The Globalization Time Bomb

Article excerpt

The globalizing economy, though wondrously dynamic and wealth-creating, is heading toward some sort of calamitous reckoning, if things don't change.

The core dilemma confronting the global system is that of companies creating surpluses. Surplus labor is an obvious by-product of corporate efficiency-too many workers around the world bidding for too few jobs, suffering depressed wages or joblessness as a result. But the more ominous threat is the growing surplus of productive capacity in the industrial system.

Across major sectors, from cars to chemicals to aircraft, manufacturing capacity is expanding faster than the global base of available consumers-too many factories chasing scarce buyers. This supply/demand imbalance drives down prices, for sure, and eventually profits. It also closes hundreds of viable factories and destroys invested capital. Taken to its logical conclusion, overcapacity invites a devastating deflation or even a breakdown of the global business system itself.

For my book One World, Ready or Not, I interviewed managers from a dozen nations on three continents. Many of these executives, who actually manage global production, live with a cloud of gross overcapacity hanging over their markets.

My case gained plausibility when the Asian economies swooned over the summer-a financial crisis driven by the buildup of excess supply (too many office towers, too many factories). While some blame the overcapacity on misguided managers, I attribute a far deeper malaise to the internal dynamics of the global system.

The perverse paradox is this: As individual companies take measures to defend or enhance their market positions, managers become stuck on an efficiency treadmill that never stops and, indeed, accelerates. They take smart and sometimes harsh measures to compete, then find they must do more of the same. Companies move production from expensive labor markets to cheaper emerging ones. This reduces production costs, but it chips away at real wages and creates unemployment back home. Workers in the emerging markets, to be sure, enjoy rising incomes-though rarely to the degree that the company benefits. But the global system's potential base of mass consumption erodes in the exchange.

The United States' supposedly booming economy is the central example: While celebrating lower unemployment and declining inflation, after five years of expansion the US median family income still has not returned to its 1989 level. So Americans keep buying by borrowing. Household debt has reached an astonishing 91% of disposable personal income, compared with 53% in 1970. When American consumers tap out, who will replace them?

Europe approaches globalization from a different perspective. It protected key industries for many years, but unification has exposed gross redundancies in labor and plant capacity. Japanese industries purposefully created gross overcapacity for export; now Japan, too, faces deep crisis. In short, who will be the locomotive if the United States falters?

Enthusiasts imagine that affluent consumers in emerging markets will fill the gap. But their wages are hostage to the same global jobs auction. Capital can move quickly to the next labor pool where workers are even cheaper. Thus, Malaysia and Thailand bump up against Vietnam and China. Governments suppress labor rights to keep factories running. Companies demand wage protection in exchange for investment.

In 1913 Henry Ford took the radical step of paying auto workers $5 a day. An industrial system cannot endure, Ford explained, if workers cannot buy the things they make. His warning was confirmed by the depression of the 1930s. Social values aside, rising economic inequality undermines a healthy economy by debilitating the basis for mass consumption.

The imbalance has also deepened on the production side. Technological reforms reduce labor input and other costs. Such innovation also typically creates new output capacity faster than companies can destroy obsolete capacity. …