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Outsourcing, or the Globalization of Production

How the capital-labor relation has evolved during the neoliberal era is the subject of this book. Chapter 1 zoomed in on three representative global commodities; this chapter turns the telescope around, presenting a historical and panoramic view of the global transformation of production and of the producers, the global working class. The purpose of this and the next chapter is to develop a rich, sharply focused concept of the globalization of production. To develop tools needed for analysis of this phenomenon, we will critically examine standard definitions of “production,” “industry,” and “services.”

ANTECEDENTS OF GLOBAL OUTSOURCING

In order to oppose their workers, the employers either bring in workers from abroad or else transfer manufacture to countries where there is a cheap labor force. Given this state of affairs, if the working class wishes to continue its struggle with some chance of success, the national organisations must become international. Let every worker give serious consideration to this new aspect of the problem.¹

—KARL MARX, 1867, Address of the General Council to the Lausanne Congress of the Second International

The wildfire of outsourcing spread during the past three decades is the continuation, on a vastly expanded scale, of capital’s eternal quest for new sources of cheaper, readily exploitable labor-power. What began as a trickle in mid-nineteenth-century Europe and became a steady stream in North America in the early twentieth century had, by the end of that century, become a flood tide, described by Kate Bronfenbrenner and Stephanie Luce as “a systematic pattern of firm restructuring that is moving jobs from union to non-union facilities within the country, as well as to non-union facilities in other countries.”² Antecedents of modern wage-arbitrage–driven outsourcing of production can be found in diverse branches of the nineteenth-century economy. Clothing and textiles, which played an important role in all stages of capitalist development, provide many early examples of the wage-arbitrage–driven production outsourcing that Karl Marx warned about 150 years ago.

The story of jute, the “golden fiber” native to Bangladesh and used for sacking and canvas sheets, contains important elements and features that foreshadow modern low-wage-seeking production. In the early nineteenth century, industrialists in Dundee worked out how to modify their linen- and flax-spinning machinery to process jute, spelling the demise of India’s hand-spinning industry. By 1860, Dundee’s sixty jute mills employed some 50,000 mostly female workers, many of them Irish migrants who had fled the Great Famine to find work in what was a notoriously low-paid sector of the economy. They were nevertheless more expensive than Indian workers, prompting Dundee’s jute barons to shift production to Bengal. Chhabilendra Roul reports that the first mechanized jute spinning mill in India was established in 1855 on the banks of the Hoogli River near Kolkata by a George Auckland, an Englishman, “with machinery imported from John Kerr of Douglas Foundry, then the leading machine manufacturer for flax machinery in Dundee.”³ By the first decade of the twentieth century the bulk of production had shifted to India, yet remained in the possession of Scottish jute barons, who successfully blocked the entry of Indian capitalists and who went on to provide a billion sandbags for Britain’s trenches in the First World War.⁴

IN LINKED LABOR HISTORIES, A STUDY of the co-evolution of the labor movements in New England and Colombia since the late 1900s, Aviva Chomsky argues that modern outsourcing “continues a pattern begun by the earliest industry in the country, the textile industry, a century earlier,⁵ and recounts how flight “from strong trade unions and toward cheap labor” saw New England textile mills pioneer international production outsourcing in the Americas, relocating first to North Carolina in the first decades of the twentieth century, then to Puerto Rico in the 1930s, and to Colombia and beyond in the decades since the Second World War.

The absence of international borders aided capital mobility in North America, where, as Gary Gereffi recounts, by the early twentieth century “many industries … began to move to the US South in search of abundant natural resources and cheaper labor, frequently in ‘right to work’ states that made it difficult to establish labor unions. The same forces behind the impetus to shift production to low-cost regions within the United States eventually led US manufacturers across national borders.”⁶

Global outsourcing of manufacturing production began in earnest in the 1960s and 1970s, with the exodus of production jobs in shoes, clothing, toys, and electronic assembly to low-wage countries, providing a new generation of commercial capitalists such as Tesco, Walmart, and Carrefour with the battering rams and trebuchets that helped them to end the reign of the “manufacturer’s recommended retail price” and established the supremacy of commercial capital in consumer goods markets. As U.S. labor historian Nelson Lichtenstein has observed:

For more than a century, from roughly 1880 to 1980, the manufacturing enterprise stood at the center of the U.S. economy’s production/distribution nexus…. Today, however, the retailers stand at the apex of the world’s supply chains…. The dramatic growth in the power of the American retail sector began in the 1960s and 1970s when Sears, K-Mart and some U.S. apparel makers/distributors began to take advantage of the cheap labor and growing sophistication of the light manufacturers in the offshore Asian tigers, especially Hong Kong, Taiwan and South Korea.⁷

Unable any longer to dictate prices to its distributors, the shift in power toward commercial capital increased pressure on the producer monopolies to ax agreements with their labor unions and to de-unionize and “flexibilize” their domestic labor force—and follow the trail blazed by the retail giants and outsource their labor-intensive production processes to low-wage countries. This involved both a redistribution of profits from industrial to commercial capitalists and the distribution of some of outsourcing’s bounty to increasingly wide sections of the working class through falling prices of consumer goods.

From the early 1960s, while the emerging retail giants were pioneering the outsourcing of toys, clothing, and other consumption goods, prominent electronics firms such as Cisco, Sun Microsystems, and AT&T were unleashing what was soon to become a torrent of outsourcing by hightech industry. Its driver was not the domestic battle with commercial capital but competition between U.S. and Japanese corporations. Until manufacturers learned how to print electronic circuits, circuit-board manufacture was exceedingly labor-intensive; its outsourcing to Taiwan and South Korea helped U.S. electronics firms to cut production costs and gave a mighty impulse to export-oriented industrialization in what became known as “newly industrializing countries.”¹⁰ The electronics and other high-tech industries have been at the forefront of the outsourcing wave. As an UNCTAD study found, “Strikingly, the growth rates of exports from developing countries exceed those of world exports by a higher margin the greater is the skill and technology intensity of the product category…. However, this does not signify a rapid and sustained technological upgrading in the exports of developing countries.” Far from it—“The involvement of developing countries is usually limited to the labor-intensive stages in the production process.”¹¹

