Globalisation as the great unbundling(s): What should governments do?

Richard Baldwin 04 September 2008

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The Kiel Institute’s Global Economic Symposium – something like a New Century Davos – is being held in a Northern German castle and it is open to the web community. Globalisation is on the agenda. Alan Blinder has contributed his thoughts on “Offshoring, Workforce Skills, and the Educational System.” Here are my comments on the subject.

The new new

This is the second time in as many decades that I write about “the new wave of globalisation”. But this time, it’s really different. It’s tempting to rattle off the conclusions and hope readers have forgotten the 1990s contributions on globalisation. But that would be too easy. It is important to understand why things are different this time.

The new ‘new wave of globalisation’ in perspective

Globalisation is the great unbundling, or rather many.1

In the late 19th Century and first three-quarters of the 20th, globalisation meant the spatial unbundling of factories and consumers. Costs of moving goods, people, and ideas fell rapidly – especially for goods. Steamships and railroads allowed things to be profitably made far from where they were consumed. The first (steam) and second (chemical/electric) industrial revolutions fostered and were fostered by the first unbundling. These revolutions also transformed the skill mix a nation needed for success; universal, free, and compulsory primary education was one governmental reaction, but far from the only.

Social consequences of the first unbundling were dire. While winners won more than the losers lost, the winner-loser pattern stressed societies to the breaking point. Governments reacted by partially unbundling income and consumption – the ‘social market economy’ in Europe, the ‘New Deal’ in the US.

And economic unbundling rolled on. Costs of moving goods, people, and ideas fell rapidly – especially for ideas. Cheap and reliable telecommunications made it profitable to organise complex manufacturing tasks that previously required physical proximity. Late in the 20th century, factories were unbundled. Supply chains were internationalised. Today’s factories don’t make things, they make bits and pieces that are assembled somewhere and sold somewhere else. Globalisation began operating at a higher resolution. Instead of harming or helping the fortunes a firm as a whole, it could reach right into the factory and help or harm a particular production stage, a particular department, or even a particular job.

Due to the government’s earlier unbundling of incomes and consumption, the resulting winner-loser pattern caused few problems – at least compared to those experienced in the 1920s and 1930s. But problems were small since the affected sector, manufacturing, was small. Two-thirds of Europe’s value added was profoundly non-traded. Two-thirds of Europe’s labour-force faced little international competition. Moreover the affected workers shared common traits: low-skill, low-education. Government policies could readily be designed to redress their plight.

But economic unbundling rolled on. Costs for ideas fall rapidly. The cheap-and-reliable sharing of audiovisual material and documents in editable form combined with cheap-and-reliable continuous communication. Email and Skype instead of fax and phone. Since audiovisual and textual materials are critical to much of Europe’s service sector – as intermediate or final goods – the new wave of economic unbundling expands on a new axis. In the New Century, Europe’s offices are unbundled. Various service components are outsourced and increasingly offshored. This radically widens the circle of affected workers.

The new wave’s implications for policy

As far as policy making is concerned, high-resolution globalisation has three key elements:

  1. Unpredictability.

The winners and losers from globalisation are much harder to predict. By their very nature, lower trade costs for goods tend to affect all traded goods in roughly similar ways, and this is why one could tell which sectors would win from further trade cost cuts. When the main barrier is the cost of exchanging information across distance (trading ideas), it is difficult to identify winning and losing tasks. Knowing the direct cost of telecommunications is not enough since it interacts in complex and poorly understood ways with the nature of the task and the task’s interconnectedness with other tasks. Economists do not really understand the “glue” that resulted in the bundling of various tasks into packages (factory and offices), so the way in which various tasks come unglued will unpredictable until economists know much more about the glue.

