Offshoring: don't break the links

In The New York Times (free registration required), Bob Herbert writes:

""Offshoring" and "outsourcing" are two of the favored euphemisms for shipping work overseas. I.B.M. prefers the term "global sourcing." Whatever you call it, the expansion of this practice from manufacturing to the higher-paying technical and white-collar levels is the latest big threat to employment in the U.S."

And:

"Most of the millions of white-collar workers who could be affected by this phenomenon over the next several years are clueless as to what they can do about it. They do not have organized representation in the workplace. And government policies overwhelmingly favor the corporations. Like the employees at I.B.M. whose holiday cheer has been dampened by uncertainty, these hard-working men and women and their families have little protection against the powerful forces of the global economy."

Matthew Iglesias and Brad DeLong already have made some valid points against Herbert’s view. In essence they say that many groups are better of thanks to outsourcing: consumers (lower prices for software and thus higher real incomes), Indian software engineers (who gets jobs for higher wages), Americans working in export industries and in construction or capital goods industries (thanks to capital inflows coming from countries like India). On the other hand we have indeed hard working people at I.B.M. but who are nevertheless very well paid. Why should they be protected to the detriment of those large groups of Indians, American workers and American consumers who benefit by offshoring?

The outsourcing of white-collar jobs is not "the latest big threat to employment in the U.S.". In the past, the offshoring of manufacturing jobs, did not lead to a net loss of employment in the American economy as a whole. Neither did NAFTA, a treaty that did unleash those powerfull forces of globalization. Indeed, in the nineties the U.S. created millions of new jobs, offshoring and Nafta notwithstanding (or maybe thanks to...). And there is no reason why this should be different now or in the future:

"When some production of software and services is done abroad, some jobs will be done abroad too. Recent efforts to quantify IT-related and other white collar job loss "offshore" frequently use the peak of the economic and technology boom as the base for analysis, thus ignoring the business cycle, trend decline in manufacturing employment, dollar overvaluation, and technology bust. Cutting through the technology boom and peak of the business cycle and comparing end-1999 with October 2003, employment in architecture and engineering occupations is stable, that in computer and mathematical occupations is 6 percent higher and in business and financial occupations, 9 percent higher. Going forward, broader diffusion of IT throughout the economy points to even greater demand for workers with IT skills and proficiency. In the 1990s, investment in IT propelled job growth for workers with IT skills to twice the rate of job growth in the overall economy. Over the next decade, the Bureau of Labor Statistics (BLS) projects that job growth to 2010 in occupations requiring IT skills will be more than three times the rate of job growth in the overall economy."

As Chatherine L. Mann explains, the "globalization of IT Services and white collar jobs" will be "the next wave of productivity growth" and so very beneficial to the American economy, American consumers and American workers (and for the world economy as a whole). Indeed, productivity growth is the basis of wealth and welfare:

"Although technological change is the most important driver of IT price declines, globalized production and international trade made IT hardware some 10 to 30 percent less expensive than it otherwise would have been. These lower prices translated into higher productivity growth and an accumulated $230 billion in additional GDP (1995–2002). Real GDP growth might have averaged 0.3 percentage points less per year from 1995 to 2002, if globalized production of IT hardware (and the globalization of jobs in IT hardware, IJ) had not occurred.(...)Just as for IT hardware, globally integrated production of IT software and services will reduce these prices and make tailoring of business-specific packages affordable, which will promote further diffusion of IT use and transformation throughout the US economy."

Mann concludes:

"Globalization of software and services, enhanced IT use and transformation of activities in new sectors, and job creation are mutually dependent. Breaking the links, by limiting globalization of software and services or by restricting IT investment and transformation of activities or by having insufficient skilled workers at home, puts robust and sustainable US economic performance at risk."

Fransis also right however: we should be thinking about real policies to cushion the blow to those white-collar workers who will lose their jobs. But his view of Herbert is, i think, a little naïve. Herbert at least is implying that those white-collar workers should be protected against the forces of globalization. Let’s just hope that people like Herbert are not giving to much credit to the view that we should "break the links", for instance by restricting the globalization or offshoring of software-industries. That we should not do.

Merry Xmas to Everyone

Just to wish everyone a merry xmas, and what better way to do it than by blogging this walking disaster. The piece from Forbes is interesting, as it focuses on the international dimension of the thing. I am off on holiday now till 1st January. No more blogging from me till then (although others please feel free to do so, and if you really are bored, I just left a pretty tangled xmas riddle down in the comments on the Joseph Bosco post). I am sure I'll have more, much more, to say on this when I get back.

Parmalat will soon have protection from its creditors, but that may not be enough to keep the global milk and cookie empire from crumbling. With $11 billion in reported debt, a black hole in off-balance sheet obligations and $5 billion in cash missing, Parmalat will have to sell either a lot of milk or a lot of assets.

