William Wolman and Anne Colamosca

It is an honor to be asked to appear before this distinguished Commission. We do not come before you as experts on the Chinese economy or on the specific issues raised by China's application for membership in the World Trade Organization. Rather, we appear as students of economic history and economic journalists who have written about the evolution of the world economy in the wake of the fall of the Berlin Wall. We regard the end of the Cold War as a critical event in world economic history, of equal scope, for example, to the events that followed the beginning of the age of discoveries in the late 15th and 16th centuries. Indeed, the speed with which relatively free markets spread around the world in the past two decades is perhaps unprecedented. And an analysis of the consequences of the emergence of a new style global market economy has been one of our major interests in recent years and led to the publication of our 1997 book, the Judas Economy: The Triumph of Capital and the Betrayal of Work. Indeed, it is our understanding that the interest of some of the Commissioners in the analysis presented in that book is the main reason that we have been asked to come before you.

That is not to say that we are bereft of views about the impact of the emergence of China on the world stage. As citizens we deplore that country's violations of human rights, its repression of free political activity and its intolerance of religious freedom. We deplore the absence of a genuine union movement. And we share the deep concerns over forced labor, prison labor, and restrictions on the free movement of workers within the borders of China.

As economic journalists, moreover, we are well aware of the growing importance of China in world trade. Indeed, because of the size and vigor of its population, the emergence of China on the world economic scene means that the trends set in motion by the end of the Cold War are so far merely in the their early stages. Virtually every trend that we foresaw in The Judas Economy is likely to work with even more intensity over the next two decades than it has over the past twenty years.

Two ideas are basic to a proper understanding of the new globalization. The first is what might be called the law of one price. The second is the simple but indisputable observation that capital is more mobile than labor.

THE LAW OF ONE PRICE

In a world in which trade is truly free, both goods and services will tend to sell for the same price no matter where they may be sold. It makes little difference if they are sold in Bangor, Maine or in Bangalore in the Indian province of Karnataka. The law of one price, moreover, applies not only to goods but also to the services provided by those who earn their living from work. So that a textile worker in the Carolinas will in the long-run earn no more or no less than a textile worker in Guangdong province of China. In the new world, then, there is a relentless tendency of prices to converge. When American consumers can buy products at lower and lower prices, as production spreads around the world, we all cheer. And rightly so. But when American workers' wages are under relentless pressure to move to a point of equality with those in other parts of the world where population is abundant, but capital scarce, we're not so sure that we should cheer.

Most of us are, after all, workers as well as consumers. And that immediately raises serious questions about the equity and justice of international trade. Indeed what prompted us to write Judas, was a deep concern that whatever the benefits of globalization may be Americans as consumers, a disproportionate share of the costs of globalization were being born by those who earn their living from work in the United States.

At the time that our book came out, the excess burden of globalization on workers were mostly being born by those manufacturing workers in the old economy whose wages came under downward pressure because production was being shifted abroad in order to take advantage of lower wage scales.

But in the book we also warned that the wage competition that affected manufacturing workers in the 1980s and 1990s, was beginning to manifest itself in the demand for, and wages of, white-collar workers. We also warned that the top rungs of the American labor market, the workers who were the most visible beneficiaries of globalization and the emergence of the new economy would, in the not too distant future, begin to feel the blows of intensified competition from the emerging world, particularly the countries of Asia.

There were already signs that white collar workers without special skills and education were beginning to feel the effects of globalization. Indeed, in one chapter of Judas, A Passage to India, we reported on our findings on the migration of the more routine data processing jobs to Bangalore, the Indian city that was showing signs of fuller and fuller participation in the economy made possible by the computer and the internet. It is interesting that in our reporting with leading executives in the Indian high tech economy, including N. R. Narayana Murthi, the CEO of Infosys, India's leading software company, the major long run concern was not of competition with the United States, but rather of competition with China. Murthi simply said that his long-run concern was that new Chinese software companies would emerge and financially undercut him since labor was so cheap there and so hampered by government in its effort to raise its wages.
There are, in fact, strong reasons to believe that the movement of white-collar work abroad will, at some point, move more swiftly and with more disruptive consequence than did the migration of manufacturing work. There are substantial home market advantages to goods production. For example, when production adds weight to a product--beer, for example--the local market becomes an attractive option that offsets low wages abroad. And in any operation where the product is bulky or heavy, transportation costs become an important consideration and limit the international spread of production.

