the long-term im pact of the schedule: "You can j ust work at night so long before you burn out." On the other hand, Scholl says the facilities she visited were "world class" in term s of com fort, ergonom ics and cafeteria services. Other organizations with overseas backoffice operations also say they t reat workers properly. The World Bank, for exam ple, used its Washington, D.C. offices as the standard for workspace size at its transaction-processing facility in I ndia, which now em ploys 110 people. Each I ndian worker gets about 90 square feet of room. Dutto, whose firm I ntelegy has form ed a partnership with I ndian-based HCL Technologies, says the 400-seat call center in New Delhi used to serve her clients is air conditioned and provides transportation for workers. Daksh, an I ndian-based business process outsourcing firm, has im ported office equipm ent to m ake sure its workspaces are ergonom ically correct. I t s roughly 2,300 em ployees work in air-conditioned offices, get t ransportation to and from work, and are given breaks from som etim es-tedious call center duties to take on other roles such as com pany librarian. Em ployees also are eligible for st ock options. So are the workers of Spectram ind, another m aj or I ndian business process outsourcer. Now 90% -owned by I ndian inform ation technology firm Wipro, Spectram ind s nearly 3,100 em ployees also enj oy air conditioning, as well as transportation services and health insurance benefits.

5 Daksh and Spectram ind m ay treat their workers as well as the top Am erican firm s do, but what about those U.S. em ployees whose j obs are sent t o I ndia and elsewhere? The displacem ent already has begun. Last April, financial services firm Conseco said it planned to m ove 2,000 j obs t o I ndia within 21 m onths, though it has trim m ed the goal to a total of roughly 1,500 j obs by the end of So far, about 1,100 workers are dedicated to Conseco operations at its I ndian subsidiary Exlservice.com. The World Bank, m eanwhile, axed 40 j obs from its Washington headquarters when it shifted som e back-office operations to I ndia. Such lay-offs are likely to becom e increasingly touchy given the possibility of a double-dip recession and the slow pace of j ob growth in the U.S. I n July, for exam ple, the U.S. econom y produced a tepid 6,000 net new non-farm payroll j obs and the unem ploym ent rate rem ained at 5.9%. Meanwhile, the Am erican public has grown enraged at corporate greed in the wake of scandals at firm s such as Enron, Tyco I nternational and WorldCom. "I f U.S. process support personnel are seen to be losing j obs to cheaper white-collar workers in I ndia and the Philippines, it is likely to becom e a serious political and public relations issue for enterprises considering offshore sourcing," Gartner wrot e in a July report. Gartner suggests a wise approach m ay include using U.S.-based outsourcers with global operations and offering redeploym ent plans for affected workers. Jeff Faux, though, suggests redeploym ent training is only a band-aid to the bigger wound of j ob exportation. As he sees it, corporations have m isled Am ericans by saying only low-skilled work would be transferred abroad. Higher-skilled j obs also have m oved overseas given the ability of people elsewhere to be trained, he says. I ndeed, som e of I ntelegy s I ndian call center workers are handling custom er support for software firm Oracle s sm all business program, work which requires technical know-how. Faux also disputes the logic that call center j obs in the U.S. are inherently undesirable. I f the j obs weren t being transferred to I ndia and other countries, the U.S. workers would have opportunities for m ore training and benefits, he says. "I t s a vicious circle," Faux argues. "You re creating m ore dead- endness t o these j obs." Faux s point is support ed in part by the experience of the CWA, which represents workers at firm s including Verizon Com m unications, AT&T and SBC Com m unications. Thanks to j oint union-managem ent effort s, CWA-represented em ployees can take a variety of training program s, including Cisco System s technology certification courses. I n addition, CWA-represented call center em ployees can m ake up to $40,000 to $45,000 a year doing custom er service work, Johnson says. Faux says that to generate j obs, stat e governm ents and the federal governm ent ought to be able to lim it overseas outsourcing. He points to a case where New Jersey welfare recipients calling with benefits questions were helped by agent s located in I ndia. When the situation cam e to light earlier this year, it prom pted outrage that the j obs weren t locat ed in the U.S. Faux suggests, though, that free t rade legislation m ay erode the ability of governm ent bodies t o prevent privatization and the transfer of j obs overseas. "I f you can t allow the state of New Jersey the freedom to create opportunities in the public sector for its poor and unem ployed, it s unlikely you re