Parmalat's Italian dairy business will likely remain intact -- especially after Prime Minister Silvio Berlusconi's weekend pledge to save jobs and factories. But Berlusconi won't see it as a priority to save jobs and factories in Brazil and North America, two of Parmalat's biggest markets. The most likely scenario: The global empire that Calisto Tanzi assembled will eventually be broken up and sold to the highest bidder, much as Europe's other global disasters: Vivendi Universal (nyse: V - news - people ) and Ahold (nyse: AHO - news - people ).

In the 40 years he ran the company, Tanzi made over a hundred acquisitions and borrowed billions to do it. Parmalat is a global brand, but most of its businesses remain local. The company, with sales of $9.4 billion last year, still markets scores of acquired brands in 30 different countries. Even Parmalat's signature long-life milk tends to be procured, processed and sold as close to the source as possible.

Now, with Tanzi under investigation, Parmalat's debt is trading for 20 cents on the dollar and its shares have fallen 95% in the last week. It's difficult to see how Parmalat will hold together. As auditors discovered late last week, the company's cash pile was a mirage.

The dairy silos, bakeries and juice businesses are real, but valuing them now is difficult. If the company's balance sheet was a sham, why should anyone trust cash flow or earnings reports? Parmalat's assets could be marked down to distress levels and that will bring out the vultures.

The first assets on the block will be of the non-dairy variety. Even before the hole was discovered in Parmalat's balance sheet, the company had been laying off workers and closing down bakery plants in the U.S. for the past year, preparing its business, which will have an estimated $1 billion in sales for 2003, for sale.

The company paid $250 million for Mothers Cake & Cookie Company and Archway Cookies three years ago. Citigroup (nyse: C - news - people )'s Citigroup Smith Barney values the bakery business, including a few Italian brands, at $531 million, but it could fetch much less than that.

One former Kraft (nyse: KFT - news - people ) executive says that the Illinois-based company should look at Parmalat's Mothers brand of cookies, which is strong in the western U.S. states where Kraft is weak. But how much appetite will Kraft have for junk food given its own troubles?

Eventually, Parmalat's dairy business could end up on the block as well. National Foods of Australia said last week that it would be interested in Parmalat's business down under. Dean Foods (nyse: DF - news - people ), America's largest milk processor, grew to a $9 billion-a-year company by consolidating dairies across the country. The Parmalat brand may not be worth what it once was, but the Italian dairy company owns some expensive European packaging lines that Dean may find interesting.

Creditors may wish to see Parmalat -- and their investments -- rescued and intact, but that is an unlikely scenario. Its also unlikely the company could be swallowed whole. Andy Smith, an analyst with Citigroup Smith Barney in London wrote in a December 17 report: "We could see a strong strategic fit between parts of Parmalat with either Kraft, Nestlé or Danone ... But which potential trade buyer would be prepared to countenance any form of due diligence when the company is in so much apparent distress?" Nestlé (otc: NSRGY - news - people ) and Groupe Danone (nyse: DA - news - people ) have said publicly they are not interested in Parmalat, at least for now.

Private equity buyers may be more willing to take the risk on a tarnished brand, providing the cash flow is there. Hicks, Muse, Tate & Furst is among the most aggressive in the food business. In Europe, PAI Partners has a stable of food investments, including Panzani and United Biscuits. Doughty Hanson, which holds U.K. baking and milling group Rank, Hovis, McDougall, and BC Partners with Galbani are two British private equity firms that like food brands.

Good thing the holidays are a time for over-eating.

China, soot and soybeans

There have been a number of posts about China’s appetite for soybeans some of them also mentioned that China’s crop yields have been dropping for several years. I’ve been meaning to post this link about China, soot and climate change.

Soot is mainly the result of incomplete combustion of some fuels – particularly coal. In China, coal is used extensively for home heating & cooking. These home furnaces tend to burn less completely than large industrial-size plants and are a major source of soot.

The researchers fed aerosol (soot) concentrations into their models. The models’ results match up well with observations; increased rainfall/flooding in south China, drought in northern China, decreased crop yields due to both precipitation changes and reduced sunlight. To add insult to injury, drought means less water for hydropower. The effects aren’t limited to China either: Central Asia (e.g. Afghanistan) has been suffering from drought for the last five or so years.

The link underscores the fact that development, energy and climate are all interrelated. [Put in standard disclaimer involving any climate research here.]

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The good news is that since soot is relatively short lived, actions taken to reduce soot would yield results in a short time (months to years). Unfortunately, it will take longer to develop and implement a viable solution.

To paraphrase Edward, these are complex, interesting issues.

Christopher Anderson

The Logic of Relative Prices

In a retrospectively obvious development, China is going to rent 17,300 acres (7,000 hectares) of arable land from Kazakhstan.

In a way, this isn't that much different that buying soybean from, say, Argentina: the soybean trade could be seen as the Chinese renting both land and labor from the Argentines. Not because Argentine labor is cheaper than the Chinese, but because soybean-bearing land is (at least at the prices dictated by Chinese demand), and sending Chinese labor to South America would be not only politically delicate, but also too expensive in any case. Kazakhstan sharing a border with China, and having ample almost unhabited zones, its "land for rent" is unbundled from its labor, and Chinese labor probably beats the local one in terms of wages.

Given the economic and demographic forces at play, I´d be surprised if this where the last of these deals.

Fear and Loathing in China

In a weekend edition of the New York Times, Nicholas Kristof asks: Is China a Threat to the Rest of the World? It is a continuation of a series of columns he is writing on his journey of exploration of the 'New China', along with a reader's forum on the series in his semi-weblog 'Kristof Responds'.

His major thrust today is concern over the "nationalism" he finds stirring in the belly of many if not most young Chinese people, university students in particular, which he finds directed most openly towards Japan and the Japanese people.

Below is an extract from Joseph Bosco's response.

In his argument, he mentions two very recent events as examples of this phenomenon: An ugly, and outrageous, incident over a skit performed by Japanese exchange students at a university in Xian in the early part of this semester; and the arrests and adjudication in a case involving several hundred Japanese businessmen and their mega-tryst with several hundred Chinese prostitutes at a hotel in the southern port city of Zhuhai (for which two Chinese citizens received life sentences just this past week).

Readers of these pages and other China-based weblogs will be familiar with both of these aberrations. His third example is the ever-upward creeping revisionism of the death toll of the Japanese atrocity in 1937, commonly known as the 'Rape of Nanjing.'

Being a visiting professor at one of China's elite universities, without qualification, I can attest to the accuracy of Mr. Kristof's underlying findings. The loathing of Japan and, to a lesser extent, the Japanese people, is quite palpable. It manifests itself whenever Japan, and things Japanese, are the focus of class lectures or discussions, any time Japan is in the news, and most vehemently in private conversation..............


Where I somewhat disagree with Mr. Kristof, is in what it actually means, and that it is fore-shadowing a potential military confrontation with Japan. I also disagree on how much of it is orchestrated by the central government as a way of using 'nationalism' as a cohesive factor in holding China together as ideology increasingly diminishes with the rush into capitalism and, yes, the beginnings of a form of 'Democracy with Chinese Characteristics' which is fact and not just dissident radicalism.

If it is possible for most people in the west to understand, the Communist Party of China itself is a burgeoning democracy, with peacefully competing wings' left, right and center, amongst the 60 million party members.

It is these two engines that are driving China, and also holding it together. While they often exercise their prejudice of Japan, what the young Chinese people spend most of their time doing is chasing what we used to call the 'American dream': a good life that includes a home of their own, a car of their own, a good education for their one child, vacations that include travel, and of course the good, steady job that provides for all of these things. Going to war with anyone seriously gums up that future and they know it.................

Another reason I do not believe that China is a military threat to Japan, or any of its other neighbors, is that while they may viscerally loathe Japan, they are not afraid of Japan, or even mistrustful of Japan. Who my students fear and mistrust is America. While they love Americans, and almost all things American, they truly believe that an administration such as George W. Bush's would in fact attack China in a heartbeat if it was in any way politically or geopolitically advantageous to what the neocons might one day believe to be American interests............

You see, Chinese students study a great deal more history than American students. The Korean war is not a 'forgotten war' to them. And the war in Vietnam isn't something they culturally want to forget as do American students. They know that war well; they know that our air force came all too close to unloading B-52s on Hainan Island, China's southern most province and its 'Hawaii', only about 100 miles of South China Sea away from North Vietnam.

This is probably not the kind of thing Mr. Kristof and other Americans want to hear—I damn sure did not like it when I first became aware of it (which was about a day after arriving in China). But it is fact: America is the only country Chinese young adults fear and mistrust. Japan they can hate, and even haze and all but terrorize its visiting citizens when they are not extremely careful regarding China's over sensitivity towards Japan's behavior during the first half of the 20th Century. They can do this because they do not fear or mistrust them; they just don't like them.

On the other hand, we Americans are treated with almost embarrassingly special attention. As long as our students are testing well and getting into graduate schools in America and Great Britain, we can almost get away with murder. Being an American 'Foreign Expert' in China is a ticket to a life of special favors in almost every sector of life. We are loved, feted, wined, dined and lavished with presents and invitations home.