The high-water mark of production outsourcing occurred, not coincidentally, in the period leading up to the outbreak of global crisis in 2007, or as UNCTAD put it, “Since around 2000, global trade and FDI have both grown exponentially, significantly outpacing global GDP growth, reflecting the rapid expansion of international production in TNC-coordinated networks.”¹² Mainstream and radical explanations of the root causes of the global crisis have focused almost exclusively on ballooning debt, the derivatives explosion, and the financial feeding frenzy that preceded its outbreak, but have given scant attention to the accompanying transformation and global shift of production. Kate Bronfenbrenner and Stephanie Luce estimate that each year from 1992 to 2001 between 70,000 and 100,000 production jobs “from ICT to high-end manufacturing of industrial machinery and electronics components to low-wage manufacturing in food processing and textiles” shifted from the United States to Mexico and China.¹³ This sharply accelerated at the start of the new millennium, when “the total number of jobs leaving the U.S. for countries in Asia and Latin America increased from 204,000 in 2001 to as much as 406,000 in 2004.”¹⁴ Epitomizing this epochal shift was the decision by the iconic “made in the U.S.” brand Levi Strauss, which in the 1960s operated sixty-three factories across the United States, to sack 800 workers at its last U.S. factory in 2004 and move production to Mexico and China.¹⁵

Outsourcing and Migration

Aviva Chomsky makes a crucial connection: “Most accounts treat immigration and capital flight separately. My approach insists that they are most fruitfully studied together, as aspects of the same phenomenon of economic restructuring.”¹⁶ She adds that “capital flight [which here means outsourcing] was one of the main reasons the textile industry remained one of the least organized in the early to mid-twentieth century, and it was one of the main reasons for the decline of unions in all industries at the end of the century.”¹⁷ At the beginning of the neoliberal era, Jeffrey Henderson and Robin Cohen made the same connection: “While some fractions of metropolitan capital have taken flight to low-wage areas, partly in response to the class struggles of metropolitan workers, less mobile sections of Western capital have enormously increased their reliance on imported migrant labor to cheapen the labor process and lower the costs of the reproduction of labor in the advanced countries.”¹⁸

Note on Trade Statistics

Conventional trade statistics double-count imported inputs—for example, Bangladesh’s earnings from garment exports include the cost of the imported textiles that Bangladeshi garment workers fashion into clothes. As the share of intermediate inputs in total trade increases this distortion has grown ever larger. Statisticians at WTO and the OECD have forged new analytical tools and datasets capable of measuring, sector by sector, how much of a given country’s exports were actually generated in that country. Results from this enormous labor are presented in UNCTAD’s 2013 World Investment Report, which estimates that “today, some 28 percent of gross exports consist of value added that is first imported by countries only to be incorporated in products or services that are then exported again. Some $5 trillion of the $19 trillion in global gross exports (in 2010 figures) is double counted.”⁸

Illustrating this, China’s export performance is not quite so spectacular when full account is made of its export-processing regime, which allows imports for processing and re-export to enter duty-free. This trade accounts for more than half of China’s exports, and is mostly conducted by U.S., European, Taiwanese, and South Korean TNCs. Van Assche et al. found that in 2005 processed imports made up 90 percent of the value of China’s high-tech exports, compared to 50 percent in the mediumhigh-tech category and 30 percent in the low-tech category. In other words, the greater the sophistication of the goods being exported, the smaller the fraction of the export value actually added in China. Correcting for this distortion, China’s share of world trade in 2005 was 4.9 percent, more than a third lower than the 7.7 percent reported by World Bank and IMF data. Van Assche et al. comment, “China has turned into a global assembly platform that sources its processing inputs from its East Asian neighbors while sending its final goods to high-income countries. Since China is often only responsible for the final assembly of its export products, this puts into question China’s responsibility for the growing U.S. trade deficit.”⁹

Bangladesh provides a vivid example of how, during the neoliberal era, outsourcing and migration have become two aspects of the same wage-differential–driven transformation of global production. Speaking of 1980s and 1990s Bangladesh, Tasneem Siddiqui reported that “the continuous outflow of people of working-age … has played a major role in keeping the unemployment rate stable.”¹⁹ It has also become a crucial source of income for poor households. According to the International Organization for Migration, 5.4 million Bangladeshis worked overseas in 2012, more than half of them in India, around a million in Saudi Arabia, with the rest spread between other countries in the Middle East, Western Europe, North America, and Australasia. They sent $14bn from their wages to their families back home, equivalent to 11 percent of its GDP. In the same year, Bangladesh received $19bn for its garment exports, 80 percent of Bangladesh’s total exports, $4bn of which was paid out in wages to some 3 million RMG workers. Gross exports earnings includes the cost of imported cotton and other fabrics, typically 25 percent of the production cost, thus remittances from Bangladeshis working abroad approximately equalled total net earnings from garment exports. According to the World Bank, in 2013 each of Britain’s 210,000 Bangladeshi migrant workers remitted an average of $4,058, three times the annual wages of his (most Bangladeshi migrant workers are male) wife, sister, or daughter working in a garment factory back home. Why export-oriented industrialization has not provided enough jobs to absorb the growth of the workforce, obliging so many to migrate in search of work, will be considered in chapter 4.

Outsourcing and the Reproduction of Labor-Power in Imperialist Nations

Neoliberal globalization has transformed the production of all commodities, including labor-power, as more and more of the manufactured consumer goods that reproduce labor-power in imperialist countries are produced by super-exploited workers in low-wage nations. The globalization of production processes impacts workers in imperialist nations in two fundamental ways. Outsourcing enables capitalists to replace higher-paid domestic labor with low-wage Southern labor, exposing workers in imperialist nations to direct competition with similarly skilled but much lower paid workers in Southern nations, while falling prices of clothing, food, and other articles of mass consumption protects consumption levels from falling wages and magnifies the effect of wage increases. The IMF’s World Economic Outlook 2007 attempted to weigh these two effects, concluding: “Although the labor share [of GDP] went down, globalization of labor as manifested in cheaper imports in advanced economies has increased the ‘size of the pie’ to be shared among all citizens, resulting in a net gain in total workers’ compensation in real terms.”²⁰ In other words, cost savings resulting from outsourcing are shared with workers in imperialist countries. This is both an economic imperative and a conscious strategy of the employing class and their political representatives that is crucial to maintaining domestic class peace. Wage repression at home, rather than abroad, would reduce demand and unleash latent recessionary forces. Competition in markets for workers’ consumer goods forces some of the cost reductions resulting from greater use of low-wage labor to be passed on to them.

