As the U.S. moves into the height of its presidential campaign season, the economy has taken center stage. Stones have been thrown at the North America Free Trade Agreement (NAFTA) because detractors claim it has cost good American jobs. The U.S. is not the only country lamenting the loss of jobs. Even nations once considered to be low-cost countries and, therefore, attractive for foreign investors, have found that it is hard to remain “low cost” enough [“The dark side of globalisation,” The Economist, 31 May 2008, print edition]. For example, The Economist looks at what has happened in Slovakia over the past decade.
“A decade ago, Samorin—a small town in western Slovakia, on the banks of the river Danube—was one of many good places in which to watch the effect of globalisation on central Europe. The town was full of cheap, experienced workers in need of jobs, with unemployment at 20%. Foreign investors duly arrived, notably Samsonite, an American luggage-maker, which set up a factory there in 1997. The town’s location helped, near a four-way border where Slovakia, Hungary, Austria and the Czech Republic meet in a cat’s cradle of big roads and railway lines. There are scores of similar towns across the region that attracted jobs from higher-cost, more highly regulated labour markets farther west.”
It’s hard to find better conditions for an economic boom — skilled workers, good infrastructure, and low costs. Of course, workers in countries that lost jobs weren’t happy.
“Workers, trade unions and politicians in old Europe mourned each factory moving east. But, as a European Commission official explains off the record, such shifts were fully expected: offshoring ‘was the whole idea of enlargement’. The process, though wrenching to some, made the European Union as a whole more competitive and spread the benefits of global trade to every corner of Europe.”
Unfortunately for Slovakia, that is not where the story ends.
“So far, so familiar. But things have moved on in Samorin. Even though new investment and jobs are still arriving in Slovakia, and proximity still counts, this river town has already lost a factory to offshoring. Samsonite closed its plant in 2006, shedding all 350 staff and shifting production to China.”
So what’s happening? There are obviously lessons to be learned.
“Like its neighbours, Slovakia has seen wages rising fast as new jobs arrived and many of its own people headed west. In most of the new member countries, unemployment rates are lower than at any time since early 2000. But rising labour costs are only part of a more complicated story. Slovakia is still cheaper than the Czech Republic. In Samorin, unskilled workers might earn 12,000-15,000 crowns (€380-480) a month. Labour costs have risen faster in other new EU members too. In overheating Latvia, pay in the fourth quarter of 2007 was 30% up on a year earlier. Samorin is a witness to the way that globalisation is fragmenting as supply chains break into ever smaller parts, sending jobs in all directions. The European Restructuring Monitor (ERM), an EU outfit that tracks globalisation, has analysed about two dozen cases of offshoring from new members of the EU, often involving complex moves. In one example, a German lighting company shed 400 jobs in Slovenia and sent the manufacturing end jobs back to Germany. In another, a Hong Kong-owned textile-maker shut up shop in Latvia, citing a ‘lack of workforce’ in the region, and shifted production to Macedonia and Vietnam.”
Countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. As my colleague Tom Barnett puts it, “Globalization integrates trade by disintegrating production chains and dispersing them across economies.” Slovakia apparently understands this phenomenon and accepts it.
“Slovakia is currently a European cheerleader for open markets and free trade. In a Pew Global Opinion survey last year, Slovaks were more enthusiastic than Americans, Swedes or Britons about multinational companies, with 72% agreeing that big foreign companies were good for their country, a European record (55% of French respondents thought foreign firms were bad for them, setting a record in the opposite direction).”
The fact is that the vast majority of global trade involves multinational corporations. If you want to get in front of that money you had better embrace them. Why? Not only are multinationals involved in the bulk of global trade, but half of that trade is intra-network trade — meaning trade within industry sectors or within the multinational companies themselves. That is really what cost Samorin its Samonsite factory.
“Labour costs were higher than in Asia, but location trumped cost advantage. The factory’s role was to manage peak demand for the highest-priced products. What killed [the] plant was the effect of higher labour costs on suppliers, who one by one moved to Asia. By the end, the factory was having to fly in materials to fill urgent orders at great expense.”
Understanding the supply chain is critical for understanding what types of job will last. China is likely to suffer a similar fate to Slovakia if parts manufacturing ever shifts to Africa. The Economist notes that demographics is also playing a role in Slovakia (as it is in the rest of Europe).
“Alarmingly, the idea has taken hold across central and eastern Europe that the most pressing crisis is a shortage of people. Every day, newspapers report plans to ship in Vietnamese textile-workers, Ukrainian road-builders or Moldovan waiters to fill vacancies. There may well be some immigration, but it will not be the cure-all some seem to expect. … Small, mundane changes would help. In some countries workers who have taken early retirement would lose their pensions if they went back to work. Bulgaria has no laws covering temporary work. [One] factory in Samorin, … has started recruiting toolmakers and other specialist workers from eastern Slovakia. But he notes that once he has persuaded skilled workers to uproot themselves and move 300-400km westward, some of them will keep going to Britain or Ireland to earn two or three times more. Everything is becoming more mobile, making life more complicated. But many central and eastern European workers remember the days when they were not free to move. They are a tough, flexible bunch and do not think the world will stop for them. The EU is lucky to have them.”
Eastern European workers may be tough, but it will be their flexibility that helps them create jobs that will last. They’ve already learned a difficult lesson about global supply chains. The fact that they are more receptive to multinational corporations should help them find a nice fit for the future.