By Robert R. Ebert, Ph.D.
Buckhorn Professor of Economics
Christopher Columbus probably would be surprised to find that over 500 years after his visit to America economists now conclude the world is flat. In a geographic sense, the sphere we live on is still more-or-less round. But, in an economic sense, we are discovering the world is flat.
Dr. Ebert
Thomas L. Friedman's recent work, The World Is Flat: A Brief History of the Twenty-first Century (Farrar, Straus, and Giroux, publisher 2005) has received a considerable amount of media attention for its observation that there is a flattening of economic fortunes across the globe. Friedman, a three-time winner of the Pulitzer Prize and foreign affairs columnist of The New York Times, has provided a valuable public service in raising awareness of the implications of globalization. The strength of his book is the breadth of the geopolitical and economic topics covered and his engaging writing style that synthesizes the globalization phenomenon in an understandable way for the general public. In truth, though, there is nothing new in Friedman's work. For nearly a century economists have been predicting and saying what has become a sudden revelation for Friedman and his media reviewers.
Why the World Is Flat
The focus of Friedman's thesis is the issue of outsourcing. Basically, the reason that tech support for your computer may be in India is a combination of interesting factors. Included in those factors is that many parts of the world are developing sophisticated educational systems that are capable of training skilled and professional workers every bit as skilled as those in the United States. With increased sophistication of telecommunications and internet-based communication systems, a well-trained call center operator in a Southeast Asian country earning the enormous (for them) salary of $500 or $600 per month can handle the same challenges as an American earning ten times that much.
Likewise, corporations are functioning in an environment of a global supply chain. Friedman uses the example of Dell Computers to emphasize his point on an economic flattening of the world. Dell has six factories including one in China, Ireland, Malaysia, Brazil, Tennessee and Texas not to mention designs
being created in Taiwan. In addition, parts for Dell Computers come from Taiwan, China, South Korea, Germany, Japan, Philippines, Costa Rica and Malaysia.
Friedman's point is clear. Many major firms and many medium and smaller-sized firms could not exist without utilizing the scientific and labor expertise of people in scores of countries around the world. In an era of outsourcing, the implications for workers can be frightening. Jobs,standards of living and ways of life are at stake, particularly in the more developed areas of North America, Europe and Japan. To put it more succinctly (and very much as I have been telling my students for about two decades), American students are no longer in competition with each other. Rather, the competitors of American students for today's and tomorrow's economic future reside in Seoul, New-Delhi, Beijing, Bangalore and even Moscow.
So What’s New? (An Economist’s Perspective)
What's new in Friedman's revelations? Not much! If we go back to the early part of the 20th Century and explore the work of two Swedish economists, Eli Heckscher and Bertil Ohlin, we find some of the seeds of the flattening of the world as we observe it today. The basis of the Heckscher-Ohlin actor-price equalization thesis is that as countries take advantage of their factor-based comparative advantages in international trade, the demand for low-cost factors of production increases in some countries leading to an eventual increase in their absolute and relative incomes. Likewise, at least the relative demand for high cost factors of production in other countries would decline and those factors would see a decline in their relative income. Or, to put it very simply, wages of labor in labor-abundant, low labor cost countries would eventually increase and at least the relative or comparative wages of labor in high cost countries would decline (Salvatore, 129-138).
Were Heckscher and Ohlin right? Look at the table on below. With the exception of Mexico and Sri Lanka, over the past quarter century production worker wages in 28 countries including seven Asian Newly Industrialized Economies (N.I.E.s) increased significantly relative to the U.S. Clearly, in terms of production wages, the world is flattening out. Many major firms and many medium and smaller-sized firms could not exist without utilizing the scientific and labor expertise of people in scores of countries around the world. Is this good news or bad news for America? Nobel laureate economist Paul Samuelson has pointed out that conventional economic wisdom states the gains to winners from international trade exceed the losses to losers from trade. But, even if that is true for the population as a whole, it is not necessarily true for some individuals or even some groups of people. When foreign countries develop comparative advantages previously belonging to the U.S. (as in certain high-tech areas and some manufacturing industries), a permanent loss of per-capital income can be induced for the U.S. From the perspective of U.S. workers, it does not necessarily mean that, overall, there are fewer jobs but rather that the new labor market-clearing real wage has been lowered by this world-flattening variation of fair free trade (Samuelson, p. 137).
Hourly Production Worker Compensation: U.S. and Trade Partners | |||||
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Country |
1975 |
% of U.S. |
2003 |
% of U.S. |
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U.S. |
$6.16 |
100.00% |
$21.97 |
100.00% |
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Mexico |
$1.47 |
23.90% |
$2.48 |
11.30% |
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Japan |
$2.97 |
48.20% |
$20.09 |
91.40% |
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Korea |
$0.32 |
5.20% |
$10.28 |
46.80% |
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Sri Lanka |
$0.28 |
4.50% |
$0.49 |
2.20% |
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Taiwan |
$0.38 |
6.20% |
$5.84 |
26.60% |
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Germany |
$6.26 |
101.60% |
$29.91 |
136.10% |
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Spain |
$2.52 |
40.90% |
$14.96 |
68.10% |
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28 Countries* |
$3.86 |
62.70% |
$16.69 |
76.00% |
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7 Asian N.I.E.s |
$0.51 |
8.30% |
$7.57 |
34.50% |
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*Trade Weighted |
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Source: Bureau of Labor Statistics. "International Comparisons of Hourly | |||||
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Compensation Costs for Production Workers in Manufacturing, 2003." | |||||
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18-Nov-04 |
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Samuelson emphasizes that the U.S. used to have a comparative advantage in educated masses, particularly in the science, management and engineering sectors. With historic U.S. easy access to capital and know-how, U.S. workers enjoyed high market-clearing real wages. Following World War II, though, know-how and capital began to diffuse away from the U.S., which has put competitive pressure on U.S. wages in a number of sectors (Samuelson, 144).
Samuelson further notes that the outsourcing evident in the early 21st Century was predictable as early as 1950 and will continue to grow for most of this century. Put succinctly, as other countries develop their human capital, the U.S. share of global output will continue to decline from 50% following World War II to perhaps 20% to 25% in the future.
Policy Implications
Friedman correctly points out that there is no turning back. Whether it is the growth of the former communist countries of Eastern and Central Europe or China or India or Latin America, the world is becoming more competitive. Knowledge diffuses quickly across borders, and foreign workers and students are eager to acquire skills, become educated,and claim their place in the world economy. If anything, the world is going to become flatter. But, as Friedman says, we can manage these changes (Friedman, 469).
There have been in the past and there will be in the future both gainers and losers from globalization. We could respond with protectional measures. However such efforts would punish and threaten to impoverish those sectors of the U.S.economy that could potentially develop new comparative advantages in the world economy. What about the losers in this economic game of world flattening? Friedman suggests a type of
wage insurance first proposed in 1986 by Robert Lawrence of Howard and Robert E. Litan of the Brookings Institution. The basis of wage insurance would go beyond the unemployment insurance program. Workers who lost their jobs due to offshoring, outsourcing, downsizing or factory closure, once they found a new job, would receive payments covering half the decline in their income from the previous job up to $10,000 per year (Friedman, 293- 295). The Wage Insurance concept would serve as both a cushion and a safety net as workers transition to the realities of a flatter world. As such, it makes sense as a short-term transition measure. Bolder steps are needed in the long run, however.
David Wessel of The Wall Street Journal, in a recent perceptive article, notes that many Americans are “tweeners” in this business of globalization. Most people are somewhere between enjoying the benefits from lower priced consumer goods and fearing job loss due to outsourcing and other forms of international competition. Wessel notes that an honest assessment of the benefits and risks of globalization
requires us to focus on these tweeners. Wessel suggests that the best approach to helping the tweeners is to make them (and by extension, their children) better equipped to prosper in the global economy. This means emphasizing education and training and providing incentives for firms and workers and future generations of tweeners to become global winners (Wessel).
Maintaining a more dynamic and competitive economy in the flatter and flatter world in which we live requires a commitment to allocate resources in the direction of potential success. Indeed, one of the reasons the world has become flatter is that our trading partners from India to China to Brazil are willing to commit resources to develop their emerging comparative advantages. They are being successful and we should rejoice in their success. However, rejoicing in their success also calls for us to play a fast-paced game of accelerating the development of our own educational and human capital resources. It will be neither easy nor cheap. The alternative, though, is to not be prepared for a world of which Christopher Columbus could not have even dreamed.
Works Cited
Bureau of Labor Statistics. “International Comparisons of Hourly Compensation Costs For Production Workers in Manufacturing, 2003.” USDL: 04-2343, November 18, 2004.
Friedman, Thomas L. The World Is Flat:A Brief History of the Twenty-first Century.New York: Farrar, Straus, and Giroux, 2005.
Salvatore, Dominick. International Economics, Eighth Edition. Hoboken, New Jersey: John Wiley & Sons, Inc., 2004.
Samuelson, Paul A. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization.” Journal of Economic Perspectives. Vol. 18, no.3, Summer 2004, 135-146.
Wessel, David. “Looking Out for Globalizationʼs Tweeners.” The Wall Street Journal. July 28, 2005, A2.
Wessel, David. "Looking Out for Globalization's Tweeners." The Wall Street Journal. July 28, 2005, A2.
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