But our government? Particularly this government? They don't trust it any farther than they can throw it. And they fear it greatly. It wasn't just one student who wondered aloud that if we could force the acknowledged leader of a country like Iraq into a rat-infested hole in the ground for weapons of mass destruction he did not have, or for supporting terrorists who were not in country much before he went into that hole, what might we Americans do to the leaders of a country that absolutely does have weapons of mass destruction, a country that has made serious military threats against a runaway province that America is sworn by law, not treaty, to defend?

No amount of explaining how that is all but impossible, even for this administration, can dissuade them, and many of their Chinese professors, from their deep and basic mistrust of American unilateralism. And this is not just since that term became a buzz word after 9/11 and Bush's strike-first doctrine. They have feared American unilateralism all of their young lives.

Italy Struggles With Growth

In marked contrast to the previous post, the economic news from Italy is decidedly not good. First there is the Parmalat scandal, where the financial black hole could in fact be bigger than €7bn. Berlusconi is remaining calm, saying that the government would take measures to "above all save the industrial part of the company and jobs" and "separate finance from industry". Those who may well not be so calm are the people who have an interest in the financing of Italy's growing national debt, the largest in Europe and the largest in the OECD outside Japan - as a % of GDP that is. The nervousness will only be reinforced by this news that Italy is having even more difficulty crawling out of the recessionary hole than the other large European economies. And while it is certainly far too soon to say told you so, I was suggesting this earlier in the year. Italy is the prime candidate (alongside Germany) for noting the Japan ageing factor - if indeed this is what it is, and with it arthrosis of the growth process.

Italian business confidence unexpectedly fell in December to a five-month low as the euro's rise to a record against the dollar weighed on exports and manufacturing stagnated.

An index based on a survey of 4,000 executives fell to 91.2 from a revised 94 in November, the government statistics office said in Rome. The index was expected to rise to 95, according to the median forecast of 18 economists polled by Bloomberg News. "The euro's strength is starting to get scary,'' said Renzo Belcaro, chief executive officer of car-finishings maker Silmet SpA and president of an association of 4,500 small and medium- sized companies in northeast Italy. ``If we don't export, we're dead.'' Italy, the third largest of the 12 economies using the euro, is struggling to recover from its first recession in almost a decade as the currency's appreciation makes it harder for companies such as Fiat SpA to sell to foreign customers.

The five-year-old euro's rise poses ``remarkable difficulties to the speed of recovery,'' European Commission President Romano Prodi, a former Italian prime minister, said last week. Italian exports outside the European Union fell almost 11 percent in November.

Fewer Italian manufacturers plan on boosting production in the next three months, Isae said. Inventories rose, and foreign demand fell. An index measuring orders from abroad dropped to minus 17 from minus 14 in November, a sign the increased value of the euro is squeezing exporters.

The survey coincides with growing woes at Parmalat Finanziaria SpA, Italy's biggest food company. Parmalat may file for bankruptcy protection as early as today after admitting that a 4 billion-euro ($5 billion) bank account didn't exist, people familiar with the situation said.

Parmalat failed to pay investors 150 million euros of bonds, Standard & Poor's cut its credit rating to below investment grade and founder Calisto Tanzi resigned as chairman. Parmalat's financial troubles put 36,000 jobs at risk.

``2004 isn't going to be an easy year,'' said Giovanni Burani, chief executive of Mariella Burani Fashion Group SpA, owner of the Mila Schon fashion label, in a televised interview with Bloomberg News.

Italy, which emerged from recession in the third quarter, faces other obstacles to a recovery. Labor unrest kept production unchanged in October. In Germany and France, Italy's two biggest trading partners, production jumped in the same month.

Plans by Prime Minister Silvio Berlusconi to force Italians to work longer to collect a full pension have triggered nationwide protests. Earlier this month, more than 1 million demonstrators took to the streets of Rome.

An October general strike forced Alitalia SpA to cancel flights and thousands of workers at Fiat didn't show up to work. The lower house of parliament had to vote confidence in the government three times to pass Italy's 2004 budget to the Senate for final approval.
Source: Bloomberg
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Drop in Brazil's Unemployment Rate

Just when you all must have been thinking that I'd sneaked off for xmas without saying goodbye, here I am back again. Just a bit of good economic news from Brazil to back up Frans last post:

Brazil's jobless rate fell for the first time in three months as retailers hired personnel to staff stores for the year-end holiday season and manufacturers such as Fiat SpA looked to boost output to prepare for an economic recovery in 2004.

Unemployment in Brazil's six-largest metropolitan areas fell to 12.2 percent, from 12.9 percent in October, the government said. The median estimate in a Bloomberg News survey of six economists forecast the jobless rate would fall to 12.65 percent. The rate was 13 percent, a two-year high, in August.
Source: Bllomberg
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