Business Economics
Vincent
There is a process by which there is both a decrease in the number of jobs that is increasing, and this is coupled with a global transfer of jobs to less developed countries. Both of these have an impact in the decrease in availability of jobs in the advanced countries. The latest news on this front is from the United States. On the 5th of the current month, there was an announcement from the Labor Department that there has been growth in the United States economy and this had led to the creation of 21,000 new jobs. The previous predictions from the economists had been that there would be a creation of 150,000 jobs, and this number is far below the expected growth. The number of jobs created is also far lower then the growth in population that occurred during that period. The rate of unemployment in the population of the United States has however been steady at around 5.6% and that is because a lot of the people are giving up on searching for jobs, as they know they will not find employment. (Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?)
Growth but no employment – a paradox of development
This is not some sudden growth and it is taking time for the system to pick up. The economy of the United States has been growing steadily since the last quarter of 2001. This has also been noted by the New York Times, and they have commented “At no other point since World War II has the economy grown for such a long period without adding jobs at a healthy pace.” It is not really possible for the employment experts and the economists to give any real reasons for this. A lot of things are thought to be the reasons and that includes productivity gains, the Iraq war, and the fundamental changes in the method of running the companies and so on. None of these are accepted as being the real reason, and they can best be treated as educated guesses. Even the members of the Federal Reserve System like Ben S. Bernanke, have said publicly in meetings at Carnegie Mellon That they are unable to fathom the reasons for this jobless recovery. (Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?)
There is now a specific reason being given for this, and that is now also an election issue, and that is called “offshoring.” This means that jobs in the United States are being replaced by jobs in countries which have a lower structure in wages like India and China. Yet, according to experts these jobs are not really large in number. According to Ravi Aron, who is a professor of operations and information management at Wharton, and who has been studying the situation for five years, the fears of the phenomenon are far greater than the real effects. The projections of jobs that are expected to be lost due to this factor are expected to be huge, but the actual numbers that have taken place are small when compared with the churn in the economy.
Now it is important to understand the meaning of the churn in economy. This is the characteristic set of changes that take place when an economy is coming out of a recession. The companies try to push the workers harder so that they produce more, and for longer periods. This ends up in increasing the output per worker. This increase in productivity lets the company to delay the hiring of workers at least till the period that the companies are sure of being able to sell the additional quantities that will be produced in the market. (Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?)
State owned enterprises
Another important reason for the decrease of employment and change in economies has been the process of privatization. This is the transferring of ownership rights of State-owned enterprises or SOE to the private sector. This is a process that is happening all over the world, especially after the collapse of the socialist model of economy in the Soviet Union. This is now a major change that is happening al over the world, after having been started from the late 1970s. In Britain it started in earnest with the government by Thatcher, and then spread all over the world. It is a feature of capitalism today. It is now common to most parts of the world and in all sectors. The quantum of changes is also large, and during the period from 1977 to 1999, there 2459 deals that were regularized in 121 countries. (Privatization around the world: evidence from panel data)
The value of the deals was a total of $1,110 billion, as per the reports received. The value of the SOE in the world also declined substantially and fell from 9% to 6% from 978 to 1991 as per reports given by the World Bank. In the financial markets also they had a great influence and the market capitalization of the privatized SOE reached a total of $3.31 trillion. The objective of this privatization was gains in welfare for the people, but the transfer of ownership was not total in many cases to the private sector. In all the offerings that were made from 1977 to 1999, the majority share holding was sold in only 30% of the 617 companies that have been considered, and in many countries, the controlling ownership was never transferred. The reasons for privatization are many, but it has already been seen to be associated with high levels of public debt, a domestic stock market with reasonable efficiency to enable disposals of the shares and a right wing government being in power. (Privatization around the world: evidence from panel data)
The shortfall in public finance due to the high public debt is a driver for privatization as the proceeds are used to settle these deficits. The existence of the stock market enables the government to take advantage of buoyant market conditions. This is also a requirement for the government to be able to collect the full value for the SOE. For a right wing government it is a part of their political philosophy, and they can thus encourage “popular capitalism.” This helps in the increase of support for market oriented reforms.
