In yesterday's post Stephen Roach was once more eulogising about the growth (and deflationary) potential of services outsourcing. He now has a two part story: manufacturing in China and services in India (and Ireland??? - what no-one has quantified yet in all this is the language-based externality attached to being a country with a large English-speaking community. By the way what about South Africa in this context?). I think there is a third part of the picture he is missing. Services now constitute around 70% of the US economy. One part of this is inherently immobile, the labour intensive, people oriented services component: social services, elderly care, health system, cleaning services, security guards etc. But don't worry, labour market globalisation has a solution: immigration, legal or otherwise. Now what was it we were saying about the modern industrial economy being global deflation resistent due to the high proportion of non-tradeables...............?
Globalization is a third leg to the deflation stool. In its early stages, globalization is mainly about new increments to global supply. Courtesy of trade liberalization, rapid dissemination of new technologies, and market-driven structural reforms, low-cost, high-quality production platforms are expanding rapidly in nations like China. As trade barriers come down, worldwide prices of tradable goods converge on the lowest common denominator -- an inherently deflationary transition.
The big surprise is that a similar phenomenon is now playing out in “non-tradable” services. Deregulation of once sheltered services industries is now global in scope, transforming administered pricing into market-driven pricing for this vast segment of economic activity. Moreover, courtesy of a surge of cross-border M&A activity, huge multinational service providers now span the globe; as a result, service enterprises are operating more and more with global rather than local supply curves. Finally, there’s the impact of the Internet. With the click of a mouse, increasingly high-value-added services can be extracted from white-collar outsourcing platforms in India, China, and even Ireland. Once shielded from global forces, service sector pricing is now feeling competitive pressures quite comparable to those shaping the tradable goods sector.
Source: Morgan Stanley Global Economic Forum
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