Wednesday, June 20, 2007


OECD correctly reports that fears and threats on globalization are fully overblown. Overestimated threats emerge from concerns over wage inequality and the loss of jobs as labor-cost incentives in emerging markets push many existing enterprises abroad. However, moving production facilities and low-skilled jobs abroad does not mean that wages neccessarily decline. Job flight is compensated by infusing high-skilled jobs such as IT, consulting and services broadly based on new economy.

Overblown rosy fears about the danger brought by the liberalization of international trade nearly turned into the commedy. Empirically, the liberalization of international trade flows encourages labor and capital mobility giving incentives to accelerate the investment in human capital. Another questions that raises woes against the pursuit of free trade is whether offshoring worsenes the unemployment agony or not? The answer is No.

Despite the increased amount of offshoring investment, the unemployment rate among OECD countries steadily declined from 33,6m in 2006 to 32m in 2007. The explanation can be based on the correct empirical assumption that offshoring investment is an incentive for domestic economy where new jobs are added particularly in high value-added areas where knowledge is transferred at an intensive pace. Regarding offshoring, both sides benefit since this is a pure behavior of market equilibrium and free exchange.

Domestic economy (where offshore investment takes place) is fueled by intensive job creation in sectors where high value-added plays a sharing role. The other side benefits from job creation. Since offshoring is primarily focused on locations where labor cost proportions are low relative to the rest of the world, say Chinese, Vietnamese or Indian workers benefit from higher job creation which lifted millions out of poverty into the middle-class wealth.

There is also concern about wages. Wage inequality is actually a good sign reflecting the difference in skills, education and productive behavior between labor market agents. The wage inequality over the last period is actually the result of technological change and increased productivity in several areas compared to another.

No comments: