The Hindu Businessline
Economics of demonstrations against globalisation
BEGINNING with Seattle, Genoa, and the cities of Geneva, Laussanne, and Evian during the recent G-8 summit, there is an increasing wave of protests against globalisation (as indeed other local issues not subjecting themselves to democratic processes).
In between there were the protests in Paris first by the ATCs and a massive one in the last week of May against some change in pension rules. There is a build up for Cancun now.
The protestors did not exactly look as if they were starving or famished; it looked more like they would require a pilgrimage to a third world country to know the basics of poverty. Their average income — by the mere looks of it — must be much more than the Indian middle class.
There is social security too. Yet, they feel compelled to resort to protests — at times violently — as if their existence is threatened. Is there economics behind this phenomenon?
Increasing incomes but declining certainty
The anger today is mainly the extreme uncertainty about the future. This may be mainly attributed to the free trade movement and globalisation. Let us see how free trade does this. Free trade is advocated mainly because of the `surplus’ from specialisation based on relative cost advantages. Thus, one has to find one’s niche and specialise.
However, one’s core competence or relative cost advantage cannot be taken for granted. Somewhere, in some vague corner of the world if someone comes up with an innovation, which makes him the newest `most cost efficient producer’ then, all the demand will shift towards him (till he himself meets that fate).
The current producer may not have had any clue whatsoever of the oncoming onslaught. The quicksand of relative cost advantage then leaves a whole lot of workers redundant or jobless. This happened in automobiles a few decades ago and is happening in BPO now.
A new auto diamond cutting and polishing machine (if one were to be invented) could wipe out the livelihood of the 8-10 lakh workers in Surat and surrounding areas alone and reduce India’s exports by almost 16-17 per cent. Even the temples of technology such as Switzerland faced a tough time when quartz watches invaded their superiority in conventional watches.
In fragmented markets, one got time to adjust. The onslaught was not quick. Innovation by its nature is discrete and not amenable to precise prediction. With increasing integration, job security seems as predictable today as the weather.
If this is on the job side, let us see how much he has gained from free trade as a consumer. The world was growing at 2-4 per cent in the industrial era, even before free trade began to be pursued. It has, may be, gone up to 4-5 per cent, up on an average by a couple of points — but without any uniformity or predictability.
What is the big deal compared to the vagaries of job losses and having to frequently shift jobs, places and skills and industry?
A Coke gets produced at around Rs 0.60 but gets retailed at Rs 8.00; a toothpaste retailing at Rs 12 costs as little as Rs 2 at the producer’s end — so how has the consumer gained?
Microsoft’s gross margins are a whopping 80 per cent of the sales revenue. Free trade and globalisation may have generated net gains due to cost advantages but the delivery thereof to the final consumer in most cases is seen to be illusory.
The people thrown out of jobs would most probably retrain themselves. If only they knew what to get retrained on. And What is the guarantee that they would not be obsolete by the time they graduate in the new skills?
With the high given costs of retraining and ephemeral benefits, it is tough game for them — and quite directionless. A fertile ground for the mobilisers of the demonstrations and NGOs engaged in these.
`Cause here; effect in an unknown place’ syndrome
In many processes, people totally unrelated to the task have had to bear the consequences whether they like it or not. It is beyond their or their government’s control. When people feel affected by manmade causes not of their own making for which they cannot initiate effective remedy, they feel frustrated and anger spills onto streets and symbols of the initiator (a la attacks on KFCs, Mac Donalds, etc.).
Just an example from From Care to Action by Martin Holdgate of how a single action in one country can leave a trail of adverse impacts in many others: “… There is an over-subsidisation of meat production in the Netherlands (cattle earns nearly $2 a day in much of Euro-Union as subsidy from the Governments, which is roughly 70 per cent more than an average Indian’s daily income — w/o PPP adjustments) which leads to surplus meat being produced there.
