Posted by: Dirk | May 26, 2007

Blinder on Offshoring

Alan Blinder wrote some very pessimistic articles last year, one of them published in Foreign Affairs. It sums up his arguments in just seven pages. His gloomy story describes how jobs move from the US to India (and China) because of lower wages. There a three points he doesn’t really touch in his story:1) exchange rate restrictions – You can only import as much as you export, at least in the long run. If jobs move to India, then the Indian rupee will appreciate and make this service more expensive for everyody else who whishes to purchase this service later. Only if India purchases something from the US will the exchange rate stay at the old level (more or less).

2) price level – The price level should be lower as trade in services works just as trade in manufacturing. Many economists point to the trade of the US with China as an explanation for the low change in the price level of recent years (while the Fed conducted a monetary expansion).

3) agglomeration – Many jobs are in industries which exist due to locational advantages. Some of them are geographic or historical, but most feature agglomeration economies “on top”. Think of NYC and financial services, IT and Silicon Valley and others.

I think these arguments are very important and cancel most of the pessimistic parts of Blinder’s story. Offshoring is a revolution, or could develop into one, but I think that the US will not lose out on the benfits. Especially since we live in a dynamic world and maybe American workers in 2050 will mainly work in industries that are not big yet. The consultant firm Roland Berger of Germany predicts a turnover of €1,000 billion in 2030 for green technology firms. And biotech should be a big thing, too. Or maybe …?

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