Perhaps the most in-depth research into this effect was conducted by two Chicago professors, Christian Broda and John Romalis, who established a “concordance” between two giant databases, one tracking the quantities and price movements between 1994 and 2005 of hundreds of thousands of different goods consumed by 55,000 U.S. households, the other of imports classified into 16,800 different product categories. Their central conclusion: “While the expansion of trade with low wage countries triggers a fall in relative wages for the unskilled in the United States, it also leads to a fall in the price of goods that are heavily consumed by the poor. We show that this beneficial price effect can potentially more than offset the standard negative relative wage effect.” They calculate that China by itself accounted for four-fifths of the total inflation-lowering effect of cheap imports, its share of total U.S. imports having risen during the decade from 6 to 17 percent, and that “the rise of Chinese trade … alone can offset around a third of the rise in official inequality we have seen over this period.”²¹

The conclusion to be drawn from this brief survey is that the globalization of the production of intermediate inputs and final goods on the one hand and the globalization of the production of labor-power on the other are two dimensions of the outsourcing phenomenon. They produce contradictory effects and interact in complex ways. They must be studied both separately and together. The increasingly global character of the social relations of production and the increasing interdependence between workers in different countries and continents objectively strengthens the international working class and hastens its emergence as a class “for itself” as well as “in itself,” struggling to establish its supremacy; yet, to counter this, capitalists increasingly lean on and utilize imperialist divisions to practice divide-and-rule, to force workers in imperialist countries into increasingly direct competition with workers in low-wage countries, while using the cheap imports produced by super-exploited Southern labor to encourage selfishness and consumerism and to undermine solidarity.

THE GLOBALIZATION OF PRODUCTION PROCESSES

In the early stages of the Industrial Revolution, before the widespread introduction of power machinery, the various stages in the processing of raw materials into final goods typically took place within a single factory, often supported by armies of homeworkers working up raw materials for final processing. Waves of mechanization over the next hundred years spurred concentration and specialization, fostering the growth within national borders of more complex production networks. For most of these two centuries international trade consisted of raw materials and final goods. Neoliberal globalization, by extending the links in the chain of production and value-creation across national borders, has profoundly transformed this picture. As William Milberg noted in a study for the ILO, “Because of the globalization of production, industrialization today is different from the final goods, export-led process of just 20 years ago.”²² The big difference, “the defining manifestation of globalized production,” no less, is “the rise in intermediate goods in overall international trade, whether it is done within firms as a result of foreign direct investment or through arm’s length subcontracting.” This does not mean, however, that outsourcing can be reduced to trade in the intermediate inputs—our concept must also include the export of finished goods from low-wage countries to firms and consumers in imperialist countries.

Mainstream theory has ill equipped International Financial Institutions such as the IMF and World Bank to conceptualize and measure the outsourcing phenomenon. As late as 2007 the IMF estimated that “offshoring intensity,” defined as the “share of offshored inputs in gross output,” has “increased only moderately since the early 1980s. The share of offshored inputs in gross output ranges from 12 percent in the Netherlands to about 2–3 percent in the United States and Japan.”²³ Yet this definition omits the export of intermediate inputs to low-wage nations for final assembly. It also excludes finished goods destined for use as inputs by Northern firms, including computers and other electronic goods, and it excludes finished goods destined for consumption by workers.²⁴ According to the IMF’s definition, none of the three global commodities I examined in chapter 1 would count toward the offshoring intensity of the nations whose firms and citizens supply final demand. The result is an absurdly low estimate of the extent and pace of the globalization of production processes. Particularly risible is the IMF’s estimate of the offshoring intensity of Japanese manufacturing. Japan’s signature form of outsourcing is known as “triangular trade,” in which “Japanese firms headquartered in Japan produce certain high-tech parts in Japan, ship them to factories in East Asian nations for labor-intensive stages of production including assembly and then ship the final products to Western markets or back to Japan.”²⁵ This pattern evolved after the 1985 Plaza Accord, when Japanese manufacturers responded to sharply declining competitiveness resulting from appreciation of the yen by offshoring labor-intensive production processes to neighboring low-wage countries,²⁶ often referred to as the “hollowing out” of Japanese industry. Yet the IMF calculates Japan’s offshoring intensity to be a negligible 2–3 percent.

Another defect of the IMF’s approach is that it takes no account of where these imported inputs come from. It discovers a more or less stable ratio of imported inputs to total inputs, but this conceals a big swing toward lower-cost suppliers in low-wage countries. Three OECD researchers reported that “while intermediate imports into the OECD as a whole from China and the ASEAN have risen sharply (as a share of total manufacturing imports), this has been offset by reductions in intermediate imports from other countries”—“other countries” being other rich nations in the OECD.²⁷ The U.S. auto industry, which imports more than 25 percent of its inputs, more than any other industrial sector, provides a clear example of this.²⁸ The OECD’s Trade in Value Added (TiVA) database reveals that in 1995 the U.S. auto industry imported four times as much automotive value-added from Canada as from Mexico, just 10 percent more in 2005, and by 2009, the latest year for which data is available, Mexico had overtaken Canada to become the source of 48 percent more automotive value-added than the United States’ northern neighbor—a striking indication of how the global economic crisis has accelerated the southward shift of production.²⁹ The shift would be even more pronounced but for the odd behavior of non-U.S. auto companies that have set themselves up in the United States to win a share of the U.S. market. As a study for the World Bank noted, “Political sensitivity … explains why Japanese, German, and Korean automakers in North America have not concentrated their production in Mexico, despite lower operating costs and a free trade agreement with the United States,” while the United States’ own auto giants, who are evidently less patriotic than U.S. consumers, relocate more and more of their production to the other side of the Rio Grande.³⁰

An alternative and widely used way to estimate the magnitude of outsourcing is to measure the share of intra-firm trade in overall international trade. This is the antithesis of the IMF’s approach, since it captures both intermediate inputs and finished goods, but it has no place for the increasingly important arm’s-length relations between Northern firms and their Southern suppliers.³¹ Peter Dicken comments that “unfortunately there are no comprehensive and reliable statistics on intra-firm trade. The ballpark figure is that approximately one-third of total world trade is intra-firm although … that could well be a substantial underestimate.”³² Princeton economists Gene Grossman and Esteban Rossi-Hansberg are more helpful, reporting that, “in 2005, related party [i.e. intra-firm] trade accounted for 47 percent of U.S. imports…. This fraction has risen only modestly since 1992, when it was already 45 percent.”³³ This modest rise, however, conceals a dramatic reorientation of this trade toward low-wage economies: “Imports from related parties [i.e. subsidiaries] accounted for 27 percent of total U.S. imports from Korea in 1992, and 11 percent of total U.S. imports from China. By 2005, these figures had risen to 58 percent and 26 percent, respectively.”