These natural protections that once existed are, of course, already dissolving in the goods production area itself. In high tech industry where value is high in relation to bulk, we have already seen the movement of production offshore at a rapid pace. One vivid example is the triangular trade in high tech products, which sees Americans placing orders with Taiwanese firms who, in turn, run many of their operations in Mainland China, where they have become major investors. So effective has this trade become in reducing costs that some call the American-Taiwanese-Chinese high tech economy, the "Golden Triangle". It is this trade that is a major cause of America's severe balance of trade deficit with China as well as Taiwan. It is also this trade that more than any other single factor that has led to the rapid growth of airfreight which supports just-on-time inventory policy for which the high tech industries have become famous.

But the barriers imposed by distance on the division of labor are virtually nonexistent for white-collar jobs. The reason, of course, is that distance is a truly minor factor in what it costs to move information on the Internet. Already, in the mid and late 1990s, a small percentage of white-collar American jobs such as medical transcription, customer phone work and data processing were being done by English speaking workers in India, the Philippines and Ireland. These workers need to have a relatively sophisticated grhtm of written and spoken English, so it is not realistic to assume that the entire global workforce will be available to do American white-collar work over the next decade. Nevertheless, year-by-year, an increasing number of foreign students are becoming fluent in English. India and the Philippines, of course, are ready-made for this kind of work,

As we learned in India, it took more than a decade of development to emerge as a major player in information processing. Indigenous Indian companies had to develop a long-term track record with American firms to win white-collar work contracts thousands of miles away. And once they did, American corporations flooded into the country and established their own facilities, not only to process information but to develop software. It started out in the mid-1990s as routine "back office" work, and that is still the backbone of the business and is still growing rapidly. For example, Bangalorean software engineers "fix" Citibank cash machines overnight if they are down, and transmit the fixes on the Internet. Throughout the 1990s many large U.S. corporations came to depend on this back-office work. Later, more traditional white-collar jobs--such as medical transcription, airline reservation and debt collection--were added to the mix. In 2001, a recently hired Indian transcriptionist with a bachelor's degree in science earns $150 a month. The point is, it didn't happen overnight. And as Mr. Murthi at Infosys pointed out, "we worked incredibly hard for years to win their confidence." (In our book, we use an anecdote in which an American executive patronizingly throws a cigarette lighter across the table during the 1960s at an Indian entrepreneur and says, "When you can make one of these, let me know." This is the kind of attitude that Murthi had to fight against during the early 1990s to make the reputation that they now enjoy.

But after the years of hard work, a new global paradigm is emerging. And because of pioneers like Murthi and its huge crop of low-wage, well-educated English speakers, India is leading this global trend. Now, in 2001, much more complex white-collar jobs are beginning to be transmitted globally. Highly educated Indian actuaries process insurance claims for Britain's Guardian Royal Exchange Group. And there are currently plans afoot in India to produce new software in graphic design, accounting, legal services, and social work transcription that could shift tens of thousands of more and more complex white collar jobs abroad over the next decade and beyond.

Now that Murthi and others have shown that white-collar work can be successfully transmitted thousands of miles away, it can, of course, be done in countries such as China, where software companies are already beginning to compete with Indians at much lower prices. In India, white collar work is being done by highly educated workers, with degrees from a deep network of universities and community colleges built under a socialist system set up under Nehru, which worked at educating at least some of India's poor. This complex of eager, well-educated students have given Bangalore's software business a lot of the creative energy it has needed to become successful.

Anywhere you go in Asia nowadays--China, India, Taiwan, or Singapore--you can find highly skilled workers designing interactive CD-RM programs, producing programs that map three-dimensional images to diagnose brain disorders, designing digital answering machines or interactive computers for children. The "back-end" work of product development--the painstaking job of turning a conceptual design into blueprints, computer code, or working models, and testing the final product--is increasingly being done in Asia these days. Citibank taps local skills in India, Hong Kong, Australia, and Singapore to manage data and develop products for its global financial services. Hewlett-Packard encourages each of its manufacturing sites around the world to become a global center for many components used in HP's microwave products. More and more, specially trained Filipino accountants do much of the grunt work in preparing tax returns for multinational firms. All this overseas work is easily transferred via satellite links, computers, and e-mail.

