Movement of jobs to low-wage countries unstoppable

Nayan Chanda, Editor, 'YaleGlobal Online', Yale Center for the Study of Globalization, Singapore

The globalization of manufacturing has led to a massive redistribution of work around the globe, in the process turning China into the world's factory. Similar developments are underway in the service sector, with jobs migrating to India, China, and other parts of the developing world.

The disappearance of white collar jobs from the U.S. has now added a new voice in the protectionist cry. The first impact was felt late last month when President Bush signed a bill that forbids certain parts of the federal government from outsourcing work to foreign companies. Many Asians are alarmed by the latest signs of creeping protectionism in the U.S.

But Singapore's wise-man-in-residence, Senior Minister Lee Kuan Yew, shrugs it off as a passing phase. Measures like this, he says, will make American companies uncompetitive and will force them to change. Protectionism may slow down the economic integration of the world, but economic forces make integration unstoppable.

Sitting in his spartan, wood-paneled office in Singapore's Istana (the palace that serves as the official residence of the President and office of the Prime Minister and Senior Minister), Lee takes a long-term view of the world. Founder of the city- state and its leader for over 40 years, Lee has witnessed the rise and fall of powers and seen Asia transformed by globalization. In an interview with YaleGlobal, Lee comments on the latest bumps on the road of globalization and assesses their impact.

"The word globalization is new." Lee says, "but the concept started with the first tribes exchanging goods which one area has and the other area doesn't have. It is a way of maximizing whatever you have." The exchange of goods has since widened into many other exchanges, including services. High-speed communication networks linking the world means "You can use cheap professional services anywhere in the world and incorporate them. They have low costs of living, they don't have to come to your country, you pay them at their wage levels."

However, this policy of outsourcing work is increasingly controversial in the U.S., which has lost three million jobs in the last two-and-a-half years and is currently experiencing a "jobless recovery." According to a study by Forrester Research, an estimated 3.3 million more white-collar American jobs will shift to low-cost countries, especially India.

Under pressure from white-collar workers' unions, state legislatures are currently drafting a dozen pieces of legislation banning outsourcing. On Jan. 23 President Bush signed into law a provision that forbids the federal government from sending jobs overseas.

Asked about the impact of such a policy, weeks before it became law, Lee said outsourcing of jobs was unstoppable. "Suppose the Americans forbid this -- 'You can't outsource' -- but the Japanese, Germans, British, French outsource, so their goods and services are cheaper. If you deprive yourself of outsourcing and your competitors do not, you're putting yourself out of business. I see this opposition as a roadblock to slow it down, but it is unable to stop the forces that drive the economy. Economic forces are let loose and are not stoppable unless all the developed countries agree they will not outsource. Why should they agree?"

Lee adds that if one state prohibits outsourcing, "business will migrate to the next state," because of how economic forces work. "So long as you are driven by profit to sell your goods at the lowest possible cost and to sell the maximum number of goods or services, how can you stop it?"

But this focus on profit is precisely what many anti- globalization protesters complain about: In their race to the bottom, companies show a lack of social conscience. Lee's response is simple: "If you're not driven by profit, and do what the communists used to, which means price equals cost plus, then your economy will collapse."

Moving to the larger issue of free trade and especially the criticism that it has widened the gulf between the rich and the poor Lee says , "It has gone too far to be able to be reversed without a grave and sudden drop in the standard of living of many peoples. Suppose tomorrow, world leaders decide, 'No more world trade,' what does America do with all her surplus production capacity? 'We've got the biggest market. We don't export, don't import, we all live by what we produce.' -- back to autarchy? Or America decides 'just NAFTA or the Americas' -- your standard of living must go down."

Asked if there isn't a problem when the U.S. is the largest market and is able to dictate the terms of trade, Lee says, "This is a passing phase in history... For the present, America is the locomotive because Americans are spending more, buying and importing. Project forward another 100 years when China has a standard of living half of America, but with four times the population. Who will have the bigger market? "

Lee asks one to look ahead. "You will notice that all the motorcar manufacturers are going to China, not because of the huge demand now, but given their rising incomes, the tens of thousands of kilometers of new roads they are building, where is the biggest growth? Similarly, if the Indians travel the same road, that's another one billion people. History does not stop."

Referring to the 2002 National Security Strategy document of the Bush administration Lee says "I understand the sentiments of American leaders when they put out their strategic assessment in 2002 that they would not allow any country to overtake the U.S. That must be the aim, their ambition. Is it achievable? If it is, then empires would have stopped with the Romans, or with the Moguls, or with the Ming or Qing, or with the Czars. There are cycles in human history."

However, the cycle of American hegemony is not about to end soon. Unlike many critics of the Bush administration who fret about the coming crisis of the U.S. economy mired in gigantic debt, Lee does not see American debt as an immediate problem. "Change will not come so soon, because Americans are owing dollars, U.S. dollars. When other countries borrow, they borrow in foreign currencies, not their own. So, they just can't print rupees and pay off their debts. But America has the advantage of borrowing in U.S. dollars and is not in the position of other countries that are borrowing in foreign currency and have to pay in foreign currency."

"Eventually, of course, there will be internal problems", Lee says, "not because Japan and China decide not to keep U.S. dollars, but because in America, another bubble may be created... Sooner or later, excesses will have to be blown off and washed away. That's a different problem. It's not an international collapse."

As far as the Chinese and the Japanese are concerned, Senior Minister Lee says, "they have to decide whether they want to keep on selling their exports and keep U.S. dollars, either in U.S. Treasuries or other U.S. assets, or buy properties, shares, or whatever with U.S. dollars. If they switch over to Euros in a big way, then Americans may have to stop buying from them, and their economy will stall. So, China and Japan have decided for the present that this is not a bad situation. 'I manufacture, use my surplus labor and sell you these goods, value-added. I take your dollars, buy U.S. Treasuries, buy U.S. shares, equity, real property, U.S. technology. It's a useful way of developing my economy.'"

In the end Lee is philosophical. "This is an unfair world. But the world has never been fair. One tribe is stronger, it has bigger people, more people, better soil, a better climate, and they also have better luck."