Reviewing these attempts to quantify production outsourcing, William Milberg has pointed out that “most attempts to measure the magnitude of the phenomenon of vertical disintegration have captured only parts of the process. Some analysts focus on intra-firm imports and others on the import of intermediate goods whether these are intra-firm or arm’s-length.”³⁴ However, the total outsourcing picture is captured by one set of comprehensive and readily available data—manufactured exports from low-wage nations to imperialist nations as a whole. Milberg and Winkler, in a study of the impact of the crisis on global production networks, explain the simple, powerful logic behind this approach:

Standard offshoring measures capture only trade inputs … [yet] much of the import activity in global supply chains is in fully finished goods. In fact, the purpose of corporate offshoring, whether at arm’s length or through foreign subsidiaries, is precisely to allow the corporation to focus on its “core competence,” while leaving other aspects of the process, often including production, to others. Many “manufacturing” firms now do not manufacture anything at all. They provide product and brand design, marketing, supply chain logistics, and financial management services. Thus, an alternative proxy for offshoring may simply be imports from developing countries.³⁵

According to this broad measure of goods offshoring, “developing-country imports constitute over half of total imports by Japan (68 percent) and the United States (54 percent), while the European countries range from 23 percent in the United Kingdom to only 13 percent in Denmark.”³⁶ This must be qualified in two ways. First, imports of raw materials and foodstuffs from developing countries reflect the traditional, pre-neoliberal pattern of North–South trade, and do not in general correspond to cheap labor-seeking outsourcing. Second, a small but significant fraction of developing nations’ manufactured exports arise not from outsourcing relationships controlled by imperialist leading firms but from home-grown industrial development. Brazil’s aerospace industry and China’s solar panel and wind-turbine industries are examples of this. But, as we shall see in more detail in the next chapter that discusses the structure of world trade, these higher value-added exports form a small part of overall South–North trade. With these caveats, then, we can agree with Milberg and Winkler and regard manufactured imports by imperialist countries from low-wage countries as a whole to be a composite of diverse outsourcing and offshoring relationships, manifested in different types of global value chains. Developing countries’ share of imperialist nations’ manufactured imports have rocketed since 1980, more than tripling their share of a cake that itself quadrupled in the subsequent three decades. In a study published by UNCTAD in 2013, Rashmi Banga found that 67 percent of the total value-added generated in global value chains is captured by firms based in rich nations.³⁷

Transnational corporations, the majority of which are headquartered in imperialist countries and owned by capitalists resident in those countries, are the supreme drivers of the globalization of production. Their connection with production processes in low-wage countries takes two basic forms: an “in-house” relation between the parent company and its overseas subsidiary, as in FDI, or an “arm’s-length” relation with formally independent suppliers—an important distinction that will be examined in the next chapter. Its diverse forms, problems of definition, and non-availability of data mean that obtaining a precise measurement of the magnitude of outsourcing is fraught with difficulties. Nevertheless, UNCTAD estimates that “about 80 percent of global trade (in terms of gross exports) is linked to the international production networks of TNCs.”³⁸ The extent of this transformation is indicated by UNCTAD’s 2013 World Investment Report, which estimates that “about 60 percent of global trade … consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption.”³⁹

In conclusion, South-North (S-N) export of manufactured goods as a whole must be thought of not so much as trade but as an expression of the globalization of production, and this in turn must be seen not as a technical rearrangement of machinery and other inputs, but as an evolution of a social relation, namely the relation of exploitation between capital and labor. International competition between firms to increase profits, market share, and shareholder value continues, but the fate of each worker is no longer tied to the fortunes of her/his employer; on the contrary, the employers that survive are those who most aggressively substitute their own employees with cheaper foreign labor.

The production process can be thought of as a sequence or choreography of tasks, of different concrete labors, in which “task” means a production task; as the labor expended in the production of commodities, “industry” is where this takes place. A striking feature of neoliberal globalization of production is the outsourcing of individual segments and links of production processes, leading analysts to talk of the fragmentation of production, or “slicing up the value chain,” as Paul Krugman described it in a much-commented-upon article.⁴⁰ The old conception of North-South trade of raw materials for finished goods sorely needs updating. Baldwin’s notion of “task trading” captures a change in the nature of global competition, “which used to be primarily between firms and sectors in different nations, [but] now occurs between individual workers performing similar tasks in different nations.”⁴¹ This manifests an evolution of the capital-labor relation, which increasingly takes the form of a relation between Northern capital and Southern labor. Before the transformations of the neoliberal era, when competition consisted of firms producing different final goods, the relative wages and security of employment of workers in imperialist countries was dependent on their employer’s defense of market share and conditioned by the threat of redundancy resulting from the introduction of labor-saving technology. Before the neoliberal era the more successful and dominant the TNC, the greater the number of direct employees it concentrated in domestic factories. “Task trading” signifies that employers now have an alternative way of making their employees redundant, an alternative way of cutting production costs, by outsourcing individual tasks, that is, jobs, to where wages are significantly lower. Now the successful TNC is the one that has outsourced production to low-wage countries and does as little as possible itself. Apple has replaced GM in terms of market capitalization by going much further down the road that GM itself is traveling. Competition between workers is therefore sharpening and becoming more direct, and is less and less a simple function of their firm’s competitiveness.

EXPORT-ORIENTED INDUSTRIALIZATION: WIDELY SPREAD OR NARROWLY CONCENTRATED?

For nearly half a century, export-oriented industrialization has been the only capitalist option for poor countries without abundant natural resources.⁴² Yet it is a widely held view that the growth in the Southern industrial proletariat is highly concentrated in a small number of Southern nations, namely China, “the supplier of choice in virtually all labor-intensive global value chains,”⁴³ and a handful of others. Ajit Ghose, a senior economist at the ILO, argues that “what appears to be a change in the pattern of North-South trade is in essence a change in the pattern of trade between industrialized countries and a group of 24 developing countries…. The rest of the developing world, in contrast, remained overwhelmingly dependent on export of primary commodities.”⁴⁴ “The rest,” comprising more than 107 developing countries, “face global exclusion in the sense that they became increasingly insignificant players in the global marketplace.”⁴⁵ Yet the 24 countries that Ghose reports have “shift[ed] their export base from primary commodities to manufactures” include eight of the ten most populous Southern nations, home to 76 percent of the total population of the global South. Of the ten most populous Southern nations, only Nigeria receives more from primary commodity exports than from manufactures.⁴⁶ In addition, many other smaller nations have made a brave effort to reorient their economies to the export of manufactures and play host to manufacturing enclaves, also known as export processing zones, which exert a powerful and distorting influence on their national economies.

