International financial and trade institutions The World Bank

International financial and trade institutions The World Bank n Provides economic development loans to its member nations. n Funds used mainly for roads, dams, power plants, pipelines, and other infrastructure projects. n International Monetary Fund n Purpose is to make currency exchange easier for member countries so that they can participate in global trade. n Lends foreign exchange to member countries. n World Trade Organization n An international body that established the ground rules for trade among nations. n Its major objective is to promote free trade.

Figure 7. 3 Benefits and costs of globalization Benefits of globalization Costs of globalization Increases economic productivity. Causes job insecurity. Reduces prices for consumers. Weakens environmental and labor standards. Gives developing countries access to foreign investment funds to support economic development. Transfers technology. Spreads democracy and freedom, and reduces military conflict. Prevents individual nations from adopting policies promoting environmental or social objectives if these discriminate against products from another country. Undermines cultural, linguistic, and religious diversity. Is just as compatible with despotism as it is with freedom.

“Finding Lessons of Outsourcing in Four Historical Tales” Losing skilled jobs to low-wage foreign competition is as old as Industrial Revolution n Trade and technology can boost living standards for many, by creating lowerpriced goods n But same forces can destroy skilled jobs n n n Competition from foreign labor hurt huge classes of American workers in 19 th century, but eventually helped ease wage disparities between nations History shows that politics can arrest seemingly unstoppable technological progress n With what consequence? ? ?

“Finding Lessons of Outsourcing in Four Historical Tales” One lesson (or implication): n “It takes away jobs from Americans and gives them to people who will work for less” n Questions for your consideration: n Do you as a consumer maximize your utility by choosing lower-priced good of equality, regardless of where that good is made? n Does firm maximize profits by employing lowest-cost resources of sufficient quality? n Does firm have ethical obligation to employ higher-cost domestic resources, even if result is lowered profitability? n

“Finding Lessons of Outsourcing in Four Historical Tales” n Lessons n Even high-skilled, good-paying jobs are vulnerable n Trade liberalization often works w/ technology to undermine powerful interests

“Finding Lessons of Outsourcing in Four Historical Tales” n Lessons n Domestic workers are always vulnerable to competition from foreigners willing to work for less n Between 1870 and 1910, 60 m Europeans, mostly young males w/ few jobs skills, emigrated n Boosted U. S. labor force by 24% n Sent industrial wages tumbling n Wages declined 1 -1. 5% for every 1% increase in immigration during 1890 s and early 1900 s n Wages dropped even more steeply in fields dominated by immigrants n U. S. labor unions turned against immigration in 1890 s n In 1870, wages were 136% higher in U. S. than in Europe, by 1913 gap closed by half n By 1921, when U. S. limited immigration, flow of immigrants was easing due to increase in European wages

“Finding Lessons of Outsourcing in Four Historical Tales” n Lessons n Politics can slow down transforming effects of new technology n Transportation revolution of late 19 th century every bit as life-changing as advent of Internet and high-speed data communication today n Cost of shipping wheat between New York and Liverpool fell by half between 1830 and 1880, by half again between 1880 and 1914 n Industries and workers hurt by imports assembled coalitions that persuaded politicians to erect high tariffs n U. S. remained high tariff country for much of early 20 th century n In Germany, political reaction was more radical n Result: militarism and economic isolation mounted

“Finding Lessons of Outsourcing in Four Historical Tales” n Implications: n Labor rates in India one-third those in U. S. Cost advantages likely to last for decades n History of immigrations suggests that if outsourcing spreads, wages of U. S. workers who compete with Indians and Chinese will suffer n Salaries of U. S. computer programmers flat between 2000 and 2002, after inflation n Number of U. S. programming jobs declined 14% n See BW cover story, “Software”; WSJ article, “Lessons in India – Not Every Job Translates Overseas” n

Behind Outsourcing Debate: Surprisingly Few Hard Numbers n Economists influenced by theories of David Ricardo, 19 th century economist who laid out principles of free trade n Ricardo believed countries should specialize where they have ‘comparative advantage’ n When countries lower trade barriers, everyone benefits because able to buy and produce goods more cheaply n In political terms, easy to see why outsourcing debate is dominated by critics of practice n Cost to individuals who lose jobs is obvious, while benefits of outsourcing (lower prices for goods and services and increased exports) less tangible (and accrue to society as whole or other individuals) n In 1980 s and ’ 90 s, two-thirds of workers who lost jobs in manufacturing industries facing overseas competition earned less on next job n One-quarter of workers who lost jobs saw income fall 30% or more when re-employed n Need for ‘Pareto optimization’ analysis n Source: Wall Street Journal, 4/12/04

“The Future of Jobs: New Ones Arise, Wage Gap Widens” n Will there be good jobs left for next generation? n The good news: U. S. almost certainly isn’t going to run out of jobs, even though history shows it’s impossible to predict what new jobs will replace those that are destroyed For example, in 1988 travel agents projected to be among fastest-growing occupations, but instead number fell due to online booking n In 1988 electronics assemblers projected to decrease, but grew as outsourcing and robotics had less effect than expected n

