In my previous entry I mentioned that labor migration can take the form of "outsourcing" (where a company stops providing a servce domestically and gets another firm to do it—sometimes overseas), migration, or trade. The USA is so big, that this often has a potent effect even when other countries aren't directly involved—or even other states. Your humble correspondent has, in a way, seen the Indian side of the outsourcing controversy despite living in the San Francisco Bay area: that's because I was a temp for years, employed without any kind of benefit, any sort of job guarantee, and with an income well below that of my unionized coworkers. I did the same work; and there was constant discussion of shifting the entire department to another firm which specialized in purchasing management. Had the company actually done so, I might have would up working for that company instead—and probably been transferred to a business park with a far longer commute, for still less pay. I was keenly aware of the canyon floor below—$5/hour below my already low pay.

The connection between labor markets and imperialism abroad is a startling one.

India is one of the more successful ex-colonies. Since partition and independence in 1947, it has retained internal peace and unity. Elections have been held in an orderly fashion, there are no famines, no death squads, no revolutions. The country's political outlook has been dominated by unapologetically democratic socialists; big business, especially foreign companies, are regarded with well-deserved suspicion if not outright hostility.¹ So India cannot be likened unto, say, Egypt, where powerful technocrats forcefully repudiated economic nationalism (after 1975), or Colombia, where "independence" has usually meant "rule by local business interests," or Nigeria, where massive institutional failure followed independence. But even India has experienced a dramatic decline in the real purchasing power of its currency relative to the US dollar.² The reason is that it's not just trade flows in products that account for exchange rates; it's also capital flows and income from prior investments. These tend to ensure an oversupply of rupees, making Indian products absurd bargains. In theory, this should lead to a massive Indian trade surplus with its trade partners, until the exchange rate is the same as the purchasing power parity (PPP). However, capital flows tend to perpetuate the colonial relationship with India; Indians are underpaid by the rest of the world (on average).

The result, of course, is that workers in places like the USA are vulnerable. In a less imperfect world, increases in worker productivity in India would lead to increased income; the Indians would buy imports equal in value to what they exported, so all that soothing rhetoric about outsourcing enabling Indians to join the middle class and buy American products is simply that—rhetoric. Oddly, the EU member states have a real exchange rate with the USA which is less than unity—a euro buys less in most EU member states than a dollar does in the USA, yet a euro buys US$1.17. So why aren't the Europeans trembling in terror at outsourcing to the USA? Because they have a sound industrial policy and we do not. They ensure that there are enterprises which can be carried out in the EU which can only be carried out in a small number of other countries. Once upon a time, we did the same.

Imperialism tends to achieve exchange rate anomalies thus: capital flows are determined by hierarchies of financial intermediaries, not markets; in theory, with the Indian rupee undervalued, there should be a boom in the demand for Indian products; investors should be desperate for shares in Indian firms, since everyone "knows" Indian firms are going to be profitable, and the value of Indian assets denominated in non-Indian currencies should shoot up. And while some of the reason this doesn't happen lies with Indian leadership; but much of it lies with the fact that capital moves in tsunamis, not in the orderly hydraulic flows theories predict.

Recall my casual explanation of why modest-sized American communities develop underpaid labor markets (previous post): if there is only one employer, like Wal-Mart, for a particular cohort of workers, then the retailer faces increasing factor costs; wages go up if the local Wal-Mart hires more people. At the same time, the same company is facing a downward-sloping marginal revenue curve; if it sells more junk, then the markup per item does down. I've simplified my explanation by assuming Wal-Mart has a monopoly of retailing and a monopsony in labor; this applies somewhat more weakly if more things interfere e.g., if there's a Sam's Club 30 Km away. Incidentally, I've explained this in the past, with charts and diagrams.

In real life, markets usually shrink to duopolies; the goods they supply are not close substitutes, but can be used thus at some considerable loss of utility or convenience. Far smarter analysts than I have usually relied on game theory or option theory to go further in explaining what happens next. But the short summary is that markets for capital determine exchange rates, which determine real exchange rates; those markets are essentially bubbles. Unlike the market for fresh tomatoes, the market for shares in a ventures are determined by what other people think it will be worth in the future. If you invest in Argentine securities, and the bottom falls out of the forex market for Argentine pesos, then then security has suddenly become a bad investment. You will have lost most of your original investment. The same is not true if you had bought something with universal intrinsic value, like wine; and even in the housing market, most participants need a place to live.

For this reason, global concentration in securities markets can mean prolonged "bubbles" in the securities/currencies of western nations, and as a result, constant downward pressure on wages in the developed world.

The Character of Labor Migration

"Filipinos take 'going places' literally" (WP) describes the effects of a major diaspora of Philipinos to the USA. The RP has a population of about 84 million people; about 800,000 are moving away each year, and 7 million live overseas (almost half in the USA). The article mentions that the Philipino diaspora exceeds others in the scope of skills and the geographical diffusion; I would expect they mean, in recent years. The RP has an 11% unemployment rate and different government agencies cannot decide if they prefer that Philipinos emigrate (the WP article implies that expats supply two thirds of the foreign currency flowing into the RP; they say half, but then say an equal amount flows in through imformal channels).

I can imagine some Philipino readers would be annoyed by the last page, which lists a number of reasons why they are such popular service workers: according to the article, there is a special Philipino knack for impersonating other singers and caring for others. Among those who have lived in the USA for a length of time, this sort of compliment is unwelcome: it implies that a certain ethnic group comes naturally to a certain task, which they may in truth enjoy no more than anyone else does. The employment of Philipinas nurses, nannies, and care workers has often been accompanied by extreme economic pressure for those workers to sacrifice the needs of their own families. Those living the USA typically notice that the innocuous-seeming compliment "Philipinos are naturally caring and thoughtful" is actually an excuse for expecting Philipinos to be suited for roles where those attributes are required. It encourages the listener to take advantage of those attributes without remorse, or suggests that the Philipino is fulfilling his natural role rather than being assertive and forceful (when that sort of behavior is more appropriate).

2 More precisely, in 1970 the rupee's exchange rate understated its purchasing power relative to the dollar by a factor of about two; now that ratio is 2.3 times as much—almost 5. In order to buy the equivalent of a $100 in India, you need 900 rupees; the markets will give you 4500 rupees for 100 USD.