The southward shift of production during the neoliberal era is strikingly portrayed in Figures 2.1, 2.2, and 2.3. The solid line in Figure 2.1 shows that Southern nations’ share of global exports of manufactured goods began its steady rise in the late 1960s. Its ascent steepened in the second half of the 1970s, rising from around 5 percent in the pre-globalization period to 30 percent by the first decade of the twenty-first century. Figure 2.2 decomposes this trace to shows the share of developing nations in Europe, Japan, and the United States’ manufactured imports. The traces for Japan and the United States show a dramatic increase in their manufactured imports from low-wage countries, rising from around 10 to 45 percent in the case of the United States and to nearly 60 percent in the case of Japan, results that make IMF estimates of Japan’s static outsourcing intensity reported above appear ridiculous.⁴⁷

The second trace in Figure 2.1 (broken line) shows that the share of manufactured goods in developing nations’ total exports commenced its astonishing ascent around 1980, increasing from 20 percent in that year to more than 60 percent in barely one decade. It then stabilized at this much higher level and, from the early 2000s, sloped downward, reflecting buoyant primary commodity prices and deteriorating manufacturing terms of trade. Figure 2.3 (page 54) decomposes this into different regions, revealing the widespread yet uneven character of the shift from the export of raw materials and foodstuffs to manufactured goods. If the different regions were disaggregated into individual countries we would find, as Ghose argues, that many small nations have not followed this pattern of development, yet the overall picture is clear.⁴⁸

China’s rise is depicted in the trace for East Asia and Pacific, of which it is by far the largest component. There is other interesting detail in the graph—for example, manufactured exports as a share of total exports from South Asia, which includes India, Pakistan, Bangladesh, and Sri Lanka, was high even in 1980. Africa’s trace (data only from 1996) shows the continent has not made the transition to export-oriented industrialization—on the contrary, its domestic light industries have been ravaged by competition from China and other Asian countries. And the trace for the Middle East, for which manufactures make the smallest contribution to overall exports, is explained by the weight of oil in the regions’ total exports—its low score is therefore a sign of abundant wealth (which is not, of course, shared evenly between different Middle Eastern countries), and not, as in Africa’s case, a sign of poverty.

FIGURE 2.1: Developing Economies’ Trade in Manufactures

Source: UNCTAD Handbook of Statistics.

FIGURE 2.2: Developing Nations’ Share of Developed Nations’ Manufactured Imports

Source: UNCTAD, Handbook of Statistics Archive: Network of exports by region and commodity group, historical series (available at http://stats.unctad.org/handbook/ReportFolders/ReportFolders.aspx).

FIGURE 2.3: Manufactured Exports as a Percent of Merchandise Exports, by Region

Source: World Bank, World Development Indicators, July 2015.

Export-Processing Zones (EPZs)

The proliferation of EPZs, now found in more than 130 countries, provides further evidence that though industrial development in the global South may be unevenly distributed it is nevertheless very widespread. It also adds more detail to our account of the insatiable appetite of imperialist TNCs for ultra-flexible, low-waged employment in which all their needs are laid out on a carpet and “the burden of the cyclical nature of demand is placed on workers.”⁴⁹

According to the World Bank, an export-processing zone is “an industrial estate, usually a fenced-in area of 10 to 300 hectares, that specializes in manufacturing for export. It offers firms free trade conditions and a liberal regulatory environment.”⁵⁰ EPZs exhibit the following characteristics: “duty-free imports of raw and intermediate inputs and capital goods … red tape is streamlined … labor laws are often more flexible than … in the domestic market … generous, long-term tax concessions … infrastructure more advanced than in other parts of the country…. Utility and rental subsidies are common.”⁵¹ A long list, yet it is strangely incomplete—“flexible labor laws” is a euphemism for almost universal hostility to trade unions; the predilection of investors in EPZs for female labor is not mentioned—invariably, the large majority of the workforce are women (see chapter 4 for more on this), and neither is the most important factor of all, indeed the EPZs’ raison d’être—low wages.

EPZs in their various forms have played and continue to play a key role in the competitive race for export-oriented industrialization. Not only are they now found in a large majority of Southern nations, their classic features have become generalized: neoliberal globalization has gone a long way toward turning the whole of the global South into a vast export processing zone. As William Milberg comments, “The distinction between EPZ and non-EPZ activity has diminished in many countries as liberalization policies have expanded in the WTO and regional trade agreements.”⁵² Yet far from declining in significance, EPZs have experienced accelerating growth—the numbers employed in them nearly tripled between 1997 and 2006, the latest year for which there are statistics, when 63 million workers were employed in EPZs located in 132 countries. Milberg’s study of EPZ reports figures for a selection of economies, revealing that in 2006 EPZs were responsible for 75 percent or more of export earnings in Kenya, Malaysia, Madagascar, Vietnam, Dominican Republic, and Bangladesh, while Philippines, Mexico, Haiti, and Morocco earned 50 to 60 percent of exports from their EPZs. Between regions, however, significant disparities persist. The ILO’s Employment in EPZs database reports that Asia’s 900+ zones employed 53 million workers, 40 million of them in China and 3.25 million in Bangladesh. Another 10 million workers were employed in EPZs elsewhere in the world, 5 million in Mexico and Central America, with another million or so in each of Africa, the Middle East, and Central Europe. South America lags, with half a million employed in EPZs.

Although China remains the most important host, EPZs have been growing faster still in other low-wage countries: 80 percent of EPZ employment was accounted for by China in 1997, falling to 63 percent in 2005–6.⁵³ After China, the largest EPZ employer is Bangladesh, with 3.25 million employees in 2005–6.

Since their inception, EPZs have been the focus of intense controversy, and were singled out by scholars and activists influenced by the New International Division of Labor school as the epitome of unbridled exploitation of low-wage labor by TNCs.⁵⁴ In a survey for the ILO published in 2007, Milberg concludes that “despite the presence of EPZs—for over 30 years in some cases—there are very few cases where EPZs have played an important role in accomplishing … direct developmental goals,”⁵⁵ and UNCTAD warned in 2004 that manufacturing EPZs were reproducing colonial forms of “enclave-led growth” in which “a relatively rich commodity-exporting sector, well connected to roads, ports and supported by ancillary services, exist side by side with large undeveloped hinterlands where the majority of the population live.”⁵⁶

The general failure of EPZs to stimulate economic development outside of the zones, typically importing all inputs except labor and paying little or no taxes to host governments, has aroused further controversy. EPZs have also received much criticism because the export subsidies and other trade-distorting emoluments dangled by host governments to lure outsourcing TNCs confound efforts by the World Trade Organization to create a “level playing field.” Given the controversy surrounding EPZs and their paltry contribution to the economic and social development of their hosts, the question arises, why are they continuing to proliferate? The answer is that, having signed up to the IMF/World Bank–promoted strategy of export-oriented industrialization, EPZs provide governments in low-wage countries with a way to attract inward FDI and connect to global value chains. In addition, what “may be the most important political factor,” according to Milberg, is that “governments find the employment creation in EPZs to be essential for absorbing excess labor.”⁵⁷