6 ever going to be (able t o) do anything about GE sending its back-office operations to the far east," Faux says. Off-shore advocates don t share Faux s slippery slope vision of j ob exportation. Organizations, they suggest, are likely to keep a chunk of their back- office operations in the U.S. t o avoid becom ing beholden to outsourcers and to prepare for disaster situations. What s m ore, advocates defend m oving back-office work offshore as good for average Am ericans in the long run. I ntelegy s Dutto says call center j obs going abroad can prod the U.S. workforce t o raise its skill levels. "We becom e the knowledge workers," she says. "The hourly rate, lower-paying j obs are going to be done where they best can be done." David Lewis, associate vice president of business developm ent in North Am erica for Spectram ind, says helping ailing U.S. com panies save m oney will allow them to earn m ore and eventually reinvest in m ore j obs. "I t s in no one s best interest for U.S.- based com panies t o suffer the way they are right now," he says. Lewis suggests wages rat es eventually will balance out, with poorer countries labor standards rising rather than U.S. standards falling. The World Bank pursued that goal when it m oved operations to I ndia. The Bank chose t o pay em ployees an above-average wage - at the 75th percentile as it hired its I ndian staff. And "m any, m any" affect ed workers in Washington found other j obs at the Bank, McDonough says. I n any event, if som e U.S. workers lost j obs while those in a poorer country benefited, the net result is still good, he suggests. "Our m ission is to rid the world of poverty," he says. "We re increasing the st andard of living in the m em ber st ate we re in. Our view is m ore global than local." http: / / artdisplay.asp?cat_id= 326 The Indian Scenario According to industry estimates, the ITES market globally was of the order of US$ 13.5 billion during 2000 and is expected to grow to US $ 142 billion by The segments within ITES that will witness tremendous growth include back office operations, remote education, data search, market research and customer interaction services. As per NASSCOM-McKinsey report 1999, the ITES industry can attain revenues of US $ 17 billion by 2008 and capture 12% of the market. India s irresistible and sustainable value proposition India currently offers a strong value proposition of all IT enabled services hubs owing to the following reasons: India s abundant skilled manpower is drawing corporate hubs to back end their operations in India. The country s English speaking manpower rates high in areas such as qualifications, capabilities, quality of work

7 and work ethics. This places India ahead of competitors such as Singapore, Hong Kong, China, Philippines, Mexico, Ireland, Australia and Holland, among others. India s telecom and physical infrastructure is approaching parity with other countries Indian companies have unique capabilities and systems for setting, measuring and monitoring quality targets. NASSCOM is working with international certification agencies to set standards. In certain ITES categories, Indian centers have achieved higher productivity levels-for example, the number of transactions per hour for back office processing, than their Western counterparts. Also, India is able to offer a 24x7 service and reduction in turnaround times by leveraging time zone differences. India s unique geographic positioning makes this possible. The regulatory environment, specially relating to ITS and ITES is highly progressive and most of the earlier policy recommendations made to the Government have been accepted and acted upon. Incentives such as income tax holiday until 2010 have been provided for the export of IT enabled services. The Government of India has announced a special policy for call centers Many state governments in India are offering incentives and infrastructure for setting up IT enabled services. A comparison amongst some countries in Asia Pacific based on these factors highlights the following: (Ratings are on a scale of 1 to 3, with 1 being the lowest and 3 the highest.) Country New Zealand Kuala Lumpur Workforce Market Access Local Market Infrastructure Cosmopolitan Cost base Japan Hong Kong India denotes low; 2 denotes average; 3 denotes high Source: Mckinsey & Co

8 UC Berkeley study assesses second wave of outsourcing U.S. jobs (See also full report, The New Wave of Outsourcing. ) By Kathleen Maclay 29 October 2003 BERKELEY A ferocious new wave of outsourcing of whitecollar jobs is sweeping the United States, according to a new study published by University of California, Berkeley, researchers, who say the trend could leave as m any as 14 m illion service jobs in the United States vulnerable. Study authors Ashok Deo Bardhan and Cynthia Kroll, both researchers at the Fisher Center for Real Estate and Urban Econom ics housed at UC Berkeley's Haas School of Business, say that not all of the at-risk jobs are likely to be lost. But, they note, jobs rem aining in the United States could be subject to

