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BW Businessworld

Flight Of Capitalism

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With the inevitability of the seasons, offshore outsourcing has reemerged as a burning issue in the US elections. But there is one difference — even the Republican candidate is shying away from defending capitalism. In the 1992 elections, candidate Ross Perot criticised George H.W. Bush, for abetting the "giant sucking sound" of jobs leaving for foreign shores. Twelve years later, Democratic Sen. John Kerry accused George W. Bush of encouraging outsourcers, calling them a new class of Benedict Arnolds (a traitor during the American War of Independence). The issue is again making headlines, but with a significant difference. The presumptive Republican nominee, Mitt Romney, has also joined in bashing free trade.

Accused of "pioneering outsourcing", Romney denies having anything to do with Bain Capital's offshore venture. He returns the charge and calls Barack Obama the "outsourcer-in-chief". Romney's disavowal is all the more remarkable as his economic adviser is the same N. Gregory Mankiw who defended Bush against Kerry's charges in 2004. Harvard economist Mankiw at the time said that outsourcing was "the basic principles of free trade" and a "good thing".

Mankiw later quoted Adam Smith: "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage." This has not only been the governing principle of capitalism but, polished by David Ricardo, turned into a winning proposition.

Falling trade barriers, revolutionary developments of manufacturing technologies, communication and transportation and rising skills in the developing world have transformed the world economy. Close to 60 per cent of the total world trade in goods involves intermediate goods, suggesting a great expansion of the supply chain. From the T-shirt to airplanes, every single product today is the result of a complex supply chain spanning the globe — creating jobs, wealth and lowering costs — providing fresh proof, if any were needed, of the success of free trade.

Why, then, is Romney, as a Democratic senator mocked "running away from his company, Bain Capital, like a scalded cat"? Because offshoring also hurts workers. According to a Washington Post report, Bain Capital invested in a series of firms that specialised in relocating jobs done by American workers to new facilities in low-wage countries such as China and India. Obama's campaign commercials have zeroed in on this aspect.

But instead of defending the practice as a completely normal move by a company seeking greater efficiency and profit, as Mankiw did in earlier times, Romney now wants to run away from it. The Republicans launched a website charging that Obama "sent taxpayer dollars" to foreign countries, with the 2009 stimulus package used to build windmills in Denmark, solar panels in Mexico, and batteries in South Korea.

Some Republicans cringe at this betrayal of their core beliefs, but go along with the attack on free trade as politically expedient. Ironically, Romney has brought this scrutiny upon himself by claiming his experience as a "job creator" equips him to lead the US economy.

Romney's flirtation with populism underlines the dilemma that supporters of free enterprise systems face, especially since 2007. The American middle class' antipathy towards free trade has grown exponentially with the Great Recession. Consumers have benefited from low-priced imported goods, but those gains are overshadowed by rising joblessness, which is a result of scant investment, automation and offshoring. But it's always easier to blame outsourcing and foreigners.

In 2004, Mankiw was condemned by some Republicans when he said "we shouldn't sort of retreat from the basic principles of free trade". Amidst rising voter anger over stubborn unemployment, which Romney has been trying to turn against Obama, it would be suicidal to make such a defence. Instead, Romney has sought to avoid responsibility for his firm's entirely sound business decision by distancing himself: "I was not in charge when Bain did such things," he claims.

In 2006, then Professor Mankiw co-authored a paper which concluded that "outsourcing will create winners and losers" but "offshore outsourcing is likely to be beneficial for the US as a whole". Don't hold your breath for Romney or his adviser to give voice to those thoughts in public anytime soon.

The author is director of publications at the Yale Center for the Study of Globalisation, and Editor of YaleGlobal Online

Online boundtogether(dot)bw(at)gmail(dot)com

(This story was published in Businessworld Issue Dated 30-07-2012)