SERVICES AND THE GLOBALIZATION OF PRODUCTION

Until around the turn of the millennium, outsourcing was associated with labor-intensive links or “tasks” in the manufacture of commodities. This took place on a massive scale, despite the significant costs and delays involved in transporting commodities over long distances. The eruption of this into “services,” in particular any service that can be delivered instantaneously to a computer screen with zero transportation costs, has only become a practical possibility for most firms since the late 1990s. Richard Freeman’s prediction that “if the work is digital—which covers perhaps 10 percent of employment in the United States [around 14 million workers]—it can and eventually will be offshored to low-wage highly educated workers in developing countries,” was widely reported in the U.S. news media.⁵⁸ So too an article in Foreign Affairs in 2006 by Alan Blinder, an eminent economics professor at Princeton University, titled “Offshoring: The Next Industrial Revolution?,” which warned “we have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering.”⁵⁹ Suddenly a layer of professional, middle-class workers began to feel the cold breath of global competition. As Gary Gereffi remarked, “While low-cost offshore production had been displacing U.S. factory and farm jobs for decades, the idea that middle-class office work and many high-paying professions were now subject to international competition came as something of a shock.”⁶⁰ Under the subheading “This time it’s personal,” Blinder concluded, “Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly skilled) people and less-educated (or less-skilled) people…. The critical divide in the future may instead be between those types of work that are easily deliverable through a wire … and those that are not.”⁶¹

Services made up 75 percent of the GDP of “high-income countries” in 2013, but only 22 percent of their gross exports,⁶² but this understates their contribution because services also form part of the value added of exported manufactured goods. “While the share of services in gross exports worldwide is only about 20 percent,” reports UNCTAD, “almost half (46 percent) of value added in exports is contributed by service-sector activities, as most manufacturing exports require services for their production.”⁶³

Clearly, a concept of the globalization of production that concentrates exclusively on manufacturing and ignores so-called services would be seriously deficient. Mainstream conceptions of industry and services classify economic activities according to the physical properties of their output, and therefore of the specific nature of the tasks, of the concrete labors, that generate it. Services are conventionally defined as weightless, intangible commodities; they cannot be stored and transported and therefore must be consumed in situ and at the moment of their production, as in the case, for instance, of a haircut or a bus journey. Thus, according to The Economist, services are “products of economic activity that you can’t drop on your foot.”⁶⁴

Yet tangibility is not firm enough to serve as the criterion for dividing industry from services. In the first place, the delivery of the intangible service invariably also involves the consumption of a tangible product of “industry,” as in the scissors used to cut hair or the bus used to transport its passengers. A musical performance cannot be touched, but it does touch the human eardrum by means of a tangible perturbation of the air. Telecommunications are also classified as a service: as with a musical performance, a telephone conversation is consumed at the moment of its delivery and cannot be stored for later use.⁶⁵ Yet this, too, involves a physical, tangible alteration of matter. Even transportation, also classified as a service, involves a change in the physical location of a product if not in its physical characteristics.

In contrast to the crude physicalist definition, what is critical from a Marxist perspective is not the nature of the specific labor but the social relations of its employment—whether it is employed in the production of commodities or as a personal service, and, if the former, whether the labor is performed in production or in circulation. To develop a valid, concrete and useful concept of the distinction between industry and services it is therefore necessary to consider the distinction between the production of commodities and their circulation.

The Production and Circulation of Commodities

The simplest form of market relation is barter. A barter trade, in which one commodity (for example, a pair of trousers) is exchanged directly for another (for example, a sack of flour), can be expressed by the expression C–C. Assuming equal exchange, C, representing the exchange-value of the commodity, is the same on both sides of the formula. The exchange-value of a commodity is determined not by the subjective desires of the buyers and sellers, as both orthodox and heterodox economic theory maintains,⁶⁶ but by how much effort it took to make it. If, for example, it takes twice as long to produce a pair of trousers as a sack of flour, then the equilibrium exchange-value of a pair of trousers would be two sacks of flour.

As market relations expand, one commodity becomes the money commodity (usually gold), against which all other commodities are measured. Here, again assuming equal exchange, the formula now becomes C–M–C. In this case, market participants sell something they don’t need in order to buy something they do. Money (M) now intermediates between trouser-sellers and flour-sellers, thanks to which they do not need to meet face-to-face.

Unlike simple commodity producers, who sell in order to buy, merchants buy in order to sell. Their aim is not to acquire something they need, but to acquire money. Their starting and end points begin not with C, but with M. They buy some commodities and then sell them for a higher price. The formula now becomes M–C–M′ where the apostrophe signifies that s/he ends up with more money then s/he started with; in other words M′>M. For this to be so, at least one of these transactions (M–C or C–M′) must be an unequal exchange, a violation of the law of value, in which the merchant takes advantage of surfeits or shortages which cause prices to move away from values.

John Maynard Keynes, who boasted of his ignorance of Marx’s economic theories, commented that:

real exchange relations … bear some resemblance to a pregnant observation by Karl Marx…. He pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C–M–C′, i.e. of exchanging commodity (or effort) for money in order to obtain another commodity (or effort). This may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M–C–M′, i.e. of parting with money for commodity (or effort) in order to obtain more money.”⁶⁷

However, in one crucial respect, this garbles Marx’s concept. M–C–M′, as we have seen, describes the behavior of the merchant, who buys and sells C, commodities, in order to increase M, his money, but not the behavior of the capitalist. Whereas small commodity producers sell in order to buy, and merchants buy in order to sell, capitalists buy in order to make. The merchant does not physically alter the commodity that has come into her/his possession (s/he does not in any way produce it). Mercantile capitalism is a primitive form, in which capitalists have yet to separate the producer from the means of production and take possession of the production process. This distinction between simple commodity production and capitalist production, which Keynes omits from his reference to Marx, requires a fundamental modification of the formula expressing the circuit of commodities, which now becomes M–C–C′–M′. Here the merchant has turned into a capitalist. M–C is now the purchase not of commodities for resale, but of “factors of production”: labor-power, means of production, and raw materials. C–C′ is the production process, in which living labor replaces C, its own value and that of materials, etc., used up in production, and generates a surplus value (the difference between C and C′). The time spent by living labor producing this surplus value Marx called surplus labor. This surplus labor is the source and substance not only of profit in all its forms, but of capital itself, which is nothing but accumulated surplus labor. Marx commented, “The production process [C–C′] appears simply as an unavoidable middle term, a necessary evil for the purpose of money-making.”⁶⁸

In this schema, value production takes place only in C–C′; the other two links, M–C and C′–M′, encompass the circulation of these values, the exchange of titles of ownership. Whether or not a task or link in a value chain is productive of value depends not on the specific nature of this particular task or link, but where in the circuit of capital it is situated. This forms the foundation for Marx’s theory of productive and non-productive labor.

