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Age 0/FluxIt's time to rethink the whole question of

how to live in a globalized world—and not just worryabout India and China taking away jobs.

N 2004, RENOWNED

economist Jagdish Bhagwatipublished his highly acclaimedbook,/n Defense of Globalization(Oxford University Press). As thetitle suggests, Bhagwati arguesstrongly for globalization, but healso seeks to balance his view-point by considering the socialimplications ofthe phenomenon.Bhagwati, who is University Pro-fessor of Economics at ColumbiaUniversity and a senior fellow ininternational economics at theCouncil on Foreign Relations, re-cently spoke with CIO Insight ed-itors Ellen Pearlman and EdwardBaker about his book, and abouthis views on the future of glo-balization. "Essentially, my bookis not about things like offshor-ing, or the strict economic debateabout whether outsourcing andfree trade are good for us, or ourworkers," Bhagwati says. "WhatI was really interested in was fo-cusing more on the social impli-cations. I wanted to address thoseissues and the effect on genderissues, the exercise of democ-racy, mainstream culture, indi-vidual culture, and a whole slew

ofthe stuff that economists canrespond to. And basically I arguethat globalization can actuallyadvance these social agendas,that the complaints and the fearsare not really justified."

But the growth of interna-tional trade raises other issuesfor Bhagwati. As he points out,"You might think something isgood, but somebody else thinksit's bad. There are too manydifferent interpretations ofthesame international transaction."So how do you deal with all that?Bhagwati is currently thinkingabout and working on ways toimpiement some kind of govern-ment regulation, or intervention,to come up with better answers.In the edited transcript that fol-lows, he talks about his view ofa "flat world" and the questionsthat still concern him.

CIO INSIGHT: How do you viewglobalization and the concernAmericans have for their jobs?BHAGWATI: My view differs fromTom Friedman [New York Times for-eign-affairs columnist and authorof The World is Flat: A Brief Historyofthe Twenty-First Century]. He ba-sically argues that the rise of Indiaand China is so dramatic in termsof skills that we're competing withpeople who have equal knowledgebut lower wages. And even thoughhe's a pro-globalization guy, bytalking in these terms and say-ing there's a flat road, he's essen-tially saying that India and Chinaare coming down that flat road, soyou'd better get yourself a shieldand armor. He's basically celebrat-ing the rise of these countries, be-cause he's not an anti-globahzationguy, but he's also telling us to wakeup, because otherwise our jobs aregoing to disappear.

I think Tom is fundamentallywrong. He listens to people likemy friend Nandan Nilekani, CEOof Infosys. Nilekani is a very smartguy, but he flexes his muscles—much like Popeye, except Popeyedoes it on spinach and Nilekani

does it on IT. Nilekani says, "Wecan do anything the Americanscan do." Now that's true, but that'snot the same thing as saying Indi-ans w\\\ do everything the Amer-icans can do. That's a separateeconomic proposition.

The developed countries stillretain a huge comparative ad-vantage. Let's look at outsourc-ing. What we now have, actually,is large numbers of low-value jobsbeing transacted on the Internet.Outsourcing of services is reallythe same thing as buying any-thing from outside—manufactur-ing components, for instance—butthat's traditional trade. So if I startcomplaining about that, I'm re-ally complaining about trade.And then there's the issue of pro-tectionism—that inward-look-ing point of view that hurts Indialike hell—which is against takingadvantage of trade. So that's notwhat we should think about.

Senator John Kerry also mixedit up when he talked during thepresidential campaign aboutpeople just pulling up a plantfrom Nantucket and taking it toNairobi. Well, that's part ofthewhole foreign-investment issue.You'd have to be really paranoidto think that the U.S. is losingfrom foreign investment. We at-tract almost as much as we sendout. A lot of what we send outis to the poor countries. A lot ofwhat we get is really high-valueinvestments from places like Ger-many. If you go down Interstate95 in South Carohna, there's a lotof German investment. That par-ticular segment of Interstate g5,I'm told, is now called the Auto-bahn. The Germans have really

lifted it up. And there are lots ofexamples like that.

