A Question for the Council on Foreign Relations: Globalization at Any Cost?

By Stormy

In a reply to a recent piece by Michael Mandelbaum on the Council on Foreign Relations website, I posted the following comment (which is still awaiting moderation):

How globalization has been structured is the issue.

In this case, with one debtor nation (the U.S.) depending primarily on its financial wizardry to carry it forward, while hollowing out its manufacturing center; and emerging nations taking up the slack in production of goods and services–all resulting in enormous disequilibria: trade/debt.

To keep the Western consumer buying and not producing has created fertile ground for the kind of disaster we are witnessing.

I strongly suggest that those who praise globalization regardless of how it is structure look more carefully at its crafting.

Mandelbaurm makes two points worthy of addressing:

1. Where some form of globalization exists, “there is no alternative.”
2. The opponents of globalization will exploit “the most potent of all modern political ideas — nationalism”

Nationalism for Mandelbaum includes, I am sure, the raising of tariff barriers. So far, that has not happened, nor will it happen, I suspect.

In short, he makes no connection between the current crisis and globalization. Once the current crises is over, everyone can go back to business as usual. Frankly, there will be no “business as usual.”

In addressing this point, I would like to examine IBM as a case study: its approach to offshoring and its recent quarterly report. IBM is doing well, with “ample cash flow from its operations and $9.8 billion in the corporate treasury.” Third-quarter net income is up 22% with an expected 22% increase over 2007.

On first glance, it would seem that Mandelbaum is correct: There is no connection. Once the liquidity crisis is addressed, there will be business as usual. To understand how this may not be, in the long run, we should look at how IBM has positioned itself globally.

Like many multinationals, for the past four or five years has pursued an active and energetic policy of off shoring. While this has enabled it to weather the current storm for the short run–building up that sizable $9.8 billion corporate warchest–, it has done so at the expense of providing the American worker with the means to meet growing debt and growing cost of living and of providing America an economic engine to reconsitute itself once the financial crisis is settle.

And just how enegetic has off shoring been for the likes of IBM and other multinationals?

In 2003, IBM began moving 4,700 programming jobs overseas. Managers were instructed to move jobs to China, India, and elsewhere where technical talent was high and labor costs were low. In IT, IBM was but a tip of the iceberg. Other IT firms were following suit: Hewlitt Packard, Intel, Apple, to name but a few.

In 2003, IDC foresaw “a quadrupling to $46 billion by 2007, or 23 percent, of total tech spending. India, China and Russia stand to gain the most from the IT spending trend. Forrester Research projected that nearly 1 million U.S. IT jobs will move abroad in the next 15 years — a forecast that greatly troubled union organizers and politicians with IT firms in their districts.

In 2006 and again in 2007, an IBM shareholders placed the following proposal on the stockholder meeting:

The stockholders request that the Board establish an independent committee to prepare a report evaluating the risk of damage to the Company’s brand name and reputation in the United States resulting from IBM’s offshoring initiative and make copies of the report available to shareholders of the Company upon request.

Both times, the IBM Board of Directors recommended a “No” vote on the proposal. Both times the proposal was defeated.

In 2003, the full scope of IBM’s plans for off shoring were laid bare. I strongly recommend readers to use this link; for the rest, here are some snippets. Tom Lynch, Director of Global Employee Relations, made the following remarks:

[When]we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high-cost labor areas to lower cost labor areas. In the1990s that focus was primarily in the are of manufacturing.

…from now until the year 2010 and beyond; we’re looking at an emerging trend now to move services offshore, in addition to manufacturing operations, some functions that would be included in those services would be engineering, Harry mentioned software development, certainly chip development as well. Services like accounting and financial services.

US workers or workers in a country where the work is being relocated from, will, in many cases, be asked to train their replacements.

If we’re moving work to China, the Chinese management team and maybe some Chinese workers will have to come to affect the transfer of knowledge needed to do that. That’s going to raise a lot of tensions as you’re training someone to do a job that you know is no longer going to be yours at the end of some fixed period of time.