Productive and Non-Productive Labor

As with our earlier discussion of different ways to measure the magnitude of outsourcing, what is of fundamental importance is not the physical properties of the commodities being produced but the social relations of their production. And more important than the largely spurious distinction between services and industry is another that is often confused with it—the one between productive and non-productive labor. As Anwar Shaikh and E. Ahmet Tonak have pointed out, “The very term ‘services’ conflates a vital distinction between production and nonproduction labor.”⁶⁹ This question is of great relevance to our investigation into labor productivity and the “GDP illusion,” and to the development of a theory of the imperialist form of the value relation. Its introduction at this point is necessary in order to liberate our concepts of industry and services from the vulgar physicalist approach that dominates mainstream conceptions and has contaminated Marxist approaches.⁷⁰

Marxist value theory maintains that economic activities that are not integral but contingent to the production process, for example banking and finance, police and security services, government bureaucracies and so forth, make no net addition to social wealth; they therefore produce no value and should instead be regarded as nonproduction activities, as forms of social consumption of values produced elsewhere. Nonproduction activities also include security, administration, advertising—activities that may be no less necessary than production activities but do not in themselves add to social wealth and should instead be regarded as forms of social consumption. Commerce, too, pertains to the circulation of commodities, and therefore consumes value but does not produce any. As Marx explains:

Since the merchant, being simply an agent of circulation, produces neither value nor surplus-value … the commercial workers whom he employs in these same functions cannot possibly create surplus-value for him directly…. Commercial capital’s relationship to surplus-value is different from that of industrial capital. The latter produces surplus-value by directly appropriating the unpaid labor of others. The former appropriates a portion of surplus-value by getting it transferred from industrial capital to itself.⁷¹

Marx’s rejection of a crude physicalist conception of value is perhaps nowhere clearer than in his attitude to transportation, where “the purpose of the labor is not at all to alter the form of the thing, but only its position.”⁷² Provided this transportation is socially necessary, the productive labor of the transport worker is materialized as the enhanced exchange value of the commodity that has been transported, yet the physical properties of the commodity show no trace of this. But this is not necessarily the case, as Shaikh and Tonak point out:

It is important to understand that not all transportation constitutes production activity…. Suppose our oranges are produced in California to be sold in New York, but are stored in New Jersey because of cheaper warehouse facilities…. The loop through New Jersey has no (positive) effect on the useful properties of the orange as an object of consumption [thus] this loop is internal to the distribution system. It [is] therefore … a nonproduction activity.⁷³

We therefore need to radically redefine what we mean by industry and services. For Marx, industry is the application of human labor to harness or alter natural forces and resources in order to satisfy human needs. From this perspective, agriculture, and much of what is counted as services, are all “industry.” Agriculture differs from manufacturing industry in that the productivity of agricultural labor is determined by the inherent fecundity of soil and climate as well as the efficient application of technology, and is similar to the case of extractive industries. These natural monopolies give rise to differential profits, and provide the point of departure for Marx’s theory of rent developed in Capital, vol. 3.⁷⁴ Though of necessity we have no choice but to work with the categories of bourgeois economic theory and the statistical data based on them, the theoretical concept of industry informing this study includes all that is encompassed by the standard International Labour Organization (ILO) classification of industry and agriculture, and also includes many production tasks conventionally counted as services.

Services in low-wage countries comprise a very different mix of ingredients than in imperialist countries. Financial services and other non-productive, rent-seeking activities that have come to dominate the “financialized” economies of the imperialist nations have a much smaller weight in the economies of the Global South (and are themselves increasingly dominated by Northern financial TNCs). With the exception of tourism, services as a whole make a proportionately smaller contribution to the exports and GDP of Southern nations than of the imperialist countries. But by far the biggest difference is that in the South the services sector encompasses—and is almost everywhere dominated by—the informal economy where people scratch out a subsistence by providing ultra-cheap services to the formal economy.

Finally, data on services trade are much less reliable than data on trade in minerals and agricultural and manufactured goods. In contrast to merchandise trade, most services trade does not pass through customs and is not subject to import tariffs. For this and other reasons, data on the outsourcing of services is vitiated by under-reporting and dubious accounting practices.⁷⁵

THE MAINSTREAM ECONOMISTS’ TAUTOLOGICAL equation of value with value added not only makes exploitation disappear, it also obliterates the classical distinction between productive and non-productive labor. If every price is by definition a value, then any activity that results in a sale is by definition productive. “To the practical economist … if it is sold, or could be sold, then it is defined as production. Thus—within orthodox accounts—commodity traders, private guards, and even private armies are all deemed to be producers of social output, because someone is paying for their services.”⁷⁶

A distinction between productive and non-productive labor exists in all modes of production and is not specific to commodity exchange in general, let alone to capitalism. What is specific to capitalism is that this distinction is veiled by universal commodification, and by the capitalists’ new criterion for productivity, profitability.

It may be asked, are not these non-productive activities providing “common goods” necessary for the reproduction of society? Shaikh and Tonak provide a cogent response: “To say that these labors indirectly result in the creation of this wealth is only another way of saying that they are necessary. Consumption also indirectly results in production, as production indirectly results in consumption. But this hardly obviates the need for distinguishing between the two.”⁷⁷ To see the veracity of this argument, consider an economy made up of laborers and security guards.⁷⁸ The laborers produce all of the goods that both they and the security guards need to live on; the security guards provide a “common good,” security. It is plain that the higher the ratio of security guards to laborers, all other things being equal, the lower the total product, and it is therefore logical to regard this economic activity as unproductive labor, a form of social consumption. Once this distinction is established for one category of economic activity, the door is opened for more additions to the list. Suppose, for instance, our imaginary community finds it necessary to allocate part of its social labor to weighing and recording the output of the production workers, and that the only available means of doing this is to carve the data into stone tablets, a slow process requiring many hours of labor. Their labor is non-productive in exactly the same way as it is of the security guards. These stones do not add to social wealth, they are merely representations of the wealth created by production labor. Were a technological advance to replace chisel and stone with pen and paper, much of this nonproduction labor could be released for production, thereby increasing total social wealth, or redeployed as security guards, resulting in no change to social wealth. Designation of security and administrative functions as nonproduction activities does not at all imply that they are unnecessary—in our simple model, both the security guards and the stone-carvers perform necessary functions.

In this simple model, as in reality, the social wealth that is consumed by the nonproduction laborers derives from the surplus labor of the production laborers, that is, the labor they perform in excess of what is required to replace their own consumption, what Marx calls necessary labor. Just as with the distinction between productive and non-productive labor, the division of the working day or week into surplus labor time and necessary labor time exists in all modes of production—for example, serfs working three days on the manor lord’s land and three days on their own. In its capitalist form, surplus labor results from extending the workday beyond the time needed to replace the value of the basket of goods for which they exchange their wage—what Karl Marx called necessary labor time. In the Marxist framework, the ratio of surplus labor to necessary labor, or “the rate of surplus value” is synonymous with the rate of exploitation.