The reason why outsourcinghas become a big issue is becausejobs that involve not just work-ing with your brawn but also withyour brains—semiskilled worksuch as call-center services, back-office operations, typing thingsup—can now be done elsewhere.Kinko's will actually take thingsto be typed to India. And people inIndia can call people in U.S. nurs-ing homes ("Mr. Schwartz, it's timefor your Lipitor") for 25 cents a call.That would cost $2.50 here. Therewould be no such job here. Mr.Schwartz would just not take hisLipitor and die. It's important to re-member that some jobs are justgone. It's not that they've beentransferred elsewhere; they're justgone because they're too expen-sive here.

That is where a whole lot oflow-value, low-wage jobs are go-ing, and that is adding to our con-

'It's importantto rememberthat some jobsarejust gone.It's not thatthey Ve beentransferredelsewhere;they're justgone becausethey're tooexpensive here/

sumer satisfaction in many ways.That is international trade in devel-oping countries' favor. But againstthat, we have large numbers ofhigh-value jobs being created here.There's no need to panic about therise of India and China, becausethere's going to be a lot of trade,and both sides are going to win.

So what does worry you?I want to come now to a stark sce-nario, which I think is a differentway of looking at globalization. Idon't think that as China and In-dia develop we have anything toworry about, just for the reasons Imentioned. But what I think we doneed to worry about is simply thenature of global competition today,and it's not focused just on Indiaand China.

Today there are so many coun-tries in play all over the world. Mul-tinationals can do good in manycountries, and they absorb tech-nology wherever they can get it.They'll go to your country ratherthan mine if they see some advan-tage in being there.

People are reading very similarbooks and have very similar know-how. Interest rates and capitalmarkets are much more integratedthan ever before. So a lot of costelements have been leveled out,and in that sense you can actu-ally begin to think in terms of op-erating in world markets, becausethe other guy doesn't have all thatmuch of an advantage over you.The fact that you have cheaper la-bor is not particularly relevant.In fact, all the econometric stud-ies show that labor cost is the leastimportant thing when it comes tolocating businesses.

Because of all this levelingdown of interest rates, and be-cause multinationals can locateanywhere, competition is fiercetoday. Talk to CEOs and executivedirectors, and I doubt you'll findanybody who's comfortable aboutthe fact that the world is movingvery fast. Maybe somebody's go-ing to take your job, which is whythere are protectionists.

Everybody fears that somebodymight overtake them. Back in 1991,when I was at my daughter's mu-sic camp, I met a Silicon Valley fa-ther, and he said he was havingbig problems—international com-petition from the Koreans and theFar East. So I turned to the nextparent and asked him what hedid. He said, "I grow mushrooms."I said, "You really must be lead-ing a quiet life." He said, "No, Tai-wan is killing me." So everybodyhas somebody killing them. Youlook over your shoulder, and some-body's stealing your party.

1 call it the Age of Flux. I call it"kaleidoscopic comparative ad-vantage." It's not that comparativeadvantage has disappeared andthat everything now goes to Indiaand China, or to another country.It's that it has become so volatile.Given that volatility, everybody isnow on edge.

So what can be done aboutthis volatility?

Now if that is the situation, then,of course, workers are going to beon edge, too. Therefore, you haveto rethink the whole question ofhow to cope with living in a glo-balized world. It's much more com-plicated than just saying we'regoing to prevent India and China

from exporting to us or takingour jobs. If it was just that, wecould say, "Go to hell. We don't re-ally need you. We can manage byourselves." But today, if you're inthe international economy, if youwant to lead a happy life, you haveto be continuously coping withglobalization and flux.

This is really where I thinkwe've got to rethink the kind of so-

"Ifwe don't dosomethingto facilitatecoping withchange, thepohticianswon't be ableto dehver onkeeping mar-kets open—and forgetabout expand-ing further."

cial-support systems we have forpeople. Suppose Boeing starts go-ing downhill. Right now it's doingwell again, but it could be that Air-bus steals some margin from it.Then you are going to have peoplewho lose their jobs at Boeing. Butthey could get jobs at Nissan orToyota, because those companiesare expanding. You could haveaeronautical engineers doing autoengineering.

We have other jobs coming up,like in medicine. Aging, for exam-ple, is creating a problem, but atthe same time it offers possibili-ties. Take the fact that almost 15percent of our income is now beingspent on healthcare of one kindor another. If you want to think ofspecific specializations, there arelots of age-related ailments thatare going to come up. I'm 72 andI'm beginning to get them nowmyself—arthritis, rheumatism.

