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.