[OPE-L] Globalization and IT: Setting the Record Straight

From: glevy@PRATT.EDU
Date: Fri Oct 13 2006 - 10:28:30 EDT

Thomas Palley Blog Archive

Globalization and IT: Setting the Record Straight
Thomas Palley
Economics for Democratic and Open Societies

Over the last three years there has been an explosion of public concern
about the wage and employment impacts of global outsourcing. As a result,
worries about globalization have begun to move up the income ladder,
infecting white-collar middle-class workers. For instance, a poll
conducted in May 2004 for the Associated Press reported that sixty-nine
percent of Americans believe outsourcing hurts the economy. Recognizing
the potential threat this shift of public opinion poses to corporate
globalization, business groups have been busy playing a game of catch-up
seeking to allay these new more broadly shared public fears.

Recently, the world renowned Washington DC based Institute for
International Economics (IIE) released a study praising the benefits of
off-shoring the information technology (IT) industry, titled
“Accelerating the Globalization of America: The Role for Information
Technology.” The study argues that IT is good for the economy, and
globalization is good for IT. Ergo, globalization is good for the economy.
The only problem is that the argument does not stack up.

The IT industry provides an opportunity for observing the effects of
global outsourcing on a cutting-edge “new economy” sector. A close
inspection of the facts confirms the fears of the public, not the claims
of corporations. The IT industry is not the apparel or shoemaking
industry, which means the adverse effects of global outsourcing cannot be
casually dismissed as just the inevitable shedding of outmoded industry.

The study’s thesis is that IT investment yields a high rate of return
for the economy. Moreover, IT investment is very price sensitive, so that
lower IT prices yield a proportionately larger increase in IT investment
spending. Finally, globalization has driven down the price of IT products.
Putting the three pieces together, globalization has been good for the
economy by driving down IT prices, increasing IT spending, and thereby
spurring growth.

Sounds very reasonable. Unfortunately, there is little evidence that
globalization has caused lower IT prices, and without that the argument
crumbles. IT hardware prices are driven by two factors – long-term
trends and the business cycle. The long-term price trend captures the
impact of technological innovation, and the trend of prices has been down
for a long time. That trend is sometimes referred to as Moore’s law -
after Gordon E. Moore a co-founder of Intel – and it states that the
unit cost of computing power halves every eighteen months. Moore’s law
was coined in 1965, long before the current period of globalization began,
and there is no evidence that globalization has accelerated the trend of
computing power price decline.

With regard to the business cycle, there is clear evidence that the price
of computing power (DRAM or dynamic random access memory) is related to
the utilization of DRAM production capacity. Prices fall when there is
excess capacity, and they rise when capacity is tight. That is standard
supply and demand analysis, which rests on economic principles that
applied long before globalization. The only contribution of globalization
is that much DRAM production capacity is now offshore because U.S.
corporations have been building new capacity offshore rather than at home.

All of this casts huge doubt over the claim that globalization has
benefited the economy by benefiting IT. However, whereas the benefits are
in doubt, the costs are not. One clear cost is that the U.S. IT hardware
industry has been significantly hollowed out. The U.S. used to run an IT
goods trade surplus. Now, it runs a huge IT trade deficit, with many U.S.
companies importing products made offshore by their subsidiaries or under
license by foreign producers. In 2005 the U.S. trade deficit in
information and communications products was $83.2 billion. The deficit
with China alone was $50.8 billion, reflecting the huge off-shoring of IT
production that has taken place.

With regard to jobs, there has also been a clear contraction in the level
of U.S. IT employment. In 1999 there were 4.9 million technology-related
jobs, but this had fallen to 4.6 million in May 2005 – a loss of 300,000
jobs. The bulk of these job losses were for workers earning less than
$30,000 per year, but there was also significant job loss of 140,000 among
computer programmers who made an average of $67,400 per year.

With regard to wages, the average real wage for lower paid technology
related jobs was essentially stagnant between 1999 and May 2005. For
mid-level computer support specialists whose annual pay averaged $43,380
in 2005, real wages actually fell 1.3 percent annually over this six-year
period. However, the real pay of higher skill tech workers rose 1.6
percent per year. The bottom line is that global outsourcing of the U.S.
IT industry has not been good for workers in the bottom half of the wage
distribution. The IT sector therefore appears to be following a similar
path to manufacturing, confirming the fears of working families about

An underlying claim is that outsourcing of IT hardware production has been
a boon to the U.S. economy because it leads to lower IT prices from which
the U.S. economy benefits. According to this logic, the U.S could benefit
from outsourcing of its IT R&D capacity and from outsourcing its software
industry. Indeed, these developments are to be encouraged, and under
current globalization policy they are. Yet, this entire way of thinking
has recently been challenged by Nobel laureate in economics, Paul
Samuelson. Samuelson has shown that when the U.S. off-shores those
industries in which it has historically held a comparative advantage (such
as IT), the U.S.’s future gains from trade and standard of living can

Changes in the structure of the U.S. IT industry are being driven by
corporations, which are intent on maximizing their own profits. In a
nationally based economy, such as was the case in the 1950s and 1960s,
profit maximization by companies tends to maximize national income. In a
global economy, that is not the case. Instead, profit maximization
promotes the maximization of global income rather than national income.
Companies are happy to outsource because they earn the profits on
outsourced production, but that does not maximize national income. This
fundamental insight is not yet appreciated within Washington policy

There is no disagreement that IT is good for the economy. There is also
agreement that globalization relies significantly on IT. However, there
are two dangers. The first is that opposition to the current form of
globalization gets misinterpreted as opposition to technology – a
misinterpretation that advocates of corporate globalization encourage with
charges that opponents are “Luddites”. The second danger is that
globalization gets credited with the benefits of IT because of its heavy
reliance on IT - that’s tantamount to a case of bait and switch.

The debate over globalization is not about the benefits of IT, and
opposition to globalization does not mean opposition to technology.
Instead, the debate is about the character of globalization – the
absence of labor standards, the absence of rules for exchange rates, the
implications of outsourcing for workers, and changed power relations that
enable corporations to set economic policy and collar productivity gains
for their top management and owners. The lesson from Moore’s law is that
the benefits of IT would have flowed regardless of expanded globalization,
and for working families they might have been even larger under an
alternative globalization.

A final generic lesson for policymakers concerns numbers and public
debate. The enormous resources of the business community means that it can
commission studies, launch them with fanfare, and then broadcast their
findings. In this way controversial calculations can quickly become
received fact. That is a problem for which there is no easy solution.
However, it does suggest that policymakers and journalists be skeptical of
studies about trade and globalization promising four course free lunches.

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