The legal position within the country also plays a role and it has been seen through measurement of the reforms that have taken place that transfer of ownership is limited in countries that follow French civil law as opposed to countries following common law. This compels only partial privatization there. The origin from French civil law provides better protection to poor minority shareholders and this may be the reason. The legal considerations have to be carefully judged in the case of new shareholders that are created in the process of privatization, as they may be expropriated by the future managers of the privatized SOE. (Privatization around the world: evidence from panel data)
Unemployment problems from the government directly
The governments also directly contribute their own share in creating the problems regarding employment. A couple of days this was seen in the budget presented by Gordon Brown, currently the Chancellor of the Exchequer or finance minister. He has fixed up his targets and part of that is to reduce 10,500 jobs through a merger of the Customs and Excise department with Inland Revenue and reduce another 30,000 more from the Department for work and Pensions. The government is on a cost cutting spree and another desired method is to move out another 20,000 civil servants from Central London to lower cost locations. These measures are clearly not liked by the people concerned, but this is a cost cutting measure. The people from London may be shifted to East Kilbride near Glasgow, as the Department for International Development has one of the headquarters there. The people in the civil service also have the fear of being left out of their informal information circle if they move out of London. (Brown’s red box, full of pink slips)
The discussions and actions regarding the size of the government are going on in a number of countries and within the OECD. There are still disputes in the some of the poorer members like Mexico, but that may be due to an effort at providing employment to the people. The other governments are already quite large as they had been growing steadily up to the middle of the 1990s, and cannot possibly grow any bigger. At the same time, the effectiveness of the public services has been in doubt for some time. To take care of this in Britain, there was the concept of a citizen’s charter introduced by the previous government of John Major. This was made into a favorite theme by the satirists. Yet the concept was liked by some countries and implemented there and these countries are from Ireland to Canada and Norway to India. (Global Agenda; Brown’ red box, full of pink slips)
The targets set in these are to improve government service and in Canada the objective is to make the users at least more satisfied by 10% by 2005. In Italy, the government has set up its own charter in 7,000 agencies and local governments. The targets are defined in concrete terms like hospitals cutting waiting lists, schools increasing literacy rates, etc. The manager concerned has to take care of this when he decides on the activities of the department. Some of the other countries like Denmark and Finland have tried to remove one of the main problems of managing public service, and that through the retention of any surpluses that arise from the current year’s budget and expenditure. This will go into the budget for the next year instead of being collected back by the government. This is expected to help in the government department being able to plan a little more, and which often causes a huge amount of spending during the last few months of every accounting year. (Global Agenda; Brown’s red box, full of pink slips)
Impact of technology and its protection
Another major impact on the development of the economy and employment comes from the indirect effect of technology and its changes. There is now a continuous set of arguments and clear difference of intentions between the developed countries and the less developed nations regarding the protection of newly developed technology. This has resulted in a great lot of attention being given to it now. The major problem for this is that the nature of inventions and innovations has changed and it is no longer individual efforts that are resulting in them- more often the changes are progressed by a corporate entity.
This has naturally resulted in a lot of more interest being given to it, as the organizations are much more capable than individuals in protecting their rights in terms of manpower and finance. They also insist on getting the protection as then they are in a position to invest more funds and energy on the matter. There is still a great dispute on the factor of protection being an element in the rate of development of change. This increase or decrease in the rate of change also has an impact in the change of technological growth, but the general attitude of the economically more powerful nations have been to move the world to a regime of stronger intellectual property protection. This ultimately resulted in the agreement on Trade Related Intellectual Property issues or TRIPS under the GATT-WTO2 in the meetings of April 1994. (Does Intellectual Property Protection Spur Technological Change?)
The concept of giving protection to inventors for an invention is not new and has been in existence from the fifteenth century and was first started by the city state of Venice. The understanding of giving this benefit was due an understanding of the natural rights of the inventor to the benefits of his labor. This could come in a developed society only through the benefits that reached the society through his invention. The benefit passed on by the society to the inventor was also to compensate him for the costs that he incurred in the development of the new process. It was also felt that when such a benefit was given, it would end up in giving him a desire to undertake more efforts in finding new items. In international terms the effort is now to give the inventor the benefit from his discovery to use of the patent all over the world.