Sure it creates some problems for them like the manure from these animals polluting soil, ground water, and adjacent shallow seas. But the feedstock for these — tapioca and soya — come from Thailand and Brazil causing significant environmental impact and imbalance in cropping pattern there. The Netherlands is unable to consume what it produces and hence exports it to Western African countries at cheaper prices. As a consequence, the locals in these countries are unable to sell their cattle at remunerative prices and hence have to let them graze freely causing overgrazing, soil erosion and land degradation in these countries… ”
Breakdown of perfect competition
The virtues of perfect competition with no intervention from either side — supply or demand — are well eulogised in the economic literature. At the final consumption level, all demand is retail in nature. The intermediate goods may be industrial and hence wholesale. The production is, however, concentrated in the hands of a few entities, corporate or otherwise.
The dominant logic given for European union years ago was to rectify this situation and make markets more perfect. Given the size of independent countries the markets had many consumers but few producers. It was thought that integrating the markets would expand the number of producers and thus make the markets more perfect with more players on the supply side with no one in particular dominant in relation to the market.
However, with the structure of corporate laws, limited liability enabling bigger and bigger enterprises being formed, bankruptcy laws, acquisition laws, patent protection, improvements in communication and technology in general and vast improvements in supply chain, production integrated faster than the markets. In many of the industries in fact the number of players have been collapsing and there are fewer players today for any given market than before trade blocks and common markets came into existence.
In retrospect it appears that common markets and trading blocs without putting some limitations on patent rights, limited liability, etc., is a remedy worse than the disease. Larger and larger enterprises have led to concentration; shift of jobs geographically, extreme standardisation and monotony. These have not been ideal for sustained employment.
Accelerated pace of mechanisation
That mechanisation has been on balance labour displacing and thus a threat to employment has been articulated by well-known authorities as Samuelson from the 1940s and the 1950s. It is too well documented to bear repetition.
What is new of course is across the globe the pace of mechanisation is accelerating due mainly to globalisation. With cross border barriers to movement of capital, technology and products getting increasingly dismantled, mechanisation is flowing from high tech countries to low income countries.
This has released many from their jobs. Surely there is also the reverse effect of cheap labour and cheaply priced higher order skills invading their markets. It has created job losses in their markets.
Even before globalisation, when markets were fragmented, the growth in employment occasioned by development was no match for the pace at which jobs are getting standardised, routinised and mechanised leading to displacement.
Now when markets are getting integrated, the resultant sizes of markets have provided an added incentive for more intense mechanisation. If Microsoft were to be restricted only to Redmond or Seattle, one wonders if it would spend so much reinventing newer and newer versions of Windows every year.
Or, would Oracle spending a fortune for developing ERP solutions for each user industry? If Pizza Hut were to be confined to the birthplace of Pizzas or Monsanto to its base district, the incentive to commit huge sums of moneys to bigger and riskier research would be lower. When the potential pay-offs are large, motivation to bet larger moneys on mechanization is very high.
Globalisation has affected blue-collar workers more than whites.
Since size is an important consideration for heavy investments occasioned by mechanization, investors go in for where there is existing proven market and where the scope of work is repetitive and large volume.
These are the preserves of the blue collar. No one is going to invent a machine to do the work of a RBI Governor or the PM. With a demand of, may be, one in every 3-5 years, the investments would not yield adequate returns. Moreover it is the existing jobs which are first prone to poaching.
While some white-collar jobs are also under attack in the last decade or so, the scale is not comparable.
Bypassing democratic process
With most in our social life subjecting themselves to democratic process there is a scope for ventilation of anger and frustration. Maybe it is once in four-five years. With astute politicians who can smell the voter preferences, you do not have to wait till the elections.
You can voice your concern through the MPs even at shorter intervals. But, unfortunately, in most countries the processes connected to WTO, globalization, etc., are not subject to any democratic rights or process. There is no effective ventilator. The actors are not the local politicians but the heads of the supra-national trade bodies. The only chance to show the wrath is the congregations and summit meeting venues.
Need for adjustments
A lot of adjustments from the agencies involved are called for if one were to see smooth implementation of their programmes and agreements. Patience, especially when one’s self interest is hit, will not be in infinite supply.