Discussion

1. Comment by: Small Girl

   Feb 3rd 2010 at 11:02

   I find this a little confusing. What am I not getting?

   “In other words capital moves abroad to access
   rich markets rather than exploit cheap labour.
   This shows that fears of exporting jobs are not
   related to the actuality of capital relocation but
   to the threat of jobs going overseas”.

   TNCs access rich markets AND exploit cheap labour at the same time. No matter who thinks they ‘make’ something bits of the product/paper/plastic/chips/dye etc etc come from elsewhere. Many goods (eg. fruit in its whole state, side of animals, mined metals and minerals) are gathered or harvested, washed and packed using cheap labour. These are exported to gateway economies where value is added through chopping and canning, filleting, repackaging in smaller quantities, putting parts into new products, maybe refining and then the end products are exported to different countries from the gateway economy. Primary goods are sourced cheaply because to access the markets there’s usually an export tariff slapped on if they want to value-add and export end products themselves. This protects the better off economies and keeps pricing stable for their own production. FDI goes into poor countries less because of unstable governments and you can only value-add to goods in their primary state by investing and that’s not required in this part of the commodity chain. This doesn’t stand for all production but a lot all the same.

   Then, in gateway economies, is capital relocation (FDI) not the same as jobs (that value-add) going overseas (more efficient gateways)?

   What do you think Donagh?

2. Comment by: donagh

   Feb 3rd 2010 at 11:02

   The trends within globalization show that many MNCs do take advantage of economies with a lower-waged work force. However, its often just one factor in their decision to locate somewhere, not necessarily the over-riding one. Take the example of Dell in Limerick. The move to Poland was motivated by a number of incentives, effectively funded by the EU, including favourable tax breaks and grants. They also provided the same access to the European market. I’m not an expert, but this is my reading of it. There are also the FDI’s brass plate companies that operate here, where they establish an R&D division but funnel a considerable amount of their earning through that operation.

   Also, while lower-waged economies are useful to FDI in that they can make their products, such as textiles cheaper it depends on the trade restrictions or tariff that they have with whatever market they want to sell to. So, Walmart make their clothes in South America at a cost of 50c per item but sell them in the US at many multiples of that. The reason for this has more to do with the favourable trade deals that the US often forces on the weaker economies.

   Doogan’s point I think is similar to the myth about how reducing wages makes an economy more competitive. The understanding that MNCs are motivated by lower wages plays into their hands and undermines the ability of trade unions to negotiate wages based on realistic expectations.. Proinnsias Breathnach had a great post on this in Progressive Economy about this called Multinationals and Cheap Labour: Myths and Facts in which he filleted IMF economist Michael Casey’s risible argument. In an IT article Casey said that “the lack of demand in the US economy is also due to the compression of wages. This was caused by multinationals leaving en masse for cheap-labour countries.”

   As Proinnsias puts it:

   “The idea that US multinationals have been relocating jobs en masse to low-wage economies is simply not true. For a start, the great bulk (70%) of employment in US MNCs is actually located within the USA itself. An even greater proportion (80%) of overseas employment in US MNCs in located in other developed countries. This is reflected in the fact that (according to UNCTAD data) the average overseas employee of a US MNC earned almost $38,000 in wages/salaries in 2005 i.e. 86% of the average salary of all US employees in that year. These are crude averages, but the orders of magnitude are nonetheless indicative. When one allows for overseas investments by US MNCs which are primarily designed to serve local markets, it is likely that the search for cheap labour accounts for less than ten per cent of all overseas employment in US MNCs.”

   Actually, you should read the whole post and the comments.

3. Comment by: Small Girl

   Feb 3rd 2010 at 12:02

   OK I see what you’re saying. My reading of it stops abruptly at the cheaper labour=better profits - I don’t take in the longer term consequences that lower wages has on the whole economy over time. And yes, corporate tax is a also a deciding factor for TNCs along with cheap labour and trade deals. It’s just that it’s all very complicated where you have a common market with countries of varying wage standards. Capital threatens to relocate even within Ireland, from Dundalk to across the border because workers were asked to take a 20% cut(well I only know of one instance). Corporate heads don’t think about the effects of lower wages on whole economies, that’s government’s job.

   I will check out Proinnsias’ post, thanks.