In fact, pioneers such as Citibank and Hewlett-Packard are only the beginning of the trend toward corporate "outsourcing" of highly skilled labor. Well-paying back-end jobs such as software designers, draftsmen, librarians, and mechanical engineers, in which many Americans make their livings are barely in the first stages of being transported globally. The Bangaloreans get paid roughly one-tenth the $25,000 average salary of full-time medical transcriptionists in the United States. And some in the large southern Indian medical community are currently hard at work trying to figure out how to use the same high-speed data lines to create more upscale medical jobs for their increasing population of university graduates. In addition, those involved in this first wave of cyberspace skilled labor are working very hard to move up from "back-end" production jobs to the creative, frontline jobs, many of which have been monopolized in the last generation, by American "whiz kids" and foreign "whiz kids" working in the U.S.

We do not know how Chinese software and white-collar workers would be treated in China's much more restrictive command economy. But it would be imprudent to assume that China's thrust into the high tech world will not succeed because of its repressive environment. Profits rule the day in the early 21st century. And Murthi's point to us was the Chinese educated labor is much, more cheap than Indian educated labor. It's just a fact of life.

HAVE THE ELITES HAD IT?

It hasn't happened yet. But it is probable that globalization will end up by hurting those at the very top of America's new economy, the electrical engineers, physicists and mathematicians who have done so much to create the "hot" centers of the new technology such as Silicon Valley. We would argue that the relative good fortune of the elite workers of the developed world is the product of a phase of economic history that is showing signs of coming to a close. Up to this point, these elite workers have gained all the benefits of globalization and paid none of the costs. That's because they have been what the great British economist Joan Robinson has called "idiosyncratic factors of production." Mrs. Robinson, who was a Cambridge University economist in the 1930s and early 1940s, pointed out that in a market economy, the highest rewards were likely to be earned by factors of production that she identified as "idiosyncratic," having, as The American Heritage Dictionary describes "unique structural or psychological characteristics." These elite workers were ideally suited to lead high tech industry in the 1980s and 1990s, and the U.S. was fortunate for their presence.

What is slightly more difficult to grhtm is that the educated elites of the developed world have been an idiosyncratic factor of production as a class for most of the four hundred year history of capitalism. Therefore, they were able to lay claim to a large share of the world's income. It was the educated classes of West European countries, including the United States, and some of the British Commonwealth countries, which were the repositories of virtually all knowledge needed to apply science to the production and distribution. They therefore had a monopoly on technological advances and the dynamics of capitalist production. And since access to this class and to its knowledge base was limited both by ethnic and racial prejudice among the captains of capital and by limited access to education during most of the history of capitalism, white ethnic Europeans, as a class, also had a monopoly on the vast majority of high-skill jobs.

It is doubtful that these forces that have benefited the United States will work with the same force in the coming decade. In particular we have already seen that there are limits to the speed with which high technology can benefit from new opportunities. Our own expectation, in fact, is that the speed of innovation in high tech will slow somewhat. Indeed, we are already seeing the emergence of a consolidation phase in the high tech business, which is placing more and more pressure on new economy companies to cut costs and employment. It is even likely, in fact, that compensation in the high tech sector will grow much more slowly than it has in the past few decades. This, of course, is an environment in which the business incentives to move activities abroad become more and more intense. And we should not be naive enough to believe that the consolidation phase in the new economy will have some extremely old-fashioned consequences. The basic tool of that economy, the personal computer, has already become a commodity in which price competition is intense. We are also witnessing a phase in which the rate of return to increasing the speed of computing and even increasing its range may well be falling, at least for the next few years. This is a perfect atmosphere for business decisions to locate new facilities and purchase products and components from low wage countries. It is also an environment in which it will pay to move more and more computer processing abroad. The Taiwan-China-U.S. economy will put particular emphasis on locating new facilities in China. We take this as a given of the coming decade.

*In nominal terms, profits have increased roughly twice
as fast as the gross domestic product since the end of the Cold War. As a consequence, the share of profits in gross corporate income, the share of national income generated in the corporate sector has reached unprecedented heights. There is little doubt that most Americans have benefited by the great investment boom that has resulted from the combination of strong profitability and the technological revolution in the use of information. But the facts are that it is the owners of capital who have received the greatest share of the benefits.