It might be asked: If workers in finance, advertising, security, etc., produce no value, how can they be exploited? So long as workers are obliged to work for longer than the labor-time needed to produce their basket of consumption goods, they are exploited. This is independent of the specific way their labor is employed and of whether they are employed in production, circulation, or administration. For present purposes, we can assume that all these workers endure the (nationally prevailing) rate of exploitation in common with production labor.

Nonproduction sectors are sustained by part of the surplus value extracted in production; the values consumed by them subtract from what is available for realization as profit in all its forms. The rate of surplus value can be ramped up, for instance by holding down wages, and yet the rate of profit may still decline. The more that social labor is employed non-productively, in commerce, finance, security, legal services, etc.—exactly what has been happening on an accelerated scale in the imperialist economies during the neoliberal era—the greater the downward pressure on profits and the greater the imperative to compensate for this by intensifying the exploitation of productively employed workers. The growing weight of services in imperialist economies is therefore as much the cause of the outsourcing pressure as it is the consequence of it.

Services and the Productivity Paradox

This brief survey of the role of services in the outsourcing of production concludes by summarizing the paradoxical effects of services outsourcing on measures of labor productivity in industry. First, we must note that many service tasks are inherently labor-intensive and cannot easily be mechanized, resulting in what appears to be stagnant or even falling levels of labor productivity in the service sector. Thus Katharine Abraham, a leading authority in the field of national accounts, reports that, in the United States,

labor productivity in the services industries … actually declined over the two decades from 1977 through 1997…. Among the individual service industries showing declines in labor productivity were educational services and health services, as well as auto repair, legal services and personal services. Construction was another problem industry, with the implied labor productivity falling by 1 percent per year over the entire 20-year period.⁷⁹

In contrast, “the rate of productivity growth in U.S. manufacturing increased in the mid-1990s, greatly outpacing that in the services sector and accounting for most of the overall productivity growth in the U.S. economy,”⁸⁰ releasing labor for redeployment to service jobs or to the reservoir of unemployed, resulting in a relative decline in manufacturing’s contribution to GDP and in an even faster decline in manufacturing employment as a share of total employment.⁸¹ This points to the first of a series of paradoxes that we must note for further study: the more rapidly that labor productivity advances in industry, the more important industry becomes in sustaining the rest of the economy and society. But at the same time, this means the more rapidly industry’s share of GDP and of total employment diminishes, an effect that gives rise to all kinds of nonsense about “post-industrial society.”

But the paradoxes arising from the tendency of productivity in industry to advance faster than in services do not stop here. Intensification of the labor process through brutal speed-ups and the introduction of labor-saving technology have undoubtedly made their contribution to productivity advances in industry, but some of the apparent increase in labor productivity in manufacturing is due to firms in this sector externalizing service tasks. When an industrial firm contracts out labor-intensive services such as cleaning, catering, etc., the productivity of its remaining employees increases, according to the conventional and most widely used measure of productivity. This occurs even if nothing about their work may have changed, and is the simple result of the firm’s unchanged output now being divided by a smaller workforce. The trend in this direction accounts for a part of industry’s rise in productivity and exaggerates the decline of industry’s reported share of the total workforce. If an industrial firm contracts out service provision to a firm that employs cheap labor in another country the apparent gains in productivity in the industrial firm’s productivity are even larger, since labor has not only been outsourced, its price has been slashed, reducing the cost of this input and therefore boosting the numerator in the formula for productivity (the firm’s value added) while reducing the denominator, the size of the directly employed workforce. As Susan Houseman found, “Services offshoring, which is likely to be significantly underestimated and associated with significant labor cost savings, accounts for a surprisingly large share of recent manufacturing multifactor productivity growth.”⁸² Thus, she argues, “to the extent that offshoring is an important source of measured productivity growth in the economy, productivity statistics will, in part, be capturing cost savings or gains to trade but not improvements in the output of American labor.”⁸³ Houseman believes this solves “one of the great puzzles of the American economy in recent years … the fact that large productivity gains have not broadly benefited workers in the form of higher wages … productivity improvements that result from offshoring may largely measure cost savings, not improvements to output per hour worked by American labor.”⁸⁴ The important point here is that Houseman’s argument applies just as much to the outsourcing of low value-added production tasks as it does to the outsourcing of services.

Three years before Houseman published her paper, Morgan Stanley economist Stephen Roach made the same point: “In the case of the United States … offshore outsourcing of jobs [is] the functional equivalent of ‘imported productivity,’ as the global labor arbitrage substitutes foreign labor content for domestic labor input. In my view, that could well go a long way in explaining the latest chapter of America’s fabled productivity saga.”⁸⁵ Where Houseman and Roach are wrong is in thinking that this solves the “productivity paradox,” which they narrowly define as the divergence between wages and productivity in U.S. industry, thereby calling into question something that is an article of faith for these bourgeois economists, namely the direct relation between wages and productivity. On the contrary, the paradoxical effects of outsourcing on measures of productivity are merely superficial and relatively trivial consequences of the profoundly contradictory nature of labor productivity in capitalist society, which can be defined either as the physical quantity of useful goods (use-value, in Marxist parlance) created by workers in a given time or as the quantity of money they generate for their employer. In different ways, each chapter of this book tries to cast empirical and theoretical light on this most important of questions, and it will be given special attention in chapter 6.

TO SUMMARIZE THE FINDINGS OF THIS CHAPTER, export-oriented industrialization is extremely widespread throughout the Global South. It is just as true that this industrialization is extremely uneven, and is highly concentrated in some countries and some regions within those countries. The Global South has made significant progress in implementing the export-oriented industrialization strategy urged on them by imperialist governments, international financial institutions (IFIs), and mainstream academics. The large majority of the roughly five billion inhabitants of the Global South now live in countries where manufacturing exports—mainly to the imperialist economies—form more than a half of their total exports.

Outsourcing has been a conscious strategy of capitalists, a powerful weapon against union organization, repressing wages and intensifying exploitation of workers at home, and has led above all to a huge expansion in the employment of workers in low-wage countries. The wage gradient between imperialist and developing nations also generates migration of low-wage workers in the opposite direction. Outsourcing and migration should therefore be seen as aspects of the same process, driven by the efforts of capitalists to profit from divisions among workers and from the huge wage differentials these divisions give rise to.

It is widely insinuated that if large parts of the Global South remain mired in extreme poverty it is because of the failure of many Southern economies to successfully integrate into world markets, “integration” meaning that if they have no natural resources, they must export more manufactured goods. Evidence presented in this chapter, and in chapters to come, indicates that, with few exceptions, those poor nations that have found success in reconfiguring their economies in line with neoliberal prescriptions have succeeded only in joining a race to the bottom.