Developed Countries of the World: Unite and Solve the Growth Conundrum
Tue, Sep 7, 10:31 AM ET, by ForexTraders.com
Major long-term trends come in all shapes and sizes, but when they stretch over decades, the possibility of a reversal takes on a dramatically longer timeframe as well. Like it or not, Houston, we have a growth problem down here, and the solution will not be found in the remaining hour of the movie. Fiscal and monetary policy changes will not fix the problem either, but perhaps, tax incentives need to be redesigned to encourage domestic investment in people and machinery. Isolationism may be another tool in the toolbox, but globalization has progressed too far to even contemplate putting that genie back in the bottle. If there is one lesson that everyone learns in their respective business careers, it is that incentives work. Some may require more time than others, but eventually they reshape the dynamics of the marketplace and change the playing field forever. If there is an opportunity to design those incentives at the outset, you had best take the time to study the potential cause and effect, because an improperly placed incentive will surely create an unexpected, and perhaps painful, result down the road. The economic incentives that promote outsourcing as an above-average cost-cutting approach have been accepted by business for centuries. If another company can do something cheaper than you can, you contract with them to perform their beneficial tasks. At some point in history, outsourcing became off