Posted on 04/06/2006 12:19:37 AM PDT by grey_whiskers
INTRODUCTION
In a prior vanity about outsourcing Another Look at Outsourcing I argued that the phenomenon of offshoring as practiced by multinational corporations in the United States was the result of demographic trends, and the search for new markets, in addition to the opportunity for wage arbitrage. In a subsequent vanity A Falling Tide Grounds All Boats I extended the position to argue that the practice of offshoring risked undermining the United States as an economic power, and that the current trend was intrinsically unsustainable, due again to demographic trends. In this article, I consider the possibility that the offshoring trend, while it may be unsustainable indefinitely, in fact may become self-limiting. I begin with a “curve ball.”
In 1956, an American geophysicist presented a paper dealing with the phenomenon of “peak oil.” This concept, for those unfamiliar with it, may be briefly described as follows. Since oil is a fossil fuel, and they aren’t making any more dinosaurs, there is a finite amount of oil available. Oil is therefore being irretrievably lost with every barrel pumped. By observing the rate at which oil is extracted from typical oil fields, it can be shown that the rate of oil per day starts small, increases to some maximum value, and then tapers off again. Either by combining the contributions of known oil fields, or just by analogy, one can therefore argue that the overall amount of oil available should peak and then taper off. Peak oil states that we have already reached the maximum rate of oil, and it’s all downhill from here.
I wish to consider the possibility that a similar situation may be developing in global labor markets. Consider first the populations of the “developed” countries—Europe; Japan; the United States. In Europe the number of children per woman is roughly 1.5, with 2.1 considered the rate needed to maintain a stable population. In Japan, the average lifetime births per woman is around 1.3; and in the United States, the rate is around 2.0 – which is better than Europe and Japan, although tempered by immigration, “welfare queens,” and the like. More on this later.
Therefore, with the aging populations of the First World, and smaller generations of youngsters to replace them, companies fear running out of both consumers for their goods, AND running out of workers. The solution so far has been to turn to developing countries, primarily in the Far East. For now, the situation has proved very advantageous for businesses, as they are able to exploit wage arbitrage while opening expanding markets for their products—and without the pesky product liability, pension, or environmental hindrances in the United States. The days of the robber barons have returned!
Or have they? Let us look a little more closely at some of the “developing” countries, for example, India, Viet Nam, and China. India has an average birth rate Contrast this with the situation in so-called “developing” countries: for example, India, Viet Nam, and China. India has a rate of around 3.0 children per woman; however, this represents a 40% reduction since the 1960’s. Viet Nam is aiming for an official policy of 2 children per woman. China, despite its high population, is infamous for its “one-child” policy; which is often enforced at the expense of newborn girls. So while the number of people in the Far East is very large, the trend is for falling birth rates worldwide.
But there is one other factor which is often left out of the calculations by those pushing “globalization.” It is that, regardless of the size of the potential market, most of the Far East remains as Third-World Countries. While this circumstance is helpful in certain aspects of business, it makes things much more difficult in others. On the one hand, as noted above, there are fewer environmental laws, fewer lawsuits, and a lower wage scale. Recall for example the comments of Microsoft’s Brian Valentine “Think India! Two for the price of one!” On the other hand, the infrastructure is in many cases far worse, the intellectual property rights are not well developed (recall where China’s Chery was accused of simply copying the design of some GM products), and the business culture and ethics are often not up to First World norms (for example, think of the debacle of Hwang Woo-suk’s stem cell research).
Oh, yes, there is one other item. The fact that there are so many people in the Far East does not necessarily mean they will all be avid consumers; nor again that they will make first-rate workers. According to an article in Business Week Online, China has 1.6 million engineers; but the number of engineers available for multinationals is just 160, 000. This would have to serve the needs of companies replacing US workers, and the needs of multinationals expanding into China. A similar situation applies to India: according to the article, only 10-25% of India’s graduates would be hired by multinationals. It is all very well to brag about the graduates of the India Institutes of Technology, but there are only a few thousand of those: and the bench strength drops off rather quickly after that. And in addition, there is the nagging problem of the large agricultural populations. In India, some 300 million people live on $1 a day or less. They are not likely to be able to fill the shoes of retiring US engineers and managers from the Big 10. (This bears some analogy to the undeclass, the "welfare state", in the United States, as mentioned above. Provided the government has enough money, these people will be consumers, all right. But they are not very useful to companies as employees.) And as has been noted earlier, China must create 25 million new jobs a year, just to break even.
So the problem is this. The First World’s population is aging. The population of the developing countries is burgeoning, but even that is falling in many cases. And businesses need both customers and employees. In fact, following the logic of Henry Ford, when he priced his automobile so that even his factory workers could afford them, companies need employees in order to have customers. But it looks like in many cases, the developing countries are producing plenty of people, but not enough employees. Will anyone be able to pick up the slack? No wonder I call it…peak labor.
Full Disclosure: It is interesting to follow the trends of the movers and shakers by reading the opinion articles in the business press. For a while the tone was “Outsourcing will solve every problem the world ever had, and US employees are incompetent anyway.” Over time, this changed to, “It is important to keep some of your good employees around for the sake of business knowledge, in order to backstop your offshore resources.” Now the mantra is changing to two competing memes: “For God’s sake, just outsource. Any reason will do” ; this is competing with “American workers, we didn’t mean it. Don’t be afraid of outsourcing. Our fulltime employees are our most important asset.” If I were engaged in reading the tea leaves, I might guess that the powers that be are beginning to realize that offshoring is not the Goose that Lays the…err, Golden Eggs.
Cheers!
I enjoyed your article. It was logical and very well considered.
Wages and fees are also equalizing between nations along the way. Our US dollar must fall, and overseas transportation is likely to get more expensive.
I have learned, as a result, that whenever there is a "journalistic front" (as Rush Limbaugh calls it) about a stock sector, it means that one of the powers that be wishes to drive investment to that area.
By analogy, whenever Business Week, Information Week, etc., start bloviating in synch about a subject, then that is the line that the people at the top want pushed.
It is similar to reading the tea leaves in Pravda in days of old...
Cheers!
Case 1: Japan.
Case 2: Germany.
What they both have in common is that they are both well developed but have a declining population.
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