Off-shoring (delocalizzazioni)

[San Siro]

Una interessante discussione sulle delocalizzazioni dei servizi in Usa.
Un economista (discepolo di Krugman) sostiene che le delocalizzazioni fanno sempre bene. La maggior parte dei lettori, invece, dissente.


Jun 16, 2009

Re-Interpreting the Blinder Numbers in the Light of New Trade Theory

by Richard Baldwin

Before the global crisis hit, offshoring was one of the scarcest things on rich nations’ economic radar screens – especially the offshoring of “good” service sector jobs. Alan Blinder was one of the first to point out the threat in his 2006 Foreign Affairs article “Offshoring: The Next Industrial Revolution?” He wrote: “constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of ‘impersonal services’’— that is, services that can be delivered electronically over long distances with little or no degradation in quality.”
Blinder has more recently produced some estimates of the size of the revolution. And they make it look like “the big one”. Blinder (2009): "I estimated that 30 million to 40 million US jobs are potentially offshorable."
This sort of media-friendly statement is part of what I consider to be very confused thinking by non-specialists – not that the economists involved are necessarily confused, but tacitly or not, they are allowing the media to misinterpret the numbers.
Let me start off by saying that I consider Alan Blinder to be one of the world’s leading macroeconomic policy specialists. Moreover, I greatly appreciate the way he uses his knowledge of economics to make this a better world (rather than focusing entirely on impressing the other inhabitants of academe). This time, however, I’m not sure it has worked out right.
I don’t wish to take issue with his numbers or methods. I wish to question the implications of those numbers. The trouble is that his numbers are being interpreted in the light of the “old paradigm” of globalisation – the world of trade theory that existed before Paul Krugman, Elhanan Helpman, and others led the “new trade theory” revolution in the 1980s.

The new trade theory: Micro, not macro, determinants of comparative advantage

Krugman’s contribution, which was rewarded with a Nobel Prize in 2008, was to crystallise the profession’s thinking on two-way trade in similar goods.[1] This was a revolution since the pre-Krugman received wisdom assumed away such trade or misunderstood its importance. In 1968, for example, Harvard economist Richard Cooper noted the rapid rise in two-way trade among similar nations and blamed it for the difficulty of maintaining fixed exchange rates. Using the prevailing trade theory orthodoxy, he asserted that this sort of trade could not be welfare-enhancing. And since it wasn’t helping, he suggested that it should be taxed to make it easier to maintain the world’s fixed exchange rate system – a goal that he considered to be the really important thing from a welfare and policy perspective (Cooper, 1968).
Trade economists back then took it as an article of faith that trade flows are caused by macro-level differences between nations – for example, national differences between the cost of capital versus labour. Nations that had relatively low labour costs exported relatively labour intensive goods to nations where labour was relatively expensive.
This is the traditional view that Blinder seems to be embracing.
What Krugman (especially Krugman 1979, 1980) showed was that one does not need macro-level differences to generate trade. Firm-level differences will do.
In a world of differentiated products (and services are a good example of this), scale economies can create firm-specific competitiveness, even between nations with identical macro-level determinants of comparative advantage. Krugman, a pure theorist at the time, assumed that nation’s were identical in every aspect in order focus on the novel element in his theory (and to shock the “trade is caused by national differences” traditionalists). His insight, however, extends effortlessly to nations that also have macro-level differences, like the US and India.
This brings us to interpreting Blinder’s 30 to 40 million offshorable jobs.

Blinder’s calculations

Blinder’s approach is easy to explain – a fact that accounts for much of its allure as well as its shortcomings.
* Step 1 is to note that Indian wages are a fraction of US wages.
* Step 1a is to implicitly assume that Indians’ productivity-adjusted wages are also below those of US service sector workers, at least in tradable services.
* Step 2, and this is where Blinder focused his efforts, is to note that advancing information and communication technology makes many more services tradable. The key characteristic, Blinder claims, is the ease with which the service can be delivered to the end-user electronically over long distances.
* Step 3 (the critical unstated assumption, if not by Blinder, at least by the media reporting his results) is that the new trade in services will obey the pre-Krugman trade paradigm – it will largely be one-way trade. Nations with relatively low labour costs (read: India) will export relatively labour-intensive goods (read: tradable services) to nations where labour is relatively expensive (read: the US).

