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The dark side of globalisation - Economist

The dark side of globalisation Economist, UK - May 29, 2008 In a Pew Global Opinion survey last year, Slovaks were more enthusiastic than Americans, Swedes or Britons about multinational companies, with 72% agreeing ...

The dark side of globalisation - Economist
Across the region, governments have failed to keep people over 55 in the workforce, an urgent problem because ex-communist populations are greying fast. All they knew was that they were made redundant five times before, in the tough years that followed the collapse of state socialism, so they felt resignation rather than shock. An interview with David Rennie, the author of this special report. At his new factory in Samorin, Mr Osvolda has started recruiting toolmakers and other specialist workers from eastern Slovakia. Bulgaria has no laws covering temporary work. 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. But many central and eastern European workers remember the days when they were not free to move. But rising labour costs are only part of a more complicated story. But will Slovaks remain so upbeat if the jobs stop coming in?Vladimir Osvolda, the former boss of Samsonite’s Samorin factory, thinks his fellow Slovaks have no choice. But, as a European Commission official explains off the record, such shifts were fully expected: offshoring "was the whole idea of enlargement". By the end, the factory was having to fly in materials to fill urgent orders at great expense."Samsonite was in Belgium 30 years before they decided the perfect solution was to invest in Slovakia," notes Mr Osvolda. Companies with strong trade unions—mostly former state concerns—have already seen strikes over pay. East Europeans never had that comfortable life, he says, and never will.Mr Osvolda lost his own job when Samsonite left; he now runs a factory for an Italian firm. Employment rates in Slovakia, Hungary and Poland hover at or below 60% of the working-age population, compared with Denmark’s 77%. 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. Every day, newspapers report plans to ship in Vietnamese textile-workers, Ukrainian road-builders or Moldovan waiters to fill vacancies. Everything is becoming more mobile, making life more complicated. Foreign investors duly arrived, notably Samsonite, an American luggage-maker, which set up a factory there in 1997. Günter Verheugen is EU Commissioner for Enterprise and Industry. He recalls that Samorin felt like a mirror of a Samsonite factory in the Belgian town of Turnhout. He suspects that not all his staff understood that they lost their jobs to globalisation. 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.Citizens of the worldSlovakia is currently a European cheerleader for open markets and free trade. In most of the new member countries, unemployment rates are lower than at any time since early 2000. In one example, a German lighting company shed 400 jobs in Slovenia and sent the manufacturing end jobs back to Germany. In overheating Latvia, pay in the fourth quarter of 2007 was 30% up on a year earlier (see chart 1). In Samorin, unskilled workers might earn 12,000-15,000 crowns (€380-480) a month. In some countries workers who have taken early retirement will lose their pensions if they went back to work. In the longer term, if new EU members "cannot compete on costs, they have to compete on quality and innovation", says Mr Verheugen.The cliché that eastern Europe is crammed with highly educated boffins and poetry-spouting intellectuals has long been disproved. In the OECD’s latest PISA survey of educational standards in science, reading and mathematics, only young Estonians and Slovenians performed above the OECD average in all three. Labour costs have risen faster in other new EU members too. Labour costs were higher than in Asia, but location trumped cost advantage. Large numbers of young people now go to university. Millions of Roma are widely seen as "unemployable". Now costs are rising but productivity is growing painfully slowly, from a low base. Romanian workers recently downed tools at a Renault subsidiary that makes the Logan, a low-cost car (see article).Nils Muiznieks of the University of Latvia says his country is too small to dream about keeping out foreign threats. Samorin is a witness to the way that globalisation is fragmenting as supply chains break into ever smaller parts, sending jobs in all directions. Samsonite closed its plant in 2006, shedding all 350 staff and shifting production to China.Like its neighbours, Slovakia has seen wages rising fast as new jobs arrived and many of its own people headed west. See also the Slovak Governance Institute. Slovakia is still cheaper than the Czech Republic. Some blame the newcomers for a rash of burglaries.Miroslav Beblavy, director of the Slovak Governance Institute, a think-tank, argues that the newcomers’ governments should start by improving their policies at home. The big test will come if (or when) growth rates in the ex-communist block slow to match those in old Europe and pay falls in real terms. The company’s Samorin business model lasted just nine years. 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. The factory’s role was to manage peak demand for the highest-priced products. The new members will thrive as long they do not become lazy, she says.To date, the newcomers’ governments have remained fairly liberal on matters such as flexible labour markets and tax policies (their support for free trade is spottier). The newcomers face the same problem as Spain and Portugal did on entry: relying too heavily on foreign investors to bring technologies and jobs, rather than creating indigenous centres of research and development. The newcomers’ success was based on three things, says Mr Verheugen: cheap labour, skilled and motivated workers, and an existing industrial base. The OECD reports findings from its latest PISA survey. 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.So far, so familiar. The town was full of cheap, experienced workers in need of jobs, with unemployment at 20%. 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. There may well be some immigration, but it will not be the cure-all some seem to expect.In sleepy Samorin, the "migrant workers" are from the poorer east of Slovakia, a few hours’ drive away, but the locals see even eastern Slovaks as a race apart. They are a tough, flexible bunch and do not think the world will stop for them. They get drunk and sometimes fight, says Irvin Sarmany, a municipal official. Too many are studying fashionable things like social sciences rather than engineering or computing.Small, mundane changes will help. Western Europeans over 40 remember a working life that was "very comfortable", he says: the iron curtain shielded them from competition in central and eastern Europe, China did not yet present a threat and strong trade unions guarded their interests. What killed his plant was the effect of higher labour costs on suppliers, who one by one moved to Asia. Workers, trade unions and politicians in old Europe mourned each factory moving east. Young Bulgarians and Romanians were way below average (see chart 2).Body-shoppingAlarmingly, the idea has taken hold across central and eastern Europe that the most pressing crisis is a shortage of people.