Low wage competition isn’t to blame for western job losses and inequality

By Will Hutton (THE GUARDIAN, 09/01/07):

Mention globalisation and a curious mist descends that prevents straight thinking. It is now a given on left and right that billions of low-paid workers are going to take away western jobs and make European welfare and taxation levels unaffordable luxuries. The only options are trade protection or a Darwinian low-tax, low-welfare fight to the finish – equipped with whatever education and training we can get. We must all accept our fate.

The problem is this nexus of givens is wrong. Globalisation and trade have greatly enlarged the world’s economic cake and our economic options, rather than narrowing them. The problem is that too much of the world is an excluded onlooker, because the rules of the game are massively tilted in the west’s favour. It is alarmist, intellectually mistaken and plain counterproductive to blame foreigners for our problems.

Even China, portrayed as the Big New Threatening Thing, has not managed to change the rules. Close to 60% of its exports, nearly all its hi-tech exports and more than half its patents come from foreign companies. In essence it is a subcontractor to the west, boosting the profits of our multinationals and the real incomes of our consumers.

China has not a single brand in the world’s top hundred, despite the projection that it will become the world’s largest exporter in 2008. Buying Rover, and shipping some of the plant back to China, was viewed as an act of strength; in fact it was an act of economic desperation. By lending $200bn a year to finance the US trade deficit, China underpins the international dominance of the dollar. In the upper echelons of the Communist party and the state council there is anguished debate about why so many goods are made “in China” and not “by China”, and why indigenous innovation is so disastrous. In 1995 China set a target of having 50 companies in the world’s top 500 multinationals by 2010. It will be lucky to have any.

Subcontractors tend to have a limited impact on contractors’ employment. So it proves with China. The most hawkish, protectionist thinktank in the US is the Economic Policy Institute. It believes Chinese imports have cost the US 2.24 million jobs between 1989 and 2005 – but the overall job churn over the same period exceeded 400m. The impact of offshoring, which attracts so much venom from the American left, is even smaller. The US bureau of labour’s survey of mass layoffs identified 884,000 job losses in 2005, of which 12,030 went overseas – two-thirds of this to China and Mexico. In Britain it is a similar story. From April 2003 to July 2006 we lost 390,000 jobs – only 19,000 went abroad. A TUC unit set up to monitor offshoring four years ago has closed because there is so little to monitor.

The reason is simple. Manufacturing represents only a small proportion of the value in any good – there is invention, design, financing, marketing, transporting, warehousing, advertising – and even then wage costs are not decisive. A Chinese worker may earn 4% of the wage of an American or British worker, but is only 4% as productive. The consultants McKinsey, for example, estimated that only a quarter of Indian engineers and a tenth of Chinese engineers are equipped to work in multinationals. In a McKinsey survey of California, the savings from offshoring to China ranged from 13% in textiles to a tiny 0.6% for hi-tech companies. Cheap labour is not everything.

Western companies can still compete against low-wage Asian businesses, as a study of 500 multinationals by Susan Berger, of the Massachusetts Institute of Technology, has confirmed. They tend to be better organised and embedded in better institutional networks. Nor, finds Peter Lindert, of the University of California, has globalisation hit the industrialised world’s capacity to sustain its welfare states; on the contrary well- targeted high social spending is good for growth. Affluence begets affluence, as new forms of economic activity emerge driven by a combination of more discriminating, better educated and affluent consumers wanting new sophisticated services that western companies are more capable of delivering via new technologies- although they need to be physically close to their markets. This is the knowledge economy. Both the network of institutions that support it and the need for market proximity make western economies less vulnerable to globalisation. The US is world leader in technology, brands, universities and patents. In Britain the knowledge- economy programme of the Work Foundation (of which I am chief executive) has found that exports of knowledge-based services trebled from 1995 to 2005, while knowledge-based employment has risen from 30% of employment in 1990 to 41% today.

For the less developed countries it seems a magic circle that is ever harder to break into; if even China is no more than a subcontractor to the west’s knowledge economy, what chance has it to break the western armlock in the process? And yet the west is hysterically convinced it is the loser – the reason for both the collapse of the Doha round of trade talks and no less than 20 anti-China trade bills in the US Congress.

The argument is false everywhere you look. Higher inequality is not caused by low-wage competition driving wages to the bottom or ever higher rewards for the skilled. What has changed is the new super-rich. Ian Dew-Becker and Robert Gordon, of Northwestern University, show that in the US, incomes of the 99.99th percentile have grown outlandishly, rising 497% between 1979 and 2002. This is the principal cause of American inequality. It is the same in Britain; 20 years ago the average CEO of a FTSE 100 company earned 25 times the average worker’s wage; today the multiple is close to 120 times.

China is not to blame. In Britain and America a business culture has developed where the share price is the be-all and end-all. Under desperately weak and unreformed corporate governance arrangements, CEOs have in effect written their own pay deals.

To deliver higher share prices, they have embarked on the world’s biggest takeover boom. In hard cash, the cumulative value of deals in the US between 1995 and 2005 was over $9 trillion. In Britain over the past three years there has been a no less astonishing £500bn worth of deals. These are the chief driver of job losses and downsizing – and typically for negligible productivity gains. The “enlightenment” obstacles to this – regulation, a sense of long-term ownership, media scrutiny, competition rules, strong trade unions and a belief in equality – have been progressively weakened. Western capitalism is losing its embedded checks and balances, its morality and, ultimately, its legitimacy.

Instead of demonising China as a threat, we should see it for what it is – both an opportunity and a country in trouble that we need to help make the transition to a more viable economic structure, in its interests and in ours. It needs to develop a soft “enlightenment” infrastructure; and we need to nurture and protect our own rather than throw it to the wolves because, allegedly, globalisation makes it too expensive. In fact, it has never been more important. We need to recapture the argument about globalisation from those who use it to serve their own interests – and fast.