The catch

This last step is factually incorrect, as recent work by Mary Amiti and Shang-Jin Wei (2005) has shown. They note: “Like trade in goods, trade in services is a two-way street. Most countries receive outsourcing of services from other countries as well as outsource to other countries.”
The US, as it turns out, is a net “insourcer”. That is, the world sends more service sector jobs to the US than the US sends to the world, where the jobs under discussion involve trade in services of computing (which includes computer software designs) and other business services (which include accounting and other back-office operations).
The chart shows the facts for the 1980 to 2003 period. We see that Blinder is right in that the US importing an ever-growing range of commercial services – or as he would say, the third industrial revolution has resulted in the offshoring of ever more service sector jobs. However, the US is also “insourcing” an ever-growing number of service sector jobs via its growing service exports. The startling fact is that not only is the trade not a one-way ticket to job destruction, the US is actually running a surplus.

Conclusion

None of this should be unexpected. The post-war liberalisation of global trade in manufactures created new opportunities and new challenges. To apply Blinder’s logic to, say, the European car industry in the early 1960s, one would have had to claim that since the German car industry (at the time) faced much lower productivity-adjusted wages, freer trade would make most French auto jobs “lose-able” to import competition. Of course, many jobs were lost when trade did open up, but many more were created. As it turned out, micro-level factors allowed some French firms to thrive while others floundered, and the same happened in Germany. Surely the same sort of thing will happen in services, as trade barriers in that sector fall with advancing information and communication technologies.
In short, what Blinders’ numbers tell us is that a great deal of trade will be created in services. Since services are highly differentiated products, and indivisibilities limit head-to-head competition, my guess is that we shall see a continuation of the trends in the chart. Lots more service jobs “offshored” and lots more “onshored”. What governments should be doing is helping their service exporters to compete, not wringing their hands about one-way competition from low-wage nations.

Footnotes

1 Full disclosure: Krugman was my PhD thesis supervisor and we have coauthored a half-dozen articles since 1986.

Source: Author’s manipulation of data from Amiti and Wei (2005), originally from IMF sources on trade in services.

References

Amiti, M. and S.J. Wei (2005), “Fear of Service Outsourcing: Is it Justified?”, Economic Policy, 20, pp. 308-348.
Blinder, Alan (2006). “Offshoring: The Next Industrial Revolution?” Foreign Affairs, Volume 85, Number 2.
Blinder, Alan (2009). “How Many U.S. Jobs Might Be Offshorable,” World Economy, 2009, forthcoming.
Cooper, R. (1968). The Economics of Interdependence. New York: McGraw-Hill.
Grossman, G. and E. Rossi-Hansberg (2006a). “The Rise of Offshoring: It’s Not Wine for Cloth Anymore,” July 2006. Paper presented at Kansas Fed’s Jackson Hole conference for Central Bankers.
Krugman, Paul (1979). "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479,
Krugman, Paul (1980). "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, vol. 70(5), pages 950-59, December.
Krugman, Paul (1991), “Increasing Returns and Economic Geography”, Journal of Political Economy 99, 483-499.

Comments

wjd123 says...

"What governments should be doing is helping their service exporters to compete, not wringing their hands about one-way competition from low-wage nations."--Richard Baldwin
Nice try, but it is two-way competition. Jobs are outsourced from America because lower wages will be accepted and jobs are insourced because lower wages will be accepted.
In the name of competition this works out very nicely for corporations, but it just makers workers corporate slaves as it mitigates their power to bargain.
It's a race to the bottom as more and more workers are added to the bottom statistical mean when it comes to income distribution.

Stephen Heyer says...

Something about all this was not quite smelling right to me, then I read wjd123's comment.
I reckon that nailed it just right: Race to the bottom for the workers and to obscene wealth for the oligarchs.
Not, of course, that very poor but reasonably educated workers in poor countries will not benefit, but workers in currently rich countries face an evening out of living standards with those in poor countries.