“The Future of Jobs: New Ones Arise, Wage Gap Widens” n The bad news: Outsourcing overseas and technology could widen gap between wages of well-paying knowledge work and poorly paid manual work Jobs that can be reduced to series of rules likely to go – either to computers or workers offshore n Jobs that stay or are newly created likely to demand the more complex skill of recognizing patterns or will involve human contact n n Tax preparation example – distinction between routine and complex returns USI 2004 grads w/ A. S. in Nursing, mean salary of $37, 200; Radiologic Technology, $34, 400; Dental Hygiene, $56, 500 (cf. BUAD(Mngt area), $27, 300) Community colleges excel at responding to shifting vocational demands in labor market

“The Future of Jobs: New Ones Arise, Wage Gap Widens” n Forces of economic change favor workers w/ education and skills n Unemployment among college grads 3%, high school grads 5. 5%, high school dropouts 8. 5% n In 1980 s and 90 s, demand for educated workers grew more quickly than supply, leading to increased pay Wages of men over age 25 w/ four-year degree now 41% higher than similar men w/ HS degree, compared to 21% higher 25 years ago n For women, 46% today compared to 25% n n Notion of career ladder becoming “rock climbing”

“The Future of Jobs: New Ones Arise, Wage Gap Widens” n MIT economist refers to two kinds of lies politicians tell about outsourcing n First, n we can turn it all back No, because even if trade cut off, technology can do same thing to workers n Second, n education is all that matters May be true, but only in long run n Wo/ better elementary and high schools, wider access to college and more training of mature workers, wage gap is certain to grow n Source: Wall Street Journal, 4/2/04

Global codes of corporate conduct The United Nations Global Compact n A values-based platform designed to promote institutional learning. n Corporations are invited to voluntarily endorse core principles covering labor, human rights, and environmental standards. The OECD Guidelines for Multinational Enterprises n Code of conduct for corporations developed by member nations of the OECD. n The guidelines are voluntary, address employment relations, information disclosure, environmental stewardship, consumer interests, and the management of technology.

Global codes of corporate conduct The Global Sullivan Principles n The objectives are to support economic, social, and political justice by companies where they do business. n Calls on companies to support human rights and to encourage equal opportunity at all levels of employment. The Caux Principles n Emphasizes working for the common good and respect for human rights.

Figure 7. 4 a Distinctive attributes of the three major sectors: Business Organizational form For-profit Goods produced Private Primary control agent Owners Primary power form Money Primary goals Wealth creation Assessment frame Profitability Resources Capital assets, technical knowledge, production skills Weaknesses Short-term focus, lack of concern for external impacts Source: Adapted from Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collaborations, ” Journal of Corporate Citizenship, Autumn 2002, pp. 43 -56, Tables 1 and 2.

Figure 7. 4 b Distinctive attributes of the three major sectors: Government Organizational form Governmental Goods produced Public Primary control agent Voters/rulers Primary power form Laws, police, fines Primary goals Societal order Assessment frame Legality Resources Tax revenue, policy knowledge, regulatory and enforcement power Weaknesses Bureaucratic, slow-moving, poorly coordinated internally Source: Adapted from Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collaborations, ” Journal of Corporate Citizenship, Autumn 2002, pp. 43 -56, Tables 1 and 2.

Figure 7. 4 c Distinctive attributes of the three major sectors: Civil Society Organizational form Nonprofit Goods produced Group Primary control agent Communities Primary power form Traditions, values Primary goals Expression of values Assessment frame Justice Resources Community knowledge, inspirational leadership Weaknesses Amateurish, lack of financial resources, parochial perspective Source: Adapted from Steven Waddell, “Core Competences: A Key Force in Business-Government-Civil Society Collaborations, ” Journal of Corporate Citizenship, Autumn 2002, pp. 43 -56, Tables 1 and 2.

Globalization Overemphasized benefits of free movement of capital, underemphasized risks n Countries that do best don’t simply open markets and wait for trade to work its magic; they use trade as part of strategy that includes building sound political and legal institutions n Growing evidence that free trade increases income disparities within countries n NGOs accountable to no one but themselves n n Source: Fortune, 11/26/01

The American Way n In business world, globalization has meant Americanization Foreign companies adopting American business practices, esp. following fall of Berlin Wall and Japanese economy, U. S. -led tech boom n English is increasingly the language of global business n International accounting standards dovetailing with those set by FASB n 80% of faculty at Insead got degrees from U. S. business schools n In past decade, proportion of foreign graduates of Harvard and Wharton has doubled, to one-third of class n n n But, ongoing resistance to some American values and practices For American business values to continue to thrive, they will have to take into account stakeholders beyond shareholders n Source: Fortune, 11/26/01