The McKinsey Quarterly has this excellent (and sobering) piece on how a financial crisis can accelerate global economic activity. A central point of the article is that whilst commodities and foreign exchange are truly globalized by Adam Smith’s definition (the Law of One Price which states that when markets are fully formed, all customers can get the same item at the same price, regardless of location), labor continues to offer significant arbitrage in different parts of the world primarily due to exchange rate restrictions that don’t let true currency value adjust naturally. I quote:
But it’s also important to understand that emerging-market economies have a structural advantage that is grounded in the operation of the global economy. Saber-rattling Western trade negotiators frequently focus their attention on the “unnaturally” depressed exchange rates of countries such as China, and this is a component of the structural advantage to which I refer. But its roots run far deeper—all the way down to the fundamental issue that labor can’t be freely traded on a single global market, while capital and commodities can. Any company sourcing its production or service operations in a lower-wage emerging-market country therefore can save enormously on labor costs. That’s painful for displaced Western workers, but it’s good for the company’s profits, good for consumers in developed markets, and good for the newly minted citizens of the global economy who are working in emerging-market factories and call centers. This is a dynamic we take so much for granted that it’s easy to imagine it as a semi permanent condition that will underpin global economic development for the foreseeable future.
Lowell Bryan, the author, opens with the a sharp wake up call:
This article explains why we should consider that seeming improbability and examines the possibility that financial crises may accelerate the transition to a global economy with more balanced trade, capital flows, and consumption.
The write-up is just superb and every CEO whose senses a complacent reliance on current labor arbitrage in her organization (read: her profit estimates depend on it), should think again.
A financial crisis may well accelerate the transition towards a global economy with balanced labor costs, but there are two other factors that are in play here. I briefly covered both these during my keynote at the International Forum on Enterprise 2.0 in Milan, earlier this month. Here goes…
First, it’s the developed nations that created the proverbial monster. As the western world sends work offshore, the standard of living and by extension cost of living in emerging markets are rising dramatically. More job opportunities means employees have negotiating power when it comes to wage increases. With rising wages we get shrinking labor arbitrage. So this can’t go on for ever. Labor prices will rise slowly but surely, at least in countries that are both quality labor pools as well as hot emerging markets.
Second, what needs to be taken into account is a phenomena that has far more immediate consequences that we work closely with our customers on, and that all leaders need to consider. In addition to balanced trade and perfect capital flows, we’re moving towards perfect engagement flows. And this will have a profound effect on globalization, financial crisis or not.
The web and now social network connectivity transcends geography and that’s obvious. From a business stand point, this means prospects and customers everywhere are fully aware of the global competencies of your organization (and that of your competitors) when it comes to innovation, product expertise, support and satisfaction. If your Westin Hotels entering China, Yelp has already informed guests about the heavenly bed you offer in the U.S. If you’re Comcast and you’re entering Malaysia, new customers may want to get support from Frank’s superb team @Comcastcares and not the call center in Bangalore. That’s because the social web is putting fluid and deep engagement flows in place between markets, and possibly long before you even reached/scaled operations in some of these locales.
With emerging markets opening up, most organizations rushed to build locally relevant products and that was a great start. With open connectivity comes engagement and with that, comes knowledge sharing. Buyers today are much more aware of your global portfolio capabilities. So products will need to reflect not only local relevancy, but also global competency.
Customers expect the brightest customer support reps, product innovators, and subject matter experts to wrap around their innovation and support needs. Not where its the most cost effective for you, but where the best answers and experts reside across the globe. And so with or without a financial crisis and with or without your attention, engagement flows will accelerate global economic activity because the customer expects it.
How do you get there? You plan and design scalable 21st century collaborative enterprises that expose the talent and passion of:
- happy customers who can be objectives advocates of your expertise and your integrity
- sales and distribution partners who know the intimate needs of customers
- employees and suppliers who know the true power of your products…
…..where ever they might be.
Are you ready?