  1. Suddenness.

A job which three years ago was considered absolutely safe – say a German computer programmer designing custom software for a Landesbank – may today be offshored to India, or outsourced to a German software firm that offshores the job to India. The deep reason for this suddenness lies in the nature of complex interactions within factories and offices. Telecommunication costs have fallen rapidly but the impact has been quite different for different tasks. This may be due to the organisation of tasks within offices and factories. This organisation has changed more slowly. At some point – what might be called the tipping point – cheap communication costs line up with new management technology and a new task can be offshored to a lower cost location.

  1. Individuals not firms, sectors, or skill groups.

In the first unbundling, one could view firms as black-box bundles of tasks since firm-against-firm competition was globalisation’s finest level of resolution. In sectors where backward and forward linkages among firms were important, a nation’s sector could be viewed as a bundle of firms whose joint actions determined the sector’s competitiveness. The competition was sector-against-sector, so individual firms who were not competitive on a stand-alone basis might still prosper due to the agglomeration economies flowing from their location. The new wave suggests that the forces of globalisation will achieve a far finer resolution; it predicts that international competition will increasingly play itself at the level of tasks within firms. New paradigm competition is on a much more individual basis, and this has some implications for policy that I discuss below.

Governmental reaction: Not education alone

The first unbundling radically transformed society. Governments reacted or failed. But promoting more appropriate skills was just one element. It is deeply misguided to think of skills separately from the full governmental package.

In the first wave, governments realised that farm and factory require different skill sets. The first unbundling saw primary education brought into the public sector and radically transformed. But this was one piece of the puzzle. As farmers moved to factories, new vagaries faced them – redundancies, inflation, and more. Part of the reaction was to establish welfare states, but equally important was the establishment of labour organisations.

Likewise, the new unbundling will require a revamp of education policies, welfare states, and labour organisations.

Better education

The basic changes to education are well summed up by Blinder (2006). The new wave is associated with much greater uncertainty, so flexibility is the key to allowing Europe to seize the opportunities of globalisation while minimising the adjustment costs. Children must learn how to learn while they are learning reading, writing, and arithmetic.

Stronger families

New research, however, tells us that schools are not the only place of learning, and perhaps not the most crucial. As James Heckman recently wrote on VoxEU.org,

“Dysfunctional families retard the formation of the abilities needed for successful performance in modern society. … American public policy currently focuses on cognitive test scores or “smarts.” Yet an emerging literature shows that much more than smarts is required for success in life. Motivation, sociability, the ability to work with others, the ability to focus on tasks, self-regulation, self-esteem, time preference, health, and mental health all matter. … A substantial body of research shows that earnings, employment, labour force experience, college attendance, teenage pregnancy, participation in risky activities, compliance with health protocols, and participation in crime are all strongly affected by non-cognitive as well as cognitive abilities.”

And governments can do something about it:

“Experiments that enrich the early environments of disadvantaged children demonstrate causal effects of early environments on adolescent and adult outcomes and provide powerful evidence against genetic determinism.”

Europe needs stable families, especially those with young children.

Better structured trade unions

Trade unions were a central element in making factory life attractive for workers in the first wave, counterbalancing the market power of firms and stabilising the vagaries of manufacturing employment. Today’s trade union structure arose in the first half of last century. As the recent “industrial action” at Lufthansa shows, this structure is not always the most appropriate for the new wave. Shocks are no longer mainly associated with skill groups or particular sectors. Globalisation operates at a much great resolution, so trade unions either need to become more narrowly focused, or more broadly focused.

References

Baldwin, R. (2006). “Globalisation: the great unbundling(s),” Chapter 1, in Globalisation challenges for Europe, Secretariat of the Economic Council, Finnish Prime Minister’s Office, Helsinki, 2006; ISBN 952-5631-15-X.

Blinder, Alan S., (2006), “Offshoring: The Next Industrial Revolution?” Foreign Affairs, 85:2, 113-128.

Blinder, Alan S., (2008). “Offshoring, Workforce Skills, and the Educational System.” Virtual Global Economic Symposium.

Footnotes

1 For the longer version, see Baldwin (2006).

 

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Topics:  Global economy

Tags:  globalisation, social policy, third wave globalisation