History has turned a full circle and George Bush faces a similar situation. If his father defeated Saddam, he has now completed the story by nabbing him. And now, his political underbelly too is the economy, which is laced with uncertainty. Unsurprisingly, the Fortune observed that the Democrats still believe that there is political gold to be mined in the jobs issue and in those unnerving deficits. Yet voters do not care and understand so much about fiscal sobriety, as they do about unemployment.
Akhilesh R. Bhargava
At first blush, the American economy seems to be on a roll. It has emerged from a four-year downturn relatively unscathed and is back on a growth path. Unrelenting consumer spending has provided forceful traction to the economy, which posted a stunning quarterly growth of 8.4% in the last quarter and is expected to average an impressive 5% in the current year. Corporate profits are on an uptick and so are mergers and acquisitions. Interest rates are at a forty-year low and inflation remains tamed and subdued. Its technological hegemony remains unchallenged and tech-spend a key indicator of corporate well-being is on an upswing. Ringed by tightened corporate laws and monitored by the likes of Elliot Spitzer, the attorney general of New York, famous for hounding truant capital market functionaries the notorious corporate collapses are thought to be bygone. The stock markets too are looking up, as the humongous market capitalisation evaporation recedes into history. Sounds indeed good.
Growth in USA is being funded by a parlous combination of debt and deficit. Fiscal deficit is at an all time high of $ 500 billion with no rollback in sight. A total dependence on foreign funds to finance the government debt has metastasised it into the largest debtor of the world with foreign debt in excess of $ 2 trillion. Lingering security threats have significantly increased its unproductive national spend on defence and internal security and fiscal costs threaten to erode the competitiveness of US corporates. Its ballooning unfunded social security and healthcare costs are a constant drain on its national resources, even more accentuated by the fact that its household savings are a chronic negative. It exposes the truth that its household spend which has propped up its shaky economy in the recent past is not funded by thrift and savings but by acute borrowings. The dollar, its national pride, is on the decline against major currencies and FDI inflows have shrunk by a worrisome 60%. And despite the strong growth rates the American economy created only a 1000 new jobs in December 2003, as against the forecast of 1,50,000. What politically scares the present resident of White House is not just the fact that its recent economic recovery has been jobless but that it continues to face the threat of a flight of white-collar jobs to India after a widespread loss of blue-collar jobs to China, in the nineties. No wonder, Peter Drucker, the American management expert says that the era of America’sdomination of the world economy is over and that India is the knowledge powerhouse. Jeffrey Sacks attests him by predicting that India’seconomy shall overtake that of USA in due course.
There has indeed been an economic revival in USA but it has been a painful jobless recovery. Employment generation has been paltry as compared with its huge gains in GDP growth attributed to the rising levels of productivity due to technological advancement. For example, a new chip manufacturing plant (a Fab unit), which involves a capital expenditure of billions of dollars, operates virtually without a single worker. Job growth has indeed been positive during the past few months but it is not even a fraction of the over 3 million jobs lost in America, since 2001. However, much its economy seems to be on a roll, the fact is that it has been powered by steroids of deficit, debts, tax cuts and unproductive government spending. Its economy is still characterised by too much debt, too little savings and an unsustainable current account deficit. The common man is not aware of this steroid diet being fed to the American economy but its mandarins at the Department of Treasury (Ministry of Finance) Washington DC are. So is the President, who knows that his fight back is fuelled by borrowed money and perhaps borrowed time too. Not only can the scourges of a seemingly unlimited debt upset the present mirage of alls well but can cause yet another economic bubble to burst there.
The American economy has been kept going by continuous bouts of consumer as well as government borrowings, pushing its total fiscal deficit to 5% of GDP. Not only is such indebtedness not sustainable but such a debt overhang also leaves its economy vulnerable to the next downturn. The bursting of one bubble i.e. the share market and the effects of lower share prices has been offset by a huge monetary and fiscal stimulus and a slide in the dollar’svalue. The next bubble incubating there is a lethal combo pack of household debt and the prop to the economy by household spend. This can yet be combated for the time being with another round of borrowing. So while Bush ignores the gaping debt trap for the moment, he has to attend much more urgent matters caused by the onset of the election primaries season. The year 2004 is the year of the Presidential election and Dubya, with a sense of deja vu needs to prevent history from being repeated. Way back in 1992, Senior Bush, fresh from a resounding victory in the Gulf War and facing a rookie challenger called Bill Clinton looked invincible. His opponent scored a memorable victory by the simple slogan that more than the military might and victory of USA, what mattered was the well being of its economy, which needed attention.
History has turned a full circle and George Bush faces a similar situation. If his father defeated Saddam, he has now completed the story by nabbing him. And now, his political underbelly too is the economy, which is laced with uncertainty. Unsurprisingly, the Fortune observed that the Democrats still believe that there is political gold to be mined in the jobs issue and in those unnerving deficits. Yet voters do not care and understand so much about fiscal sobriety, as they do about unemployment. The steady drain of manufacturing jobs especially in the critical battleground states like Virginia, Ohio, Pennsylvania and West Virginia makes trade policy particularly critical this year. Employment and loss of jobs to other nations (read India), is a populist issue, which was fermenting in various states, where Senators were demanding that state contracts couldn’tbe outsourced or subcontracted to non American companies in order to give jobs to locals. India has become a favourite whipping boy and is seen as a real threat to their white-collar jobs. The idea had caught political fancy and in order to seize the political initiative, Dubya has supported the passing of a law that bars outsourcing of US government contracts to companies outside USA. In the first federal law against outsourcing, the US Senate January 22, 2004, passed a law barring doling out sub contracts to India and other countries by American companies to cut costs. The legal measure originally sponsored by the Republican Senator from Ohio, George Voinovich now awaits the President’sassent. Under the measure, when the Federal US government gives contracts to an American firm, as it has to on public money, that firm cannot give sub contracts out of that, to a source outside USA. The attack is on BPO jobs and also on IT jobs. Further, January 23, George Bush signed into law, a bill which bars outsourcing by the US treasury and transport departments. Another bill called the Truthfulness, Responsibility and Accountability in Contracting Act of 2003 (TRAC Act) introduced in the US Senate last year could stop any outsourcing by the federal government, if it becomes law.
Such legislation sets a bad precedent and is against the WTO spirit of free trade. Though the industry experts say that just about 2% of the jobs to India may be affected yet India can approach the WTO for redressal. Indian companies have reacted with characteristic insouciance, as behoves an industry leader. Jobs are being outsourced to India not just because of our low labour costs, but more because of the excellent work output of our BPO and IT firms. Such measures are anachronistic in an era of free trade and supremacy of the market forces. Though intended to distort the flows of trade in our favour, they will prove to be nugatory and stillborn. India incorporated is not perturbed, as Kiran Karnik of NASSCOM rightly remarked that the impact of such a move on the Indian IT industry would be very small. Most of the work outsourced to India in the BPO segment flows from private parties. The biggest technology centres in India are not offshoots of the White House or the Pentagon but of the likes of GE, IBM, CISCO and INTEL. Taking cue from such an unhealthy precedent (perceived to be politically prudent), other states, such as NewYork, Florida, Washington, Connecticut, Maryland etc. are proposing bills restraining outsourcing by more heavily regulating the privatisation of state services. As long as the job growth in America remains flat, such efforts are bound to intensify. But like in the case of Bush’spolitically driven steel tariffs decision, which he was forced to back down on last year, this one too could meet with a similar fate.
While such defeatist legislation are being taken up in USA, companies like Wipro are on the overdrive, adding more and more American clients (24 in the last quarter) to their burgeoning list. While jobs loss may be an irrational issue being inflamed by the politicians there, the prospect of improving corporate profits by outsourcing to India, is too juicy an option to be ignored by embattled American corporates. What also needs to be recognised is that in an increasingly globalised world economy, the simpliciter dominance of USA is over. India is emerging as a powerhouse, which no one can ignore. Jeffrey Sachs says that the US preeminence rests mainly on advanced technology, which is being increasingly made available to the world. He thus predicts the ascent of India, which Drucker calls a knowledge powerhouse and rates our potential as far better than that of China. Drucker is right in his observation that economics are now global. What better proof of the global reach and impact do we need than these contentious legislations passed by the US Senators. Bush’sremedy to his economic problems and his election strategy has an India connection. It is globalisation par excellence as the efforts for electoral gains in USA, are wired to Gurgaon, Bangalore, Mumbai and Pune.
What politically scares the present resident of White House is not just the fact that its recent economic recovery has been jobless but that it continues to face the threat of a flight of white-collar jobs to India after a widespread loss of blue-collar jobs to China, in the nineties. No wonder, Peter Drucker, the American management expert, says that the era of America’sdomination of the world economy is over and that India is the knowledge powerhouse. Jeffrey Sacks attests him by predicting that India’seconomy shall overtake that of USA in due course.
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