But, by 2003, the advantages of NAFTA had begun to wane.

Now Mexico doesn’t look as cheap as, you know, some other labor markets, as well. So it’s a real dynamic marketplace out there. Each of you, I would urge, work with your folks to see what makes the most sense in terms of your own businesses and your own needs. But clearly the dominant countries that are being talked about are India, China, and generally speaking, Eastern Europe.

Tom realized that governments might complain.

Government reaction? It is hard for me to imagine any country just sitting back and letting jobs go offshore without raising some level of concern and investigation, and I think we’re going to see some of that in the countries where jobs are moving from.
It’s hard to fight globalization. Governments, I think are going to find it is fairly limited as to what they can do so unionizing becomes an attractive option. And for a lot of reasons, there are indications that union organizing is going to become more aggressive over the coming months.

Well, with NAFTA and the WTO strongly behind this kind of globalization, the cat was out of the bag, so speak. At this point, government or union intervention may be futile.

Tom put the matter succinctly when he said:

I think that we’re at the stage, frankly, where for many of our managers, the answer is “offshoring—what is the question?” So we’re really, the approach and the strategy here really has to crystallize as we decide what it is that is going to be moved, and what are the implications of doing so.

In this fashion was globalization structured. To say the least, the structuring of globalization, despite all its hoopla, was designed to benefit a select few. Corporations did not consider anything other than cheap labor. No, they did not think of the poor Chinese or the poor Russians. That kind of argument was window dressing for economists: How the world would be united through trade and poverty abolished.

How then do we make the leap to the current crisis? First, enormous wealth flowed out of the U.S. and into the private coffers of our multinationals. That flow was directly responsible for the obscene bonuses and incomes that CEO’s earned, of which we now complain. That flow placed ever-greater strains on actual financial resources within the U.S. To compensate for stagnant wages, credit in every form–however leveraged or ill-designed–was extended. America had become a debtor nation of staggering proportions. As debt increased, so too did the trade deficit. Financial institutions, which already had made significant monies investing overseas, attempted to keep the party going at home through questionable lending practics.

But America already was in decline; the flow of jobs to third world emerging economies already was taking its toll on America. The flow of jobs sent unimaginable wealth, not only to corporate CEOs, corporate coffers, and to third world managers who oversaw third world labor but also to the coffers of third world governments, such as China The preponderance of that wealth did not go to lowly employees.

As long as labor was kept cheap, the game was on. In short, the disparity of wealth between those at the top and those at the bottom increased globally, here as well as in China and elsewhere.

What ruled the day? Managerial talent at the top that could exploit every niche in the structure of globalization.

And what happens when finally the credit game is over, when this finely honed corporate machine exhausts the consumer, when it has bankrupted us all? (By the “corporate machine” I mean not only producers of products and services to support those products but financial corporations as well.)

I have said it repeatedly, and I will say it again: How globalization was structured provided fertile ground for the present collapse. More care should have been taken. Instead the floodgates were completely and suddenly opened. Instead of a trickle that we all might handle, we were greeted with a torrential flood, from which there is now no escape.

Let me return to widen one Mandelbaum quotation, giving you its full context:

(World War II demonstrated that while manufacturing weapons can increase productive economic activity, actually using them has the opposite effect.) As Mrs. Thatcher might put it, where some form of globalization is concerned there is no alternative.

In Mandlebaum’s view, any economic activity connected with globalization is worthwhile, as long as it increases “productive economic activity,” even if that activity is manufacturing weapons.

Globalization however it is structured is a primary good, a good that transcends any questions of detail. This is the mantra we have endlessly heard.

To which I say: the HOW is everything. The race is not to the swiftest but to he who most carefully plans. Globalization is important. But avoiding sudden dislocations in wealth, trade, debt, and credit must be major considerations.

Maybe we will learn better the next time.