Arnold Kling  

Tyler Cowen Makes a Suggestion

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He writes,

It is also a good paper for Arnold Kling to comment on

I take this as a suggestion that I read the paper, by Richard Baldwin. Actually, I am not sure that I have many comments. Here is an excerpt from the conclusion:

The ICT revolution lowered the cost of coordinating complex activities at distance and this made the geographical dispersion of supply chains feasible and profitable. Rich-nation firms offshored segments of their value chains to developing nations. As the output had to mesh seamlessly with continually evolving production processes in other nations, the multinational typically deployed its firm-specific technology in the foreign factory - especially since this combination of rich-nation technology and low-wage labour could be very profitable. This 'technology lending' - which is very different from the 'technology transfer' of old ISI [import substitution] theory - could revolutionise the output of a developing nation's industry almost overnight.

Offshored factories arrived with everything needed. Much of this was regional as key personnel still had to travel among factories. Oversimplifying to make the point, all the developing nation had to do was be located near a supply chain, provide reliable workers, and establish a hospitable business environment.

I am not convinced that computers and communication technology are the key enabler here. The key enabler might be "located near a supply chain, provide reliable workers, and establish a hospitable business environment." Or it might be declines in physical transport costs. Container ships might be more important than the Internet for creating an international manufacturing supply chain.

In any case, the natural comment for me to make is that this is a story that predicts factor-price equalization. The wages of reliable workers in a hospitable business environment should tend to be equalized around the world. That means that wages rise in low-wage countries and wages fall in high-wage countries.

As people in other countries get richer, they will want better services (including retailing and education) and better infrastructure (including cleaner air and better internal transportation). Our skilled workers (some of them) should have opportunities in helping provide some of these services. But I read Baldwin as saying the concept of national comparative advantage has gone away. Comparative advantage applies to skill groupings of workers, not to nations.

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COMMENTS (2 to date)
david writes:

The part of being near a supply chain, providing a docile workforce, and subsidizing foreign investments all applied "already" in the relevant NIC nations. The work was principally done earlier in suppressing anti-Japanese and anti-Western sentiment after WW2. Enforcing a system where Japanese investors return and become regional bosses was incredibly unpopular for obvious reasons.

But that was all done in the past. The more recent marginal improvement had to come from somewhere else. So... ICT? In particular when explaining the movement of Western MNCs around the region. Offices all over Asia is much more difficult to manage than one office in Seoul without rapid communications. ICT weakens the tendency to concentrate.

A "reliable" workforce has, I daresay, less to do with wages and more to do with theft, corruption, and propensity to engage in labour unrest. It's more about "legibility" in the "seeing like a state" sense to a foreign investor. The context is not Vietnam but the NICs, whose wages were already substantially higher than in other parts of ASEAN.

Shayne Cook writes:

"Comparative advantage applies to skill groupings of workers, not to nations."

The most profoundly important economic statement I've read in a very long time.

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