Yet, this do not always happen as patent protection leads to monopoly production by certain manufacturers and they are at liberty to charge monopoly prices. This may also lead to diminishing returns as the consumer may not be able to use the product on spite of the product being suitable to his requirements because of the high monopoly pricing. It has also been seen that this may not end up maximizing the welfare that is possible due to the invention. Thus it may be that countries which are backward in producing new innovations, the welfare due to the system of patents may be negative. It has also been shown in some researches that stronger protection of rights or subsidies in production may cause the rate of technical innovation to fall. It has also been shown that strong protection increases the rate of innovation only in the short-term due to the increase in profitability, but leads to a fall in the long-term development of innovation as the profit maximization attempts would also curtail the use of newer products. (Does Intellectual Property Protection Spur Technological Change?)
In certain industries like pharmaceuticals and chemicals this has led to higher development of innovation. This was measured in a survey of 650 executives in the U.S. In 1987 who were asked to rank the different industries in order as to their feelings about the requirement of the industry for patent and protection. It was seen that protection for the pharmaceutical and chemical industry was though to be the most important by everybody. Another reason is that this protection also often does not have any great effect in protection as competition begins to quickly find out alternative methods and thus reduce the profits of the developer. It has been noted that the commercial utility of a new crop in the U.S. is only for 7 years and this is also going down as compared the legal protection that is granted for 20 years. (Does Intellectual Property Protection Spur Technological Change?)
There was another study that was done on 100 firms in the U.S. In 13 industries and that information on new products or processes reach the competitors within a year for the products and about 15 months for processes. There is generally weaker protection of patents in the less developed countries, but this was not liked by the inventors in the advanced countries as they felt that this led to greater chances of their patents losing out on returns. This difficulty is leading to two ways of the transfer of technology, and the first of these is through imitation, and this will be reduced through stronger protection. The other method is through the formation of multi-nationals, and then the transfer of technology to the less developed countries would increase.
It is also felt by the patent producing countries that protection of patents in the less developed countries should improve, as otherwise they may be compelled to take action. This loss of potential profits from patents led the advanced countries like U.S. And the others to bring up the question of patent rights seriously and within the jurisdiction of the GATT/WTO. This was expected to bring in some type of a settlement of disputes, whereas this was not possible under WIPO. The other advantage that they hoped to gain was to be able to use trade sanctions to reduce the instances of piracy. (Does Intellectual Property Protection Spur Technological Change?)
The present situation in the protection of patent rights has led different countries to take different stands on the issue. To understand the total picture, one would have to look at unison in all areas like patents, trademarks, copyrights and trade secrets. This is not going to be attempted and the only effort would be to look at the patents law differences in different countries. The first set of differences are in the areas of coverage and some countries allow patents on both products and processes in many activities, but some countries do not permit product patents in certain areas like pharmaceuticals, chemicals and food products. The second great difference is in the duration of the accepted patent. This is as high as 20 years in most of the countries of Europe, but in other countries it varies from 5 to 17 years like in Pakistan, India, Sri Lanka, Jordan and U.S..
The age of the patent is also considered differently and some consider it from the application filing date as in Nigeria, Jordan, Thailand, etc. whereas others measure it from the publication date like India, Korea, Austria and still others measure it from the grant date as in Pakistan, Mexico, Portugal, Canada, Iceland, U.S., etc. There are also differences in procedural matters of patent infringement. The investment in R&D also depends on the openness of the economy, but this is a very difficult thing to measure. (Does Intellectual Property Protection Spur Technological Change?) The importance in R&D is however very high in the development of economy as we are moving to an age where many of the jobs are related to the changes that are taking place. The more ability a country has to adjust to the changing times, the greater chance it will have in adjusting to changes in production technologies, products and processes.
The growth in exports and growth of economy
The old Classical theory of comparative advantage had mentioned that the amounts gained through exchanges tended to increase the welfare of people and also that free trade would lead the world to economic prosperity. Among the different trade theories themselves, there were different determinants of comparative advantages. The Ricardian theory stated that competitive advantage of an economy arose from the costs and technical differences, but the theory propounded by Heckscher- Ohlin- Samuelson stated that factor price differences were most important. The Neo- Factor- Proportion theory considered the factor aspect, but laid more emphasis on technological gap and product cycle theory was more interested in technological innovation. It has been also said that comparative advantages occur due to soft technological inputs like learning by doing. (Does Intellectual Property Protection Spur Technological Change?)