The real problem is this churn-ing, and the fact that we're an ag-ing society. If I lose my job as aprofessor of economics when I'm45, and then you come and tell methere are jobs available for profes-sors of physics, I'd say, "Get lost,you're really increasing my an-guish by telling me that."

We don't have to worry aboutnew skilled jobs. Skilled jobs aregoing to keep coming up, and tech-nological change is also continu-ously creating jobs. Skilled peoplehave nothing to worry about. Whatwe do need in an aging society isfor everybody to get together, par-ticularly professional societies, andreally work out optimal trajecto-ries of transitions. If a radiologistis going to lose out and there aregoing to be jobs for plastic sur-

geons, how do we minimize thecost of retooling? If the AmericanMedical Association cannot fig-ure out how you make transitionsfrom declining occupations to ex-panding ones, then some smartguys will probably work it out.

Have you seen anybody actually

work this out?

No, but I have written about thisrecently, and I'm going to work atit now. It's not just a matter of giv-ing people money for two years tosupplement their incomes whilethey're bagging groceries andstocking shelves at the local Wal-Mart. That's not enough. There areinsurance plans now which weare experimenting with—not un-employment, but wage insurance.So if you go from a $70,000 job to,say, a $20,000 one at Wal-Mart,half of your wages are picked upfor three years under an insuranceprogram. A pilot insurance pro-gram like this was enacted in theU.S. several years ago.

So we're working at it, butwe have to work out these trajec-tories of transition. And for un-skilled workers, because they alsolose jobs, we now have to do whatthe old socialists who were forworkers' education used to do.We now have to improve the un-skilled workers' portfolio of assetsthrough training. I think workershave to be educated. It's the unionsthat should do that, because thatwill really protect workers againstflux. And companies have somecorporate social responsibility aswell. Individual firms may not beable to do that, but I think employ-ers' associations, chambers of com-merce and the like can. They are

obviously interested in interna-tional trade. Many of our firms areinternational now, and ifwe don'tdo something to facilitate copingwith change, the politicians won'tbe able to deliver on keeping mar-kets open, and then you can forgetabout expanding further.

If you really believe globaliza-tion is a source of gain, which I do,and social advancement as well.

"There's no needto panic aboutthe rise of Indiaand China,because there'sgoing to be alot of trade, andboth sides aregoing to win.

which I write about in my book,then I think these problems haveto be solved. We have to look at theissues of an aging society and thelack of skilled jobs. I don't thinkthe middle class is under that kindof threat, but we do want to beable to move from job to job. Ourentire social and economic setup isattuned to conditions of stability,where you start in a firm and youexpect to die in it. I remember asan undergraduate, the first ques-tion that kids asked prospectiveemployers was, "What's your pen-sion plan?" They expected to retirein the bloody place! Today nobodyexpects it—and nobody wants iteither, if they're educated. I mean

the last thing you want is to be atone firm forever.

1 think we really need a seachange, and that's what I've beenlecturing about quite a bit in Ger-many and Denmark. I think ev-erywhere the talk is about how tocope with the changes wroughtby globalization, and what is thebest way to reorganize our social-support system to meet thosenew needs. But ifwe don't do that,we're in trouble, and I think we'llfall behind. People have the vote,thank God, and they can actuallyvote you out if you don't do some-thing about it.

Are you optimistic or pessimistic?

I think America is resilient. I wasreally pleased the other day whenHillary Clinton's chief of staffwanted me to come and talk withher about international trade.I told her, "You're the first Dem-ocratic politician who has everwanted to talk about it." Increas-ingly, people are beginning to seethat they have to talk about this,and that simply rolling along isnot going to be very helpful. If thefears are real, that's different, butif the fears are simply based onfaulty analysis and lack of appro-priate responses to globaUzation,then it's an unnecessary contradic-tion we're imposing on ourselves.

I think we need to rethink awhole lot of things—trade, aid,how we want to operate in theworld. I think we can do it becausewe're very pragmatic and solution-oriented. And I think the U.S. willdo it ahead of anybody else. O

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