[OPE-L] the global labor force and capital accumulation

From: glevy@PRATT.EDU
Date: Sat Jan 14 2006 - 10:59:27 EST


The following article by Richard Freeman claims that there has been
a doubling of the global labor force.  A couple of questions:

1) is his estimate of the increase in the size of the global labor
force correct?

2) from a Marxian perspective, what are the short- and medium-term
consequences for capital accumulation, the composition of capital and the
general rate of profit of such an increase in the size of the working
population?

In solidarity, Jerry


---------------------------- Original Message ----------------------------
Japan Focus Article
JapanFocus.org
China, India and the Doubling of the Global Labor Force: who pays the
price of globalization?


By Richard Freeman







[In this concise article, Harvard Economist Richard Freeman shows us that
a spectre is haunting the industrialized societies, and above all the
workers of these countries. Though little recognized in Japan and
elsewhere, there has been an effective doubling of the global labour force
(that is workers producing for international markets) over the past decade
and a half, through the entry of Chinese, Indian, Russian and other
workers into the global economy. The effective supply of capital, on the
other hand, has virtually remained unchanged. With such a massive increase
in the supply of labour, its relative share of the returns from production
inevitably decline. One important dimension of this decline is the ability
of increasingly footloose capital to find cheaper labour to employ. Morgan
Stanley's Chief Economist Stephen Roach has long referred to a "global
labour arbitrage" wherein high-wage jobs in the developed world are
eliminated in favor of low-wage jobs in the developing world. He has
argued that this is not limited to manufacturing, but also extends to such
service industries as banking. But capital does not have to move to keep
pressure on wages and salaries. Even work that is not at present
outsourced may experience this pressure if the cost of labour becomes
excessive relative to global benchmarks (including premiums for developed
world levels of political stability and infrastructure).

Small wonder, then, that the labour share of compensation in Japan, the US
and the EU countries is almost flat (indeed, incomes are declining for
much of the workforce), while corporate profits are robust. What is more
than a little strange is the general lack of recognition of this labour
supply shock and its sobering implications. The public debate on
globalization is largely dominated by pressure to open markets in order to
attract more capital or at least keep what one has, while progressive
taxes, regulations, unions and the other means of collective provision and
action are either ignored or dismissed as "socialistic" impediments to
growth. But Freeman rightly argues that capital can take care of itself
and that it is time for domestic and international politics and policy to
shore up the woefully eroded position of workers, a proposition that
applies no less in the periphery than in the core. Japan Focus]

The global economic community, and economic policymakers in governments
and global institutions alike, has yet to fully understand the most
fundamental economic development in this era of globalization  the
doubling of the global labor force.

I estimate that the entry of China, India and the former Soviet bloc into
the global economy cut the global capital/labor ratio by just 55% to 60%
what it otherwise would have been.

The doubling I am referring to is the increased number of persons in the
global economy that results from China, India and the ex-Soviet Union
embracing market capitalism.


1. Chinese workers assemble computers in Fuzhou, Fujian

In 1980, the global workforce consisted of workers in the advanced
countries, parts of Africa and most of Latin America. Approximately 960
million persons worked in these economies.

Population growth  largely in poorer countries  increased the number
employed in these economies to about 1.46 billion workers by 2000.

New players enter the scene

But in the 1980s and 1990s, workers from China, India and the former
Soviet bloc entered the global labor pool. Of course, these workers had
existed before then. The difference, though, was that their economies
suddenly joined the global system of production and consumption.



2. Indian programmers

In 2000, those countries contributed 1.47 billion workers to the global
labor pool  effectively doubling the size of the world's now connected
workforce.

Competing globally

These new entrants to the global economy brought little capital with them.
Either because they were poor or because the capital they had was of
little economic value.A decline in the global capital/labor ratio shifts
the balance of power in markets away from wages paid to workers and toward
capital, as more workers compete for working with that capital.
Using figures from the Penn World Tables, I estimate that the entry of
China, India and the former Soviet bloc into the global economy cut the
global capital/labor ratio by just 55% to 60% what it otherwise would have
been.

The capital/labor ratio is a critical determinant of the wages paid to
workers and of the rewards to capital. The more capital each worker has,
the higher will be their productivity and pay. A decline in the global
capital/labor ratio shifts the balance of power in markets toward capital,
as more workers compete for working with that capital.

Even considering the high savings rate in the new entrants  the World
Bank estimates that China has a savings rate of 40% of GDP  it will take
30 or so years for the world to re-attain the capital/labor ratio among
the countries that had previously made up the global economy.

Pressure to compete

Having twice as many workers and nearly the same amount of capital places
great pressure on labor markets throughout the world. This pressure will
affect workers in the developing countries who had traditionally
participated in the global economy, as well as workers in advanced
countries.

Countries that had hoped to grow through exports of low-wage goods must
look for new sectors in which to advance  if they are to make it in the
global economy.