Rdan says...

So how do we inject some labor power into the equation, as the WTO runs the game in this part.

reason says...

Read the chart, it is not charting jobs but money. The balance of jobs is surely the other way around.
How to lie with statistics part 10.

ken melvin says...

I don't think that they, those making the push for global trade (aka offshoring and the same thing as bringing in illegals), know what is happening in downtown LA, SF's Mission, Oakland's Fruitvale, i.e., what is happening to America, and I don't think that they care. As for me. I no longer care for their numbers and I know that their metrics are garbage. More, the model is flawed. We listened, we believed them because we didn't think they were lying to us, but they were. Even their best can't seem to put together the consequences of offshoring though the fraction of our population living in poverty is near 30% (see Links for 2009-06-14 - BARBARA EHRENREICH's - OpEd, here at Economist'sview) as income disparity continues to rise.

ken melvin says...

Even their best can't seem to put together the consequences of offshoring combined with automation though...

save_the_rustbelt says...

Economic navel gazing.
Recent experience - 200 yards from the headquarters of the overwhelmed State of Ohio unemployment operation, illegal aliens freshen up the landscaping at the Hyatt Regency (they were discussing the best way to send money home).


Beezer says...

reasons notes:
"Read the chart, it is not charting jobs but money. The balance of jobs is surely the other way around."
It's a simple article, so you have to give it some leeway, but still these macro models always leave a lot of important questions unanswered. Such as this one by Reason. Sure you have money being swapped. But who's money is it and how is that money disbursed among the population? Is it $50 billion for Gates, and $1 billion for the remainder of the country, as an example?
Maybe this is something like Reich's "symbolic analyst" idea. Where our future economy will rest on this type of production, or service.
The "race to the bottom" (our bottom is their ceiling right now) is a reasonable concern among the so-called richer nations. We don't mind competing, but we sure wish our competition paid their labor something more than slave wages. China and India both have their billionaires. But they also have massive slums and hard bit impoverishment.
With all the transfer of our wealth to them the past 20 years or so, it would be less disconcerting if their population's burdens were more evenly shared.

dw says...

so what jobs are we insourcing? its easy to see what is off shored. just about any thing.
but i don't know of any jobs that have been insourced? is this just the same 'hope' that we are given as that there will be new jobs? but never defined as to what they are.

anne says...

"Recent experience - 200 yards from the headquarters of the overwhelmed State of Ohio unemployment operation, illegal aliens freshen up the landscaping at the Hyatt Regency (they were discussing the best way to send money home)."

Recent question about an experience, how does a person know that another person is an illegal alien (what a rotten name)?
Does a person go over to other people and ask them "kind people are you illegal aliens? Kind people, please tell me whether you are illegal aliens, so I can have a suitable record for a scrapbook I am building on illegal aliens. So far, I have pages for illegal aliens from 7 of the 9 planets. I am working now on Venus, are you all Venusians?"

anne says...

"So what jobs are we insourcing?"
We are insourcing tens of billions of dollars in direct foreign investment, only a little less than we are outsourcing, and such investment creates all sorts of American jobs and could create more were we more open to investment from abroad.
Paul Krugman pointed out that in terms of direct foreign investment $245 billion went about and $184 billion came in in 2006, for a difference of only $61 billion * and there is an advantage in investing somewhat more abroad than is invested here in terms of future income streams to America.

* http://krugman.page.nytimes.com/b/a/258224.htm

ken melvin says...

What's with the fascination w/ 19th - early 20th century urban ghettos? This is progress? Tell me do, what jobs are we insourcing? No more lies with numbers; what jobs? Manufacturing jobs? Construction? Where?> BS is BS.

kievite says...