4. Comment by: donagh

   Feb 3rd 2010 at 17:02

   Well, I agree with you that it’s a government’s job. I’ve been reading Rudolf Meidner recently, the economist for Sweden’s largest trade union, LO, and who is considered to be one of the main architects of the much famed Swedish or Nordic model. In a 1993 article in Socialist Register he analyses the failure of the Swedish model. The article covers a lot of ground, but at one point he makes that point, that it is the government’s responsibility to put a check on the free market (or the drive to increase profits by reducing wages):

   The essence of the Swedish Model, as outlined in the report to the 1951 LO Convention, was the notion that full employment and economic stability could be made compatible. We argued that anti-inflationary full employment policy had to be based on two pillars: a restrictive general economic
   policy which does not guarantee full employment, and selective labour market policy measures which absorb redundant labour.

   Swedish governments have frequently neglected the first part of the recommendation and tolerated periods of excess demand in the product and labour markets. The destabilizing effects of this inflation-prone policy were obvious already in the 1970s but became fatal in the 1980s: profits
   skyrocketed, speculation pushed property values to unsustainable heights, growth came to a stand-still and Swedish competitiveness faltered.

   It is inappropriate to blame the unions for reacting aggressively in a tight labour market nor can the market forces be faulted for acting according to
   market principles in a situation of excess profits and high liquidity.

   Profit maximization is the maxim of the free market and the capitalists did only what the textbooks prescribe. To ensure economic stability and to combat
   inflation is the responsibility of the national government - but the government had neither the courage nor the strength to play this role.

   I was going to say too, that the US Marxist economist Michael Perelman in his book Railroading Economics uses economic history to show how orthodox economists have in the past argued that high wages, rather than low wages created greater profit. But while looking for a suitable quote I came across this very interesting entry on Wal-mart, which illustrates how transnational companies do exploit low-wages in different countries to increase profits at home. http://michaelperelman.wordpress.com/2008/10/17/the-economic-crisis-the-wal-mart-economy-dimension/

   But using the search I was able to find an entry on the point he makes in Railroading Economics, which argues that increased competitiveness is less efficient, as it leads to an increased number of bankruptcies and that high wages push profits up because it promotes rapid technological change. http://michaelperelman.wordpress.com/2007/03/04/the-benefits-of-high-wages/

   One of my special interests is the way that commonly accepted economic theories have radical implications. For example, the idea that competition causes prices to fall towards marginal cost makes markets unworkable when marginal costs are very low compared to high fixed costs. In my book, Railroading Economics, as I showed how competitive forces were causing repetitive bankruptcies in the railroading industry in the 19th-century, so much so that the major economists in the US came to favor trusts, cartels, and monopolies. When Joseph Schumpeter revived this idea, without the slightest acknowledgment to any predecessors, he was seen as a brilliant economist. Unfortunately, none of his admirers seem to understand the radical implications of that idea.

   Another radical idea from conventional economics is that high wages promote rapid technological change. Most modern economists would accept that business attempts to economize on expensive factors, but rarely take the next step that high wages can promote rapid economic change. As I discussed in railroading economics, this idea was popular between the late 19th century and the 1920s. Unfortunately, today the idea is that high wages represent an impediment to competitiveness.

   Admittedly, the upsurge in globalization complicates the argument, but economies have the choice between competing by cutting wages — what I call the Haitian Road to Development — or making labor more expensive to encourage business to develop either high technology production techniques or better products to gain a competitive edge.

5. Comment by: Small Girl

   Feb 3rd 2010 at 22:02

   Wow! You’ve outthunk me here. Maybe unions should be saying to government that they’ve been as equally dependent on FDI as construction and that Ireland needs a mixed economy that’s not dependent on speculation and credit to get through the next few years and prepare for future growth, and good public services provides more social stability during transition so lay off the wages cuts. Personally, while unions operate in the legalised space the state allows them, I would have liked to see them concede wage cuts ONLY IF the maybe above €80,000 earners got creased in tax(public and private alike) on a gradient scale - that would not separate workers in what emerged in the media as opposing sectors and even if they didn’t succeed they’ve have much more kudos. My income is €27,000 gross and set to drop about €4,000 this year and I’ve two school-going kids so €80,000 seems very adequate to me for having a nice life. I’m terribly disappointed the labour voice for the lower paid was not louder, these are the people who plug the economy because they spend week to week and don’t/can’t save. Plus I think most people, myself included, have unrealistic expectations about unions and economics. All I know is that a healthy society should have a strong labour movement but I’m just not sure how.

6. Comment by: Donagh

   Feb 3rd 2010 at 23:02

   Well, I agree completely, and the impact of the budget has been mainly on the lower-paid, so you would have expected that the unions would have pushed more on tax increases. From talking to people who earn around 50K or more - I’m on considerably less but work with plenty of people who are - they barely noticed the effect of the budget. It didn’t touched them. So the recession is effecting people differently, and we can see that in the media coverage - entirely middle class. And you’re right about the need for a strong labour movement. Its the most important factor and is needed if change is going to happen.