9 pressures to lower wages, and the jobs that leave m ay slow the nation s job growth or generate losses in related activities. Jobs m ost vulnerable to the new wave of outsourcing, the researchers say, include m edical transcriptions services, stock m arket research for financial firm s, custom er service call centers, legal online database research, payroll and other "back office" activities. Altogether, the positions feature vulnerability-producing attributes such as a lack of face-to-face custom er service, work processes that enable telecom m uting and I nternet work, high wage differentials between countries, a high inform ation content, low social networking requirem ents, and low set- up costs. Bardhan and Kroll say that the widely quoted Forrester Research (an independent technology research com pany) report issued in 2002 that 3.3 m illion jobs would be lost to outsourcing by 2015 already seem s conservative. They point to the rate of outsourcing over the past few years to I ndia - 25,000 to 30,000 jobs in June 2003 alone. Hourly w ages for select ed occupat ions US and I ndia, US I ndia Occupat ion W age w age Telephone $12.57Under operator Health record technologist/ Medical transcriptionist $1.00 $13.17$ $2.00 Payroll clerk $15.17$1.50 -$2.00 Legal $17.86$6.00 assistant/ -$8.00 Paralegal Accountant $23.35$ $15.00 Financial researcher/ Analyst $ $35.00 I ndia, they say, is the leading destination for outsourcing due to its population s widespread use of English in both education and business, institutional sim ilarities with the United States in its legal system, wide wage differentials with the United States, and its large num bers of science and engineering graduates. Yet, other locations such as China, East Asia, Russia, I srael, and I reland also are increasingly popular and com petitive outsourcing destinations, the authors say. They cite tentative evidence that shows the outsourcing of business process and $ $15.00 Source: US wages are from US Bureau of Labor Statistics, National Com pensation Survey, July 2002; I ndia wages are from interviews, business literature search and review of em ploym ent want ads by the authors.

10 software jobs generated m ore than a m illion jobs in the 90s and hundreds of thousands m ore since the turn of the century. "Because white-collar work is so widely spread throughout the United States, m any different parts of the country m ay feel the effects of this wave of outsourcing," says Kroll. Areas that benefited over the past two decades from the m igration of "back office" work out of central cities could now see a share of those jobs leave for other parts of the world, warn Kroll and Bardhan. Major m etropolitan areas are not im m une either, they say. San Francisco and San Jose as well as expensive East Coast locations such as Boston and New York City are vulnerable, according to the researchers, both because of their high shares of occupations that can be outsourced and because of their high cost of labor. This graph, based on Bureau of Labor Statistics data, shows how outsourcing of j obs is likely to vary by geographic area, and by j ob classification within those areas. (Source: Bardhan and Kroll) I n term s of real estate m arkets, "outsourcing will not em pty out office buildings in the United States," says Kroll, "but it will certainly slow the rate at which current vacancies are absorbed." Both "back office" m arkets and high- tech centers are likely to feel the effects, she says. But all is not necessarily gloom y for the United States econom y, the researchers say. For exam ple, outsourcing of service jobs m ay prove m ore costly to the econom y than the earlier wave of m anufacturing outsourcing, conclude Kroll and Bardhan. This, they say, would be the case if the econom y does not generate enough

11 technological growth to replace the jobs lost with new ones and workers eventually find new work in lower-wage occupations. "On the other hand," says Bardhan, "continuing innovation and technological advances could allow the U.S. and California econom ies to keep the cream of new developm ent and highervalue-added jobs at hom e, while m ore routine activities are outsourced." This was the pattern for high-tech m anufacturing outsourcing of California s low-wage assem bly jobs during a downturn that brought productivity increases in its wake and a wide range of opportunities in new service jobs, he said. Haas School trio explores globalization, high tech By Kathleen Maclay, Media Relat ions 11 February 2004 BERKELEY Foreign out sourcing can boost the profit m argins for high-tech firm s but it also contribut es to the growing earnings disparit ies between blueand white-collar workers in California, says a new book by researchers at t he University of California, Berkeley's Haas School of Business. I n "Globalizat ion and a High-Tech Econom y: California, the U.S. and Beyond," (Decem ber 2003, Kluwer Academ ic Press) the aut hors analyze the im pacts of the globalizat ion of high technology on job opportunit ies, wage distribut ion, com m unity resources, regional growth pat terns, t he prospect s for new business developm ent, and the very structure of these businesses. "This book explains why high tech is a driver of U.S. gross dom est ic product growth at the sam e t im e the sector appears to be bleeding jobs to outsourcing act ivity overseas," says Dwight Jaffee, Willis Boot h Professor of Banking, Finance and Real Estat e. Jaffee co-wrote the new book with senior research associate Ashok Deo Bardhan, and Cynthia Kroll, a senior regional econom ist. All three are with the Haas School's Fisher Center for Real Estat e and Urban Econom ics. Their book delves into questions of im port ance t o m any econom ic observers. Quest ions include why high-tech firm s rely on foreign out sourcing for so m uch of their m anufact uring, the im plications for the U.S. econom y of a cont inuing trade deficit in m anufactured high-tech goods, and why high tech is steadily losing m anufacturing jobs while gaining professional service sector jobs. Am ong their key findings:

12 * Foreign outsourcing in high tech can be a m ixed blessing, helping firm s profitability but account ing for one-third to one-half of the increase in relative earnings disparities between California s blue- and white-collar workers. * Foreign outsourcing in U.S. m anufacturing overall has grown steadily for 15 years. That s part icularly true in high-tech m anufacturing, where nearly 40 percent of m anufactured m aterials are im ported today, with the m ajor part com ing t hrough im ports by m ult inational corporat ions from their affiliat es and subsidiaries abroad. * I ndustries undergoing sharp sales declines were m ore likely to restructure their product ion processes by resorting to foreign out sourcing, using it as a restructuring tool during recessions. * The business networks of m ultinat ional firm s and the transnat ional social networks of foreign-born im m igrant s who sett led in the United States represent an "inform at ion bank" on foreign m arkets. These networks can provide inform at ion and insights that serve to enhance U.S. com petitiveness and help increase overall exports. * Recent global expansion of the outsourcing of service activit ies, such as software production and business processes in I ndia, China and Russia raises the prospect that a significant share of California s high-tech service jobs m ay be lost to outsourcing, following the pat tern of the loss of high-tech m anufacturing jobs. * A significant port ion of growing global dem and for products from California and U.S. high-tech com panies will likely be m et by foreign subsidiaries or affiliates of United Stat es-based m ult inational enterprises, not by direct exports from California or the United States. "To m e, the m ost com pelling findings of the case- study work center around the huge changes in how com puter software and services are produced or provided," says Kroll. "Fast er com m unicat ions, m ore advanced I nternet capabilit ies, and m ore powerful com put ers have allowed software and services firm s to go global." Kroll advises policy m akers to recognize that high levels of innovat ion in hightech industries are accom panied by frequent changes in product ion processes and labor force dem ands, as high tech evolves. "Dem ands for newly trained workers m ay occur at the sam e t im e that other workers have been displaced due to the m ovem ent of jobs overseas," she notes. "A big push for outsourcing was the com binat ion of rising labor and facility costs, and very tight supply," Kroll says. "Now costs are down and supply is up in both labor and real estate, m aking a U.S. location m ore feasible for m any act ivities." The authors caut ion that outsourcing also com es with added costs that can counterbalance salary savings, and som e com panies will opt to keep cert ain act ivities onshore because som e com m unications and m anagem ent sim ply work better face- to-face. Bardhan says t he book s key research questions include "how global production and trade have affected t he structure of U.S. high- tech firm s; and how the

13 growing globalization of highly-paid service jobs in high-tech sectors is challenging the posit ion of high-wage em ploym ent centers like Silicon Valley." Globalization of the World Economy: Potential Benefits and Costs and a Net Assessment Michael D. Intriligator Professor of Economics, Political Science, and Policy Studies Director, Burkle Center for International Relations University of California, Los Angeles [This article came up on a search under outsourcing. It doesn t mention outsourcing per se, but is a very good article, pointing out both good aspects and risks of globalization.] 1. Introduction and Purpose Globalization is a powerful real aspect of the new world system, and it represents one of the most influential forces in determining the future course of the planet. It has many dimensions: economic, political, social, cultural, environmental, security, and others. The focus here will be on the concept of "globalization" as applied to the world economy. This concept is one that has different interpretations to different people. Partly as a result of these different interpretations, there are very different reactions to "globalization," with some seeing it as a serious danger to the world economic system while others see it as advancing the world economy. There are three purposes of this paper. First, it will clarify the notion of "globalization" as applied to the world economy. Second, it will evaluate both the potential benefits and the potential costs stemming from globalization. Third, it will consider how the costs or dangers stemming from globalization could be offset through wider international cooperation and the development of new global institutions. The view taken here, representing the thesis of this paper, is that there are both positive and negative aspects to globalization, that some of its positive features stem from the effects of competition that it entails, and that some of the negative aspects that could potentially lead to conflicts could be offset by international or global cooperation through agreements on policy or through the development of new international institutions. Thus, while globalization can cause international conflicts, it can also contribute to their containment through the beneficial effects of competition and the potential of global cooperation to treat economic and other threats facing the planet. 2. Globalization of the World Economy: An Interpretation "Globalization" will be understood here to mean major increases in worldwide trade and exchanges in an increasingly open, integrated, and borderless international economy. There has been remarkable growth in such trade and exchanges, not only in traditional international trade in goods and services, but also in exchanges of currencies; in capital movements; in technology transfer; in people moving through international travel and migration; and in international flows of information and ideas. One measure of the extent of globalization is the volume of international financial transactions, with some $1.5 trillion flowing through world currency markets each day, and with the volume of daily international stock market transactions exceeding this enormous amount.

14 Globalization has involved greater openness in the international economy, an integration of markets on a worldwide basis, and a movement toward a borderless world, all of which have led to increases in global flows. There are several sources of globalization over the last several decades. One such source has been technological advances that have significantly lowered the costs of transportation and communication and dramatically lowered the costs of data processing and information storage and retrieval. The latter stems from developments over the last few decades in electronics, especially the microchip revolution. Electronic mail, the Internet, and the World Wide Web are some of the manifestations of this new technology, where today s $2,000 laptop computer is many times more powerful than a $10 million mainframe computer of only twenty years ago. A second source of globalization has been trade liberalization and other forms of economic liberalization that have led to reduced trade protection and to a more liberal world trading system. This process started in the last century, but the two World Wars and the Great Depression interrupted it. It resumed after World War II through the most-favored-nation approach to trade liberalization, as embodied in the 1946 General Agreement on Tariffs and Trade (GATT) and now in the World Trade Organization (WTO). As a result, there have been significant reductions in tariffs and other barriers to trade in goods and services. Other aspects of liberalization have led to increases in the movement of capital and other factors of production. Some have suggested that globalization is little more than a return to the world economy of the late nineteenth century and early twentieth century, when borders were relatively open, when there were substantial international capital flows and migrations of people, and when the major nations of Europe depended critically on international trade. This is particularly the view of some British scholars, looking back to the period of British imperial dominance of the world economy. While there are some similarities in terms of trade and capital movements, the period of a century ago did not have some of the major technological innovations that have led to a globalized world economy today that is qualitatively different from the international economy of the last century. A third source of globalization has been changes in institutions, where organizations have a wider reach, due, in part, to technological changes and to the more wide-ranging horizons of their managers, who have been empowered by advances in communications. Thus, corporations that had been mainly focused on a local market have extended their range in terms of markets and production facilities to have a national, multinational, international, or even global reach. These changes in industrial structure have led to increases in the power, profits, and productivity of those firms that can choose among many nations for their sources of materials, production facilities, and markets, quickly adjusting to changing market conditions. Virtually every major national or international enterprise has such a structure or relies on subsidiaries or strategic alliances to obtain a comparable degree of influence and flexibility. As one measure of their scale, almost a third of total international trade now occurs solely within these multinational enterprises. With the advent of such global firms, international conflict has, to some extent, moved from nations to these firms, with the battle no longer among nations over territory but rather among firms over their share of world markets. These global firms are seen by some as a threat to the scope and autonomy of the state, but, while these firms are powerful, the nation state still retains its traditional and dominant role in the world economic and political system. Non-government organizations, the NGO s, have also taken a much broader perspective that, as in the case of the global firms, is often multinational or global. Even international organizations, such as the United Nations, the International Monetary Fund and World Bank, and the World Trade Organization have new global roles. Overall, multinational enterprises and other such organizations, both private and public, have become the central agents of the new international globalized economy. A fourth reason for globalization has been the global agreement on ideology, with a convergence of beliefs in the value of a market economy and a free trade system. This process started with the political and economic changes that started in the 1978 reforms in China and then involved a

15 "falling dominoes" series of revolutions in Eastern and Central Europe starting in 1989 that ended with the dissolution of the Soviet Union in December This process led to a convergence of ideology, with the former division between market economies in the West and socialist economies in the East having been replaced by a near-universal reliance on the market system. This convergence of beliefs in the value of a market economy has led to a world that is no longer divided into market-oriented and socialist economies. A major aspect of this convergence of beliefs is the attempt of the former socialist states to make a transition to a market economy. These attempted transitions, especially those in the former Soviet Union and in Eastern and Central Europe have, however, been only partially successful. The nations involved and their supporters in international organizations and advanced western market economies have tended to focus on a three-part agenda for transition, involving: 1) stabilization of the macroeconomy, 2) liberalization of prices, and 3) privatization of state-owned enterprise. Unfortunately, this "SLP" agenda fails to appreciate the importance of building market institutions, of establishing competition, and of providing for an appropriate role for the government in a modern mixed economy. A fifth reason for globalization has been cultural developments, with a move to a globalized and homogenized media, including the arts and popular culture, and with the widespread use of the English language for global communication. Partly as a result of these cultural developments, some, especially the French and other continental Europeans, see globalization as an attempt at U.S. cultural as well as economic and political hegemony. In effect, they see globalization as a new form of imperialism or as a new stage of capitalism in the age of electronics. Some have even interpreted globalization as a new form of colonialism, with the U.S. as the new metropole power and with most of the rest of the world as its colonies. These "colonies" supply the U.S. not only with raw materials and markets, as in earlier forms of European colonialization, but also with technology; production facilities; labor, capital, and other inputs to the production process on a global basis. Whether one sees globalization as a negative or as a positive development, it must be understood that it has clearly changed the world system and that it poses both opportunities and challenges. It is also clear that the above technological, policy, institutional, ideological, and cultural developments that have led to globalization are still very active. Thus, barring a radical move in a different direction, these trends toward greater globalization will likely continue or even accelerate in the future. One important aspect of these trends will be the growth in international trade in services that has already increased substantially but promises even greater growth in the future, especially in such areas as telecommunications and financial services. The result will be continued moves toward a more open and a more integrated world as it moves closer and closer to a planet without borders and to a more integrated, open, and interdependent world economy. The result will be even greater worldwide flows of goods, services, money, capital, technology, people, information, and ideas. 3. Impacts of Globalization on National Economies Globalization has had significant impacts on all economies of the world, with manifold effects. It affects their production of goods and services. It also affects the employment of labor and other inputs into the production process. In addition, it affects investment, both in physical capital and in human capital. It affects technology and results in the diffusion of technology from initiating nations to other nations. It also has major effects on efficiency, productivity, and competitiveness. Several impacts of globalization on national economies deserve particular mention. One is the growth of foreign direct investment (FDI) at a prodigious rate, one that is much greater than the growth in world trade. Such investment plays a key role in technology transfer, in industrial restructuring, and in the formation of global enterprises, all of which have major impacts at the national level. A second is the impact of globalization on technological innovation. New technologies, as already noted, have been a factor in globalization, but globalization and the spur

16 of competition have also stimulated further advances in technology and speeded up its diffusion within nations through foreign direct investment. A third is the growth of trade in services, including financial, legal, managerial, and information services and intangibles of all types that have become mainstays of international commerce. In 1970, less than a third of foreign direct investment related to the export of services, but today that has risen to half and it is expected to rise even further, making intellectual capital the most important commodity on world markets. As a result of the growth of services both nationally and internationally, some have called this "the age of competence," underscoring the importance of lifelong education and training and the investment in human capital in every national economy. 4. The Benefits of Globalization Stemming from Competition It has already been noted that globalization has both positive and negative effects. This section will focus on its positive effects of globalization, stemming from competition, while the next will focus on its negative effects, which could lead to potential conflicts. Finally, the last section will consider the potential for international cooperation to diminish or to offset the negative effects of globalization. Globalization has led to growing competition on a global basis. While some fear competition, there are many beneficial effects of competition that can increase production or efficiency. Competition and the widening of markets can lead to specialization and the division of labor, as discussed by Adam Smith and other early economists writing on the benefits of a market system. Specialization and the division of labor, with their implications for increases in production, now exist not just in a nation but on a worldwide basis. Other beneficial effects include the economies of scale and scope that can potentially lead to reductions in costs and prices and are conducive to continuing economic growth. Other benefits from globalization include the gains from trade in which both parties gain in a mutually beneficial exchange, where the "parties" can be individuals, firms and other organizations, nations, trading blocs, continents, or other entities. Globalization can also result in increased productivity as a result of the rationalization of production on a global scale and the spread of technology and competitive pressures for continual innovation on a worldwide basis. Overall, these beneficial effects of competition stemming from globalization show its potential value in improving the position of all parties, with the potential for increased output and higher real wage levels and living standards. The result is a potential for greater human well being throughout the world. Of course, there is the distributional or equity issue of who does, in fact, gain from these potential benefits of globalization. 4. The Costs of Globalization and Potential Conflicts Globalization involves not only benefits, but also has costs or potential problems that some critics see as great perils. These costs could lead to conflicts of various types, whether at the regional, national, or international level. One such cost or problem is that of who gains from its potential benefits. There can be substantial equity problems in the distribution of the gains from globalization among individuals, organizations, nations, and regions. Indeed, many of the gains have been going to the rich nations or individuals, creating greater inequalities and leading to potential conflicts nationally and internationally. Some have suggested the possibility of convergence of incomes globally based on the observation that the poor nations are growing at a faster rate than the rich nations. The reality, however, is that a small group of nations, the "tiger economies" of East Asia, have been growing at rapid rates, while the least developed nations of Africa, Asia, and South and Central America have been growing at a slower rate than the rich nations. These poor nations are thus becoming increasingly marginalized. The result has been not a convergence but rather a divergence or polarization of incomes worldwide, with the rapidgrowth economies joining the rich nations, but with the poor nations slipping even further behind. This growing disparity leads to disaffection and possibly even international conflicts as nations seek to join the club of rich nations and have-not nations struggle with the have nations for their

17 share of world output. This issue of distribution is a major challenge in the process of the globalization of the world economy. A second cost or problem stemming from globalization is that of major potential regional or global instabilities stemming from the interdependencies of economies on a worldwide basis. There is the possibility that local economic fluctuations or crises in one nation could have regional or even global impacts. This is not just a theoretical possibility as seen in the exchange rate and financial crisis in Asia, starting in Thailand in 1998 and then spreading to other Southeast Asian economies and even to South Korea. These linkages and potential instabilities imply great potential mutual vulnerability of interconnected economies. A worldwide recession or depression could lead to calls to break the interdependencies that have been realized through the globalization process, as happened in the Great Depression of the 1930 s, with competitive devaluations, beggar-my-neighbor policies, escalating tariffs, other forms of protectionism, etc. The result could be economic conflict, gravitating to economic warfare and possibly to military conflict, repeating the history of the interwar period leading to the largest war in human history. A third type of problem stemming from globalization is that the control of national economies is seen by some as possibly shifting from sovereign governments to other entities, including the most powerful nation states, multinational or global firms, and international organizations. The result is that some perceive national sovereignty as being undermined by the forces of globalization. Thus globalization could lead to a belief among national leaders that they are helplessly in the grip of global forces and an attitude of disaffection among the electorate. The result could be extreme nationalism and xenophobia, along with calls for protectionism and the growth of extremist political movements, ultimately leading to potential conflicts. It is sometimes alleged that a cost of globalization is unemployment in the high wage industrialized economies. The low unemployment rates in many high wage nations and their high rates in many low wage nations disprove this allegation. National policy and technological trends are much more important determinants of employment than global factors. A related myth is that globalization is threatening the social welfare provisions of some states, but other factors are much more important, including domestic fiscal policy and demographic trends. In both cases, globalization is simply a convenient scapegoat for failures of national policy. It is important also to appreciate that the economic aspects of globalization are but one component of its effects. There are potential noneconomic impacts of globalization involving great risks and potential costs, even the possibility for catastrophe. One is that of security, where the negative effects of globalization could lead to conflicts, as suggested above, or the very process of globalization leading to integration of markets could make conflicts escalate beyond a particular region or raise the stakes of conflict, for example, from conventional weapons to weapons of mass destruction. A second noneconomic area in which globalization could lead to catastrophic outcomes is that of political crises, that could escalate from local to large-scale challenges and, if unresolved, to a catastrophic outcome. A third such area is that of the environment and health, where the greater interconnectedness stemming from globalization could lead again to catastrophic outcomes, such as those stemming from global environmental impacts, such as global warming, and pandemics. 5. The Role of Global Cooperation in Dealing with Global Threats and in Creating a New Post Cold War System The last two sections have highlighted both the benefits and the costs stemming from globalization. Some could see globalization as a very dangerous negative development by focusing on the costs and the potential for conflict while others could see it as a positive development offering unprecedented opportunities. Both of these views contain some elements of truth, but each should be offset by the other in order to gain a full understanding of the impacts of globalization. There are twin myths here, the optimistic one that globalization leads to only