IMHO the theory that Richard Baldwin advocates is actually a flavour of Lysenkoism. This "two way street" outsourcing is a myth. It is one way street.
What is true (like wjd123 aptly noted) is that outsourcing can destroy even jobs that are not directly affected serving as a potent weapon to depress wages.
But aside from the excessive praise of Krugman (and please remember Krugman's vicious attack on Galbraith) there is not much meat in the paper.
The key question here is what people who lost jobs due to outsourcing will do. When you have a reserve workforce of highly specialised people it is not easy and rather costly to move them to other areas.
I observed the destruction of IT field and the picture is not pretty. We now see former IT specialists working in WalMart. So we use people with five-ten years special education and, say, five-twenty years experience pushed to lower end service jobs.
And they are often much more qualified them their off-shore counterparts (especially in older segment -- "unemployed IT specilists over 50" segment). That an interesting example of increasing economic efficiency.
And it also suggest that talks about recovery are just talks as standard of living continues to slide down accommodating changes in the structure labor force toward low paid service sector jobs.

jobs vs money says...

"We are insourcing tens of billions of dollars in direct foreign investment, only a little less than we are outsourcing, and such investment creates all sorts of American jobs and could create more were we more open to investment from abroad."
The questions are:
WHICH jobs are insourced?
HOW MANY of each job?
For example, Toyota might spend 500 million dollars to build a new plant in Tennessee and provide a thousand jobs, although thousands of US auto workers lose their jobs, and US auto parts suppliers outsource thousands of jobs while investing 400 million dollars abroad.
So 100 million dollars net "insourced" and thousands of jobs net "outsourced"

SS says...

Traditional trade theory - - Heckscher-Ohlin-Samuelson- calls for the leveling of wages and returns on capital; resulting in labor intensive countries China, India, producing more labor intensive goods while capital intensive countries like the U.S. produce more capital intensive. Wage rates go down n the U.S. and return on capital rises. The process goes on until equilibrium is reached and rates of return are equal across all factors. Though not a student of Krugman I believe contrary to Mark that his insights on firm level competition attenuate the process but do not change its direction or belie its conclusions.
There is but one long term solution to the downward drift of wages in the West and that is to distribute shares of capital to those who produce it, i.e. the workers. Workers will be incentivized to increase productivity as they will share in its fruits. They will than simultaneously participate in the increased returns on capital even as their wages fall.

bakho says...

FWIW, a lot of the manufacturing job losses (prior to this recession) are due to automation, not export.
Changes in technology and markets require retraining and reinvestment. The US government invests way too little. Special interests are allowed to capture too much of the gains of globalization and too little public investment is being made. The "rustbelt" exists in part because it is a net exporter of wealth to the rest of the country. The reinvestment is not being made.

Alex Tolley says...

anne raises a good question - what jobs are being insourced? Don't post industrial nations tend to have very large financial industry components? I know the UK's largest "export" was financial services (including insurance). Given that we know banking in the US generated up to perhaps 30% of all corporate profits, it might be argued that some fraction was "insourced labor". If so, perhaps that answers another question raised - who gets the $bn's of insourcing value?

Robert C. Shelburne says...

What Baldwin discusses is intra-industry in services. I provide a detiled analysis of this in a paper with Jorge Gonzalez, The Role of Intra-Industry Trade in the Service Sector, in Michael Plummer (ed), Empirical Methods in International Trade, 2004. We find that IIT in services is even greater than it is for merchandise trade given a similar level of aggregation. For the US the IIT index is in the .71 to .76 range. Even US bilateral services trade with low income countries such as India has quite high levels of IIT.

Braden says...

"I know the UK's largest "export" was financial services (including insurance). Given that we know banking in the US generated up to perhaps 30% of all corporate profits, it might be argued that some fraction was "insourced labor"."
This is probably the right answer to Baldwin's rather poor attempt to convince us that down is indeed up. We have been specializing in the production of fun new financial products that are the envy of the world. Our future will be selling derivatives and credit default swaps to the Chinese government (Hooray!).
This has meant a discernible uptick in overall service sector wages (I hear these finance guys really make a killing!) even though the bottom end of the U.S. service sector labor market continues to suffer from prolonged wage stagnation despite rising productivity.
In the end, Mr. Blinder is correct, as the IT outsourcing of the past decade demonstrates. Innovation and invention can only maintain a country's competitive advantage for as long as it takes a rival firm in India to produce the same product in its factories or offices. India and China have dramatically reduced the "education gap" over the last 20 years and are now well-placed to offer the same American services for a fraction of the cost.
To Mr. Baldwin and Mr. Krugman, sometimes aggregate data is less useful than a commonsense observation of what has happened to firms in the United States. It doesn't take a sophisticated economic model to reach the conclusion that wage stagnation and unemployment in the long run will be the likely consequence of free trade policies. I don't doubt the pareto-optimizing nature of this outcome, but I'm not particularly keen on the idea given the fact that I live in one of the countries that will have to adjust downward.

Lilguy says...

Nice try, but I think the net outcome of outsourcing/insourcing will undermine US economic wellbeing over the longer run.
First, I think few doubt that generally higher-paying manufacturing jobs are being outsourced (or disappearing all together a la the auto industry). The technology that makes this possible is being exported almost as fast as it is developed--unless it has virtually an exclusive military application.
Second, on the service side, some higher-paid services--think the skilled trades (plumbers, electricians, auto mechanics, etc)--simply can't be outsourced. Yet, there could be a wage/compensation decline if more unemployed from other sectors move into the trades (although that will be stubbornly opposed by unions). The effect is a net negative for workers; it could be zero sum for GDP because buyers' savings could be spent elsewhere. (Note: Lower-paid unskilled services--restaurant, cleaning, etc.--are unlikely to be affected either way.)
Third, while the US may be a net insourcer (there's a word!) of knowledge-based services (IT, management, & other consulting, for example), over time the American advantage is likely to dissipate as education there and foreign students here improve foreign national capabilities. India is an excellent example. There is nothing inherent in the American advantage here.
Fourth, and finally, service jobs (especially low-knowledge ones) that do not require an on-site presence will continue to move abroad as long as there is a compensation advantage--which looks like a pretty long time. I'm waiting for the day when I get a call with a distinctly Indian accent asking me if I want to extend the warranty on my car, buy some property in the mountains or on the beach, etc.
In short, the US is and will likely continue to be a major outsourcer of jobs to countries where personnel costs are lower. I can't put this at a number as Blinder has, but it is likely to be in the many millions of jobs in the next decade.

[piof]

secondo me

il problema non è esattamente il delocalizzare (produrre in cina)

il problema è che questo delocalizzare tende a causare deficit della bilancia commerciale, soprattutto se si mantengono artificialmente certi squilibri sul valore delle valute

[ramirez]

Originalmente inviato da piof

secondo me

il problema non è esattamente il delocalizzare (produrre in cina)

il problema è che questo delocalizzare tende a causare deficit della bilancia commerciale, soprattutto se si mantengono artificialmente certi squilibri sul valore delle valute

non è obbligatorio se si concordono quote di import export
tra Stati. Poichè delle quote fisse sono troppo..fisse
si può decidere che alcuni prodotti-servizi siano esclusi.
L'importante è cercare un interscambio equo (o abbastanza equo)

[el_figus]

la delocalizzazione in massa mi convince poco.. voi dite che dopo X anni il tutto torna in equilibrio da solo? non c'è il rischio di creare troppo lavoro da 1 parte e levarlo dall'altra con il conseguente crollo dell'economia (perchè se levi lavoro dagli stati + moderni poi perdi potere d'acquisto se non riesci a riciclare i lavoratori, e quindi chi cazz compra i prodotti prodotti a minor costo?)

[Birbun]

La delocalizzazione è un processo naturale del sistema economico che manda nei Paesi a basso costo certe produzioni a basso valore aggiunto.
Senza la delocalizzazione queste imprese chiuderebbero lo stesso.

Sta agli imprenditori riconvertire le loro industrie sui produzioni ad alto valore aggiunto tali da giustificare l'alto costo di produzione che c'è nei Paesi Occidentali.

Esempio pratico: è inutile insistere a fare le magliette qui da noi se in Cina costano 1/10.
Meglio chiudere baracca e burattini qui,trasferire la produzione laggiù e concentrarsi invece qui su produzioni di lusso.