MOBILE CAPITAL

The second idea that guided "Judas" was also a simple one: capital is more mobile than labor. It is far easier for capital to move into zones where the returns are higher than at home than it is for labor to accomplish a similar feat. As the world opened up to the relatively free movement of capital, it was easy for American businessmen and American investors to move their capital into zones where rates of return were high. No such spectacular opportunity was available to those who earned their living from work in the United States. All they could do was sit by and watch production move abroad. The effect, of course, was a weakening in the power of American labor. Wage growth began to stagnate, many high wage jobs disappeared and the American labor movement lost much of its power to bargain effectively for American workers. One effect was a shrinkage in the union movement.

The erosion of the position of those who earned their living from work represents a radical change in the entire atmosphere of the United States. Virtually anyone who has studied economics remembers the vivid celebration of the position of the American worker in the early days of the republic. In "The Wealth of Nations", published in the year of the Declaration of Independence, the great economist Adam Smith, explained why the average worker was faring better in what was to become the United States than in Europe. He patiently showed that American workers were prospering simply because they were scarce, and small in number, relative to the quantity of resources, particularly land, that was available in the country. The consequence, of course, was that the returns to labor, wages, were under constant upward pressure as compared to Europe where the supply of labor was abundant as compared to land and other resources.

In sharp contrast--a contrast that many Americans still fail to notice--the post Cold War economy has made a critical factor of production, American capital, scarce as compared to work. The result has been a radical change in the American economy. During most of the history of the American economy, the movement of people was matched by a movement of capital--monies used to invest in the economy. Even the size of capital flows roughly matched the number of people who were moving. Thus, in broad outlines, the flow of capital out of Europe followed the flow of people. The United States, the country to which people migrated in the greatest numbers, was the recipient of the greatest flow of capital to build canals, railroads, and other industries. Similarly, in the colonial orbit, the flow of capital from Britain to India was closely connected with the movement of the British into administrative and business positions in India, whose top ranks were made up mostly of British. The symbiosis between labor and capital was maintained, even while emigration provided an important safety valve for European workers displaced by invention and innovation. As the Industrial Revolution swept across Europe, the workers displaced by economic change swarmed into the United States.

It is the vast labor pool that global capitalism has tapped into that is the new leviathan. As capital has become more mobile since the Berlin Wall came down in 1989, the number of workers ready and anxious to find work in the new global market has exploded. The effect, which is barely being felt so far, and which will get worse, is to greatly weaken the competitive position of those who earn their living from work in the advanced countries.

The magnitude of the global increase in workers available for global market production since the end of the cold war has yet to sink in, either in the intellectual community or among average Americans. With the free market suddenly sweeping the globe after the end of the cold war, workers from the developed world are now facing competition in a much more intense, explosive way from middle-class mind workers around the world.

Only after the collapse of the Soviet Union did those populous Asian countries that were not part of the original group of economic "tigers"--China, Indonesia, Malaysia, Vietnam and India--begin changing at dizzying speeds. It wasn't until the early 1990s that Westerners, along with the overseas Chinese, began pouring large amounts of money into China with a growing confidence that the pro-market revolution would prove permanent and eventually, over a billion Chinese would enter the promarket economy. These newcomers would be tapped as both the world's largest new consumer market and capitalism's newest vast and talented labor force.

In all, the size of the globally competitive population rose from under 1 billion to over 5 billion in 1994, and the size of the globally competitive world middle class grew from about 725 to a figure something over 1.2 billion. Around the world, indigenous well-educated managerial classes--the likes of which the world has never seen before--have aggressively begun making their presence felt as promarket reforms have been put in place, changing the demographics of the professional labor force forever.

The effect has been a sharp increase in the return to capital as compared to the return to work. When we wrote "Judas", the full impact on the emergence of China on the global distribution and abundance of workers had not quite dawned on Americans, even those Americans who specialized in economic analysis. But the past three years has made the impact of China clearer. Many of us are now aware that in one-way or another, some three hundred to four hundred million Chinese have entered the global economy. This emergence of a vast new pool of Chinese workers will lead to an increase in the speed in which the post Cold War global economy is being transformed.

But what is also true is that the explosion of the global labor supply has greatly reduced the need for a cadre of middle managers to impose industrial discipline on lower-run workers. Instead of relying on stern bosses to keep workers' toes to the line, companies now make it obvious that they can--and will-move their facilities elsewhere. And now, they no longer need to move facilities. Instead, an e-mail is only a few clicks away.

Over the past two decades there have been enormous benefits from the post Cold War spread of the free market.
Around the world, but particularly in Asia, hundreds of millions of people have been raised out of poverty. In the United States those in a position to benefit from the free movement of capital have been enriched particularly by the rise in stock prices. But the ownership of capital in amounts to make a real difference is strictly limited in the United States.