7. Comment by: Pope Epopt

   Feb 4th 2010 at 11:02

   Thanks Donagh and Small Girl for an illuminating discussion. I’d never heard of Perelman before. One of the valuable role ILR serves is making us aware of these forgotten voices.

   I particularly like the notion of “the Haitian Road to Development”. We could look at our lack of preparation and inability to deal with (increasingly frequent) extreme weather events as a consequence of a similar devaluing of public infrastructure as opposed to private profit. Our little problems, of course, entailed several orders of magnitude less suffering.

   Nice one on the Iceland post, by the way.

8. Comment by: donagh

   Feb 4th 2010 at 12:02

   Thanks PE. I had meant to write a quick thing that I came across on Perelman’s site which ties in to the ERSI/private incinarator company looking to carve up waste management in this country/John Gormley story. While there is nothing wrong, per se with the ERSI coming out against a Government minister, it’s hardly surprising that they should do so to support a private company. That bias is inherent in the ERSI, especially in ‘environmental’ matters. Richard Tol after all has said that the privatization of all public utilities is the cure all for our current difficulties. While its not really a public verses private argument - that ship has sailed when it comes to waste management in this country, - it is about the ‘devaluing of public infrastructure as opposed to private profit’ as you say.

   So anyway, Perelman has a new book coming out called Invisible Handcuff, and what is great about his stuff is the way he shows how orthodox economic ideas come in and out of fashion, but also about the ideological bias behind much of economic theory. So, in light of the ERSI report, you should read the short extract from the forthcoming book that he’s just put up.

   http://michaelperelman.files.wordpress.com/2010/01/cost-benefit.pdf

   It’s about how economists put a price on a human life, and how the economist who developed the idea and who has become a prominent behavioural economist since the study was published as part of his doctoral thesis, became disillusioned with the validity of his own research. Anyway, the upshot is that the premise of the study, to see what wage demands people would make even though the work they carried out reduced their life expectancy considerably, was seriously flawed. Despite this though it was used by anti-regulation lobbiest to argue for a reduction of safeguards…oh what I am explaining it for, its better explained in the piece.

   Yes, hopefully Birgitta will be able to write something on the forthcoming bank enquiry in Iceland. As a member of Parliament she is on the committee that will review the report - it was due at the beginning of Feb but has been delayed once again. Considering the opacity of our own banking enquiry it will be interesting to hear what comes of it.

9. Comment by: Small Girl

   Feb 4th 2010 at 16:02

   I’m not up to speed on the details of what’s going on but I will be watching how the regulators fare in our banking enquiry. And I might even go mad and check out Perelman myself. Cheers guys.

10. Comment by: Kevin Doogan

    Feb 9th 2010 at 00:02

    Hi Folks

    If there is a wider interest in the discussion referred to in the New Humanist piece it is possible to pursue it in the book ‘New Capitalism? The Transformation of Work’ published last year by Polity

    Best wishes

11. Comment by: D_D

    Feb 10th 2010 at 21:02

    Kevin,

    Good to hear your name on the blogosphere. Impressed about the book. Looks very interesting. Hope you are well. Not back in Glasgow? That part of Parnell Street is now our Chinatown and the old flat is no longer a shoe shop but, like everything on that block, a Chinese or, maybe, Korean restaurant. We’d never have thunk it in the 70s.

    Des D

12. Comment by: Kevin Doogan

    Feb 14th 2010 at 19:02

    HI Des

    Great to hear from you. Living in Cardiff since leaving Dublin but working at University of Bristol.

    I will be speaking at Marxism in London this summer if you ever attend these events. If so do say hello.

    best wishes

    Kevin

13. Comment by: Eoin O\'Mahony

    Feb 23rd 2010 at 12:02

    Coming to this late but basically MNCs want access to wealthy markets, not just cheap labour? So we have to get wealthy if we want to stay wealthy, right?

    Chasing tigers’ tails?

14. Comment by: Donagh

    Feb 23rd 2010 at 13:02

    My God, a comment! Is this the end of our longest dry spell? We haven’t even got spam in like, a week.

    Well, in the case of Ireland, I imagine the wealthy market is access to the EU. Our low corporation tax and proximity to Europe makes the decision to move here a ’slam dunk’. What we need to made aware of though is the fact that when choosing to locate here MNCs consider access to the market to be far far more important than wage levels - contrary to what we are often told by the ‘competitiveness’ hawks.