SCHUMPETERIAN CREATIVE DESTRUCTION
The number of scholarly corona-related articles, blogs, commentaries, essays, perspectives, podcasts, tweets, and vlogs has grown and is still growing exponentially, all within a matter of months rather than years. This is not different in the related disciplines of International Business and International Economics. Regarding the short-run consequences, there is broad consensus that the worldwide lockdown responses in one country after another will produce economic havoc. The longer the virus cannot be adequately cornered by an effective vaccine or treatment, the deeper and more prolonged this economic downfall will be. This is straightforward macroeconomics. However, as far as the long-run diagnosis is concerned, the choir of scholarly voices does not sing the same melody. At one extreme, we find those arguing that COVID-19 is a one-off disaster, after which the global economy will bounce back to its ‘old normal’ pre-corona state – known as V-shaped recovery (or, W with two pandemic waves). At the other extreme, the argument is that the world is experiencing a radical disruption that will produce a ‘new normal’, with scholars speculating about a whole series of different ‘new normal’ future states of the world.
In this commentary, largely inspired by Brakman, Garretsen, and van Witteloostuijn (Reference Brakman, Garretsen and van Witteloostuijn2020, Reference Brakman, Garretsen and van Witteloostuijn2021; both can be consulted for much more detail and many more references), I argue that the world is facing a paradox. On the one hand, with many, I expect that capital will de-globalize even further, with a prominent return of borders and buffers. This is the intuitive part of the paradox. In this commentary, I will not extensively focus on that, as many have done so elsewhere (see, e.g., the COVID-19 special issue of the Journal of International Business Policy). On the other hand, my expectation is that labor will be hit hard by an opposite – and deep – disruption in the form of accelerating globalization. This is, to me, the interesting part – the part that is much more challenging; the part that has the potential to unleash a powerful process of Schumpeterian creative destruction.
DE-GLOBALIZING CAPITAL
Global value chains suddenly came to a standstill when China closed cities and factories in order to combat the new mutant of the corona virus. As a result, internationally operating businesses and governments started to realize that extremely efficient (lean) global value chains designed on the basis of the just-in-time principle came with a huge cost: lack of resilience after a shock. Hence, international businesses are expected to return to the white board to design value chains that follow a just-in-case principle with the aim to increase their shock resilience. To the extent that value chains are seen as vital for society by governments, such as those related to health, national policy measures may be launched to force such a value chain re-design upon businesses, realizing that the current pandemic is very unlikely to be the last one in a global world full of connections (not only among humans, but also with animals). In practice, this implies a return of borders and buffers, with businesses diversifying and regionalizing their value chains. In classic economics terminology, this means that capital will start to de-globalize, amplifying a trend already fueled by the rise of modern mercantilism (e.g., Trump's ‘America first’ and Johnson's ‘take back control’). This is the intuitive leg of the paradox.
GLOBALIZING LABOR
The logical follow-up expectation from the intuitive observation that capital will de-globalize would be that labor will de-globalize, too. However, I believe the opposite is likely to happen. The COVID-19 pandemic strongly incentivizes labor-saving technological change, as capital cannot be infected by the virus, which amplifies the ongoing labor-saving trend associated with the digital or industrial 4.0 revolution. Worldwide, automation and robotization are on the rise. This will now receive a further impetus because businesses relying on ‘cheap’ international labor, and now considering to re-shore, are incentivized to switch to more capital-intensive production to continue saving on labor cost. All this is bad news for labor, nationally and internationally, generating a downward pressure on labor demand. This will not only introduce further downward pressures on wages, but will also lead to the unraveling of protective labor market arrangements, varying from labor safety and pension schemes to sick leave compensation and health insurance.
Of course, the substitution of capital for labor is a process that is already ongoing for centuries. What is likely to happen in the aftermath of the re-shoring boost driven by the current pandemic is not only that automation of re-shored jobs and tasks will speed up this process, but also that the nature of the process will adopt an industry revolution 4.0 character. Automation and robotization in the context of the digital or industrial 4.0 revolution, unlike the technological change that occurred with the rise of the personal computer in the 1990s and 2000s, is not primarily labor-augmenting (and hence in favor of high-skilled workers), but mainly labor-saving (and hence damaging all types of workers). Firms that rely on ‘cheap’ international labor that consider re-shoring are incentivized to switch to more capital-intensive production to continue saving on labor costs.
Even more disruptive is the current quick switch to the working-from-home modus operandi in many countries. Dingel and Neiman (Reference Dingel and Neiman2020) argue that about 40 percent of all US jobs can be done from home, which comes close to the actual number of US workers forced to work from home in the spring of 2020. This is not different in many other OECD countries. Many expect that this working-from-home increase will largely persist after the COVID-19 pandemic wears off, structurally increasing the share of working-from-home labor. A critical implication is that many jobs or tasks that used to be glued to a fixed working location will be disassociated from this physical ‘fixity’. Due to technological advances that relate to the process of work, with ‘Zoomification’ being one of these advances, many tasks can be done and coordinated without the (co)workers involved actually being in the same physical place or, crucially, in the same country.
Again, the COVID-19 crisis speeds up processes that were under way already. Basically, digital technology provides the platform (oftentimes literally so) for (a) disconnecting labor from capital, and (b) globalizing a large part of the labor market for services. This relates to the emergence of what is known as the ‘gig economy’, but now on a global scale, where flexible and tenured employees are turned into self-employed entrepreneurs offering their services to businesses that switch to outsourcing much work that traditionally was performed by employees. Experiencing the low cost and high benefit of working from home during the corona-related lockdown, globalized capital (albeit currently engaged in a move toward partial de-globalization) will be joined by globalized labor, implying that both will have to invent new ways of connecting what is becoming disconnected, which involves new ways of organizing, new ways of contracting, and new ways of networking.
For labor, the ‘boundaryless career’ will become the standard across many segments in the labor market, with international borders losing their importance (Friedman, Reference Friedman2020). Moreover, the old protective status of ‘employee’ will be replaced by the new one of the vulnerable ‘entrepreneur’. This does not only imply that national labor market and social security policies of governments have to be adapted accordingly, but also that businesses will have to reorient their modus operandi. National governments must think through the labor market and social benefit arrangements that will fit with this new reality, launching deep reforms. And businesses must re-design their constellation of in-house and out-house jobs and tasks to benefit from the new globalization of labor, specifically as far as services are concerned that can be performed without the need to master local languages.
One caveat should be made, though. An important shift in the labor market is an increasing importance of ‘thoughts’ vis-à-vis ‘things', which benefits white collar work. And as far as this thought-based work is concerned, some tasks demand effective team work, not only by closely aligning complementary tasks, but also in the form of dialogue and interaction. Extant work suggests that much efficient and effective team work requires physical interaction, as communicating digitally alone frustrates important ingredients such as information flow, team-building, and trust development. Indeed, from IB research, we know that teams tend to have a hard time working across international boundaries. Hence, future work is needed to closely examine how the development of more advanced digital communication and interaction tools may reduce these traditional downsides of physical separation, as well as what tasks that traditionally used to be based on physical interaction can be transformed into modular activities without physical fixity.
HETEROGENITY
The impact of this labor globalization trend is likely to be anything but symmetric and universal. Not only will some jobs and tasks be more affected than others, but also will the effect vary across countries. Cross-country variation will be driven by differences in terms of the composition of national labor markets. Countries hosting employment in services that are specifically hit hard by the current move toward working from home can expect to be impacted more strongly. On the one hand, given the high share of working-from-home activities in developed countries, these can expect a major shift in both the nature and size of the demand for labor. Given the push toward further automatization and labor-saving innovation, the re-shoring trend is not expected to boost demand for labor in the rich part of the world. Rather, due to the globalization of many segments in the services-related labor market, international competition may well have a two-fold negative effect.
First, the size of demand is likely to decline, leading to downward pressure on wages and secondary labor conditions (such as pension schemes and health insurance), similar to what happened to the low-wage segments of the labor market during the first globalization wave that started in the 1980s. In the rich part of the world, the lower class will expand, with the middle class being squeezed in the face of race-to-the-bottom global competition. Second, many employees will have to turn into entrepreneurs, which does not only come with the requirement to adapt in terms of attitude and behavior, but also with the increased importance of life-long learning in order to engage in quasi-permanent skill upgrading to keep up what is asked for by businesses. But this ‘entrepreneurial freedom’ will come with further austerity in protective labor market and social security arrangements.
Among developed countries, the Anglo-Saxon world is particularly vulnerable, and hence particularly likely to suffer from the labor market disruption that awaits around the corner of a post-corona crisis future. The reason for this is that the advantage of their native tongue English being the world's lingua franca, from which they benefitted for so many decades, will turn into a disadvantage. After all, many outside the Anglo-Saxon countries master English sufficiently well to emerge in the post-corona crisis world as cut-throat competitors of their Anglo-Saxon colleagues to perform the then de-localized modular jobs and tasks in many parts of the world of services. In the Netherlands or Sweden, language-sensitive services will not be challenged by the American or British labor force, given the tiny percentage fluent in Dutch or Swedish. But this is very different the other way around.
On the other hand, the globalization of labor is likely to boost demand for jobs and tasks that can be done from less developed countries or more remote regions. Partly, within the club of rich countries, workers outside the main economic agglomerations where most business activity is located may see their job potential and prospects improve, as they can offer their services from anywhere to wherever. However, I would argue that the main shift will be the one from developed to less-developed countries. As happened during the period of globalization when capital from rich parts of the world moved to labor in poor parts of the globe, we now enter into a disruptive era of labor from the poor countries connecting to capital in the rich part of the world without any physical movement. If labor in these less-developed parts of the world is able to adapt to the skill-driven gig economy with a large market for modular jobs and tasks, this opens great opportunities to boost their further development.