It should be obvious that Americans who earn their living from work have paid more than their fair share of the cost of globalization, however, beneficial that globalization may have been from a historical perspective. It is therefore incumbent on policy including obviously U.S. trade policy towards China to be mindful of protecting those who earn their living from work in the United States. That is the main message that history is sending to Washington at this point in time.

Most economists deny that competition with low-wage workers abroad is a problem for Americans. They tend to view calmly the movement of capital into low-wage areas and expect its effects, in the end, to be benign. Their argument, essentially, is that the wage advantages that make newly industrializing areas effective competitors with the established countries of the world will disappear over time. And it is certainly true that these earnings differentials have had a tendency to diminish in the past. As capital moves to low-wage areas, the employment rate tends to rise, and wages are pushed up. Certainly wages in many countries have been rising faster than in the United States, reducing the gap between the cost of labor in developing countries and American labor and the gap between the prices of goods in developing countries and in the United States.

Economists see the process by which earnings in less developed areas catch up with wages in the advanced countries as an htmect of convergence. In this view over time the advantage that low-wage countries have over high-wage countries erodes. As capital moves into the less developed countries, increasing productivity there, exports to the developed world rise, generating more demand for work in the once disadvantaged areas, and increasing wages there. In an environment of reasonably free trade, the process of convergence proceeds to a point where wages in the developing world catch up with wages in the developed countries.

Particularly reassuring to many economists is the experience of the United States in its trade with Western Europe and Japan after those areas began their post-World War II reconstruction. Wages were far lower in those countries than in the United States at the time, far lower, indeed. But by the beginning of the 1990s, wages in Japan and Europe had caught up with American wages, and now wages are higher in those countries than they are in the United States. And although they have yet to equal wages in America, wages in many of the other countries in Asia are catching up.

Don't worry, say most economists. In their view, wages in the other emerging countries will catch up with those of the United States too, and there is nothing wrong with capital moving abroad because rising prosperity in the emerging world will also increase demand for U.S. goods and services, thereby increasing American production, employment, and productivity.
We do not dispute the first tenet of this argument: the probability is that rising wages and increased demand for American products in the developing world will, in the long run, bring some benefits to American workers. We also join conventional economists in hailing the sharp growth in American exports of both capital goods and consumer products to the developing nations, particularly those nations that are growing rapidly.

Nonetheless, we do not believe that these developments will bring the benefits to the United States that many economists claim they will. The full impact of rapid growth abroad on jobs and incomes in the United States cannot be measured in terms of the growth of U.S. exports; rather it should be gauged by what happens to the margin between the quantity of goods that the United States exports and the quantity of goods that the nation imports. And by both measures that margin, the balance of trade, has been deteriorating because American imports are growing faster than American exports. While American industry is becoming more competitive in some product lines, it is losing competitive advantage for products that have an even greater total value. The widely celebrated American export boom is impressive, but the less celebrated import boom is more telling. And because U.S. imports have been growing faster than U.S. exports, it is likely that the international position of American workers is not improving but deteriorating. That is a major reason why there is no end in sight to wage stagnation in the United States and in other industrial countries.

The optimistic view of America's ability to prosper in the wake of the new demographic revolution is, in our view, anchored in the past. The demographics of a world where the growth of the free market labor force is in hyper drive are far different from those during the cold war, before the free market held unquestioned sway. Because of the seismic impact of the rapid worldwide spread of available skilled labor, the process by which wages will become equalized around the world is almost certain to progress extremely slowly. It is only among the economic tigers on the periphery of Asia and in one province in southern China (Guangdong), and elsewhere just among select members of the middle class, that the process of wage convergence has advanced with any degree of speed.

There should be no mistaking where the logic of a totally free, totally integrated world labor market leads. The very same forces that pit the exchange rate of the dollar against other currencies will eventually guarantee that a programmer earns no more in Boston than in Bangalore, a certified public accountant no more in Baltimore than in Beijing, or an architect no more in New York City than in Kuala Lumpur.

Nor is there any way for those in the industrialized world who earn their living from work to really escape the assault of the market. On the eve of a fight with a skilled defensive boxer, Tony Pastor, the great heavyweight champion Joe Louis once said, "He can run, but he can't hide." And so it is with all those who earn their living from work.