Recently studies have been done by Memedovic in 1994 and one of the things included in that study was state type in terms f class base, capacity of administration and methods of intervention. This study felt that the government actions themselves can give areas competitive advantage. This can be seen in the case of Singapore where the government adopted a strategy of picking the winner. In the case of South Korea, the government directly participated in the establishment of “Chaebols” or large corporations. These were to be used for promoting exports. Where the government and the state directly determine the social and economic conditions, they can get changes in comparative advantage for the country. Today, these are sought to be countered and one of the weapons that are being used are non-tariff barriers.
These were used by the advanced countries during the 1980s in their industrial sectors like iron and steel, motor vehicles, textiles and clothing, footwear, etc. During this period there was also a sharp growth of exports and this continued even in the 1990s. Today their rapid growth is not there, but is being captured by the ASEAN countries and the Latin American countries. This was interrupted by the Asian financial Crisis in 1997-98 and there are new challenges in that area from South Asia and Mainland China. The development of Latin America has been remarkable, but to an extent it is due to the initial low share of those countries in exports. (Does Intellectual Property Protection Spur Technological Change?) The situation in this international aspect is rapidly changing, and may be we will see new leaders in the world economy in a few years.
In the case of the American economy, it has been noted that the recent production gains have been much higher, and the annual growth has been as high as 4.5% annually, as compared to the 2.5% that was being achieved in the 1990s. Even that was good. Some experts feel that the changes are being pursued aggressively by the companies through investment in technology, and that is the reason for the increase in productivity. A case in point is Rohm and Haas, who are a Philadelphia-based chemical maker. They have stated that they may even reduce workers in the current year due to a new software system costing $300 million that they have introduced. This system links up their world-wide operations. This is for 2004, and in 2003 the company had removed 550 people and set up software for coordinating their orders and shipping. (Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?)
Off-shore employment
On the other hand, the nature of jobs moving offshore are also changing, and currently even jobs in radiology, financial analysis, architecture and engineering are shifting abroad. Yet, there is a certain amount of risk in the moving of jobs abroad. The first is of course that failures may occur in the system. The second is that when you move the job abroad, and to an outsider, that person can be opportunistic and take advantage of the situation and cause difficulties. The final reason is that any outsourcing is also reducing capabilities of the firm that is outsourcing the job, and so it is becoming more vulnerable. Due to these reasons, it is believed that companies will limit the outsourcing of jobs to a figure of between 8% and 10% of their employees. The process of outsourcing is however creating difficulties for the less capable American worker. Earlier they could take up the jobs that are now being done in the call centers and gain experience and skills there so that they could then move on to more skilled jobs. (Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?)
Conclusion:
Thus the changes in the job situation may not be so simple, and it may be that the world economy is itself changing and the resultant changes are taking place in the picture of employment. This sort of changes had taken place also within the United States in the 19th century when the textile industry in the U.S. shifted from the states in the Northeast to the South. This led to a situation where the earlier centers of textile production were emptied out and all the operations moved to new places like Greensboro and Burlington in NC. This was a shift across the borders of the states, and today it may be happening across nations. (Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?)
Bibliography
Bender, Siegfried; Li, Kui-Wai. “The Changing Trade and Revealed Comparative Advantages of Asian and Latin American Manufacture Exports” March 2002. Retrieved at http://www.econ.yale.edu/growth_pdf/cdp843.pdf. Accessed on Bortolotti, Bernardo; Fantini, Marcella; Siniscalco, Domenico. “Privatization around the world: evidence from panel data” Retrieved at http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V76-47C8TWR-2&_user=10&_handle=B-WA-A-A-WU-MsSAYZW-UUW-AUYWBCWBVC-AUDEEBBAVC-BAWEYUWYB-WU-U&_fmt=full&_coverDate=01%2F31%2F2004&_rdoc=14&_orig=browse&_srch=%23toc%235834%232004%23999119998%23466581!&_cdi=5834&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=fc6b7c0aa0055af294e78ae7d375c227Accessed on Global Agenda; Brown’ red box, full of pink slips “The Economist. 8 March, 2004 Retrieved at http://www.economist.com/agenda/displayStory.cfm?story_id=2516331Accessed on Kanwar, Sunil; Evenson, Robert E. “Does Intellectual Property Protection Spur Technological Change?” Retrieved at http://www.econ.yale.edu/growth_pdf/cdp831.pdf. Accessed on Puzzling through the Jobless Recovery — Or Is It a Fundamental Shift?” Retrieved at http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=955Accessed on
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