The effect on advanced countries
Mexico, Columbia or South Africa cannot compete with China in
manufacturing, as long as Chinese wages are one-quarter or so of theirs 
especially since Chinese labor is roughly as productive as theirs.

The entry of China, India and the former Soviet bloc to the global
capitalist economy is a turning point in economic history.

The ending of the apparel quotas in January 2005 has brought this point
home to many countries, which are now rethinking their growth strategy.

But the advent of 1.47 billion new workers also pressures labor in
advanced countries. The traditional trade story has been that most workers
in advanced countries benefit from trade with developing countries because
advanced country workers are skilled, while developing country workers are
unskilled.

But this analysis has become increasingly obsolete due to the massive
investments that the large populous developing countries are making in
human capital. China and India are producing millions of college graduates
capable of doing the same work as the college graduates of the United
States, Japan or Europe  at much lower pay.

A shifting monopoly

By 2010, China will graduate more PhDs in science and engineering than the
United States. The huge number of highly educated workers in India and
China threatens to undo the traditional pattern of trade between advanced
and less developed countries.

Historically, advanced countries have innovated high-tech products that
require high-wage educated workers and extensive R&D, while developing
countries specialize in old manufacturing products. The reason for this
was that the advanced countries had a near monopoly on scientists and
engineers and other highly educated workers.

Job migration

As China, India and other developing countries have increased their number
of university graduates, this monopoly on high-tech innovative capacity
has diminished. Today, most major multinationals have R&D centers in China
or India, so that the locus of technological advance may shift.The world
needs to abandon the Washington Consensus model of globalization that was
designed, not all that successfully, for an utterly different global
economy.

Certainly, the rate of technological catch-up will grow, reducing the lead
of advanced countries over the lower wage developing countries.

Business experts report that if the work is digital  which covers perhaps
10% of employment in the United States  it can and eventually will be
off-shored to low-wage highly educated workers in developing countries.

If and when Russia gets its economic act together, labor market pressures
on educated and skilled workers will grow.

Transitioning to global market capitalism

The entry of China, India and the former Soviet bloc to the global
capitalist economy is a turning point in economic history. For the first
time, the vast majority of humans will operate under market capitalism,
with access to the most modern technology.


3. Kunshan development zone: the epicenter of Taiwan high tech investment
in the Shanghai-Suzhou corridor

The workers in these new entrants to the global capitalist system should
make great gains, reducing rates of poverty, as indeed has occurred in
China and India over the past 10-15 years.

A difficult change

But there will be a long and difficult transition for workers throughout
the world to this change  a more formidable transition than that
associated with the recovery of Europe and Japan after World War
II.Countries that hoped to grow through exports of low-wage goods must
look for new sectors if they are to make it in the global economy.

In advanced countries, real wages and/or employment are likely to grow
more slowly than in years past. In developing countries that have
traditionally been part of the global economy, manufacturing jobs are at
risk.

They are likely to see a shift in labor to the informal sector with rising
poverty, as indeed has occurred in many countries. China and India
themselves are likely to face problems. Inequality in China and the former
Soviet bloc has risen at rates unprecedented in economic history.
Inequality has historically been high in India.

Large numbers of rural workers in China and India could lose from
globalization, creating dangers of social unrest, particularly in
non-democratic China.

Responsibility of policymakers

What does all this mean for economic policymakers and officials like Paul
Wolfowitz at the World Bank and his counterparts at the International
Monetary Fund?

So far, the World Bank and the IMF have tended to blame economic problems
on insufficient labor flexibility, or fiscally irresponsible governments
with excessive expenditures on social safety nets, as well as on
government interventions in markets.

The role of the IMF and World Bank

The IMF, in particular, has sought to protect capital, particularly
foreign capital, as its actions in Argentina make clear. But with a
doubled workforce, capital should be quite capable of taking care of
itself.The huge number of highly educated workers in India and China
threatens to undo the traditional pattern of trade between advanced and
less developed countries.

Instead of seeking to protect capital, the World Bank and the IMF need to
help countries develop policies to minimize the costs of adjustment to
workers during what is likely to be a long transition.

The global community needs to make sure that the gains of globalization
are spread widely, to avoid backlashes and instability. And the world
needs to increase savings as rapidly as possible to build up the global
capital stock.
For its part, the United States has to shift from being the world's
greatest debtor to becoming a giant creditor to the global economy.

A new consensus

In short, the world needs to abandon the Washington Consensus model of
globalization that was designed, not all that successfully, for an utterly
different global economy.

The world needs a new model of globalization and new policies that put
upfront the well-being of workers around the world. They will be on the
short end of the stick for a long time to come.

Richard Freeman is a Harvard University economist and co-chair of the
Harvard Trade Union Program. This article appeared in The Globalist on
June 3, 2005. Posted at Japan Focus August 26, 2005.


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