3 May 2018

Should we fear development?

David writes:*

Tariffs on steel, backing out of trade agreements: after years of rapid globalization and increased trade openness, it seems like once again the West is captured by the fear of international competition. The narrative of "our jobs will be taken by foreigners" seems more present than ever. Alan Blinder, the former vice-chairman of the Fed, has even warned of a “Third Industrial Revolution”. He argues that the United States, and the West as whole for that matter, should radically shift its labor force towards sectors that require personal interaction and cannot be offshored, because all other jobs will be taken over by countries that are rapidly developing their comparative advantages, like China and India. But how realistic is this doom-scenario?

Through globalization, transaction costs have significantly decreased, which makes offshoring easier. However, there is also such a thing as on-shoring: the acquisition of jobs through globalization. The West can now export their physical goods and intellectual property worldwide; the markets have significantly grown. Moreover, as jobs are lost to other countries, their economies will rapidly grow and their imports will increase. Blinder’s main argument is that countries will develop their comparative advantage, but that is necessarily through specialization [pdf]. That means they will still need to import most of their goods from other countries, including the West. Go to Kenya, Vietnam, or Peru, and count the number of iPhones you see in 10 minutes. Then remind yourself that Apple is responsible for 2 million U.S. jobs.

But even in a scenario where the West would not have any comparative advantages,** the implications of globalization are not likely to be so drastic. Many jobs in the West are easily replaceable, yet have not been offshored. Structural unemployment has not risen over the last few decades in almost any Western country, even though globalization has been going on for a while. There are several reasons for this:
  1. The Law of Diminishing Returns implies that specialization stops at a certain point, because at that point the worst industries of the ‘specialized’ country are competing with the best industries of others. Most countries maintain a broad variety of industries, because the best industries in each sector will almost always be internationally competitive. By getting access to global markets, these industries will grow as well so the sector does not necessarily shrink. 
  2. Many consumers like locally produced products. The label “Made in America” is not really an indication of quality but national pride. Although I can't see why people prefer that a fellow citizen is employed over someone in Pakistan, the reality is that many people do care. Corporations will keep employing Americans (even against higher costs) in order to win their goodwill. 
  3. Most countries in the world are not developed yet to the point where they can fully exploit their comparative advantage. There is a reason discussions about offshoring are always about India and China: most other developing countries are not yet at the point where they can compete with mass-producing, often subsidized Western corporations. In order for the massive disruptive effects of globalization to occur, the rest of the world will need to substantially develop first.
Bottom line: The popular idea that foreigners will steal our jobs often fuels nationalist rhetoric, but fears of a Third Industrial Revolution seem irrational. Our jobs are under threat, but it's not clear that foreigners are the source of that threat.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

** DZ: This is technically impossible, as comparative advantage is defined in such a way that every country must have an advantage in something.