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Sunday, February 04, 2007

Sustainable Globalization

Stephen Roach writes,

The pendulum of economic power is at unsustainable extremes in the developed world. For a broad collection of major industrial economies - the share of economic rewards going to labor stands at a historic low of less than 54 percent of national income - down from 56 percent in 2001. Meanwhile, the share going to corporate profits stands at a record high of nearly 16 percent - a striking increase from the 10 percent reading five years ago. This divergence is not sustainable. The angst of workers in the developed world has become a major source of tension. .. A shift in political orientation is likely to prompt an equally important pro-labor swing in the pendulum of economic power.

This, he warns is likely to prompt an equally important pro-labor swing in the pendulum of economic power. In the US house(s), topics now on the table are increased minimum wages, higher taxes on the energy industry, and new scrutiny of corporate compensation and excessive returns going to hedge funds and private equity firms. These are early warning signs of a looming shift in America's reward structure - away from the excesses going to capital and back toward labor. The biggest risk is the rising threat of protectionism. Politicians throughout the developed world view trade liberalization increasingly as a serious threat to job and income insecurity.

While, am not an expert in this field, to the extent that I understand these matters – I think that Mr.Roach is overblowing the trumpet. First of all, based on my direct experience in dealing with so many business units, I can state that the vibrancy & optimism levels are infectious. The capital accumulation problem is on account of many reasons and the important ones are linked to productivity and international trade expansion. The labor component of cost of products is perhaps coming down when assessed alongside the trends of other overheads. As operations get more profitable then more of the revenue goes into earnings, investments and reserves and less as a proportion towards labor. Matter of fact assessment of labor situations needs to be sector/region specific – a mixture of all hardly would qualify to be a rational basket for the purposes of assessment. Alternative measures like total employment numbers, average compensation levels in a stratified way, inflation and value of the currency may matter a lot for assessment purposes. In general, if both capital and available labour expands, then their relative rates of expansion would determine the basis of capital allocation. Technological changes have more influence on labor than trade influences. Around the world, corporations talk about shortage of good quality talent - labour and manager included. Technology and skills upgradation are the key and more capital accumulation would help invest lot more on such things. Cheaper imports from places like India or China are just like a tax cut; there is more money left in your wallet at the end of the day. And they create American jobs(ditto for other developed countries),too, which is less intuitive and therefore often overlooked. If you save money on cheaper cotton towels, much of that extra cash is likely to be spent on American goods and services. A DVD player used to cost $500. Now it costs $40. What happens to the other $460 ?. In the din , something substantial is being missed out. The international business volumes of majors from developed countries are expanding quite significantly. The dependence on such markets for their future growth can’t be underestimated. Mr. Roach himself has spoken about the consumption led growth of economies like India, in the process creating major opportunities for global corporations. Charles Wheelon wrote recently that whats good for India is good for America, examining things from socio-economic perspective, a trait that US policymakers seems to be exhibiting less and less these days.
The better measures of labor pool wellness are total employment, compensation rates and inflation. the expansion of the capital to labor ratio that makes wages rise. The world actually needs more and more capital, and lesser the obstacles to capital formation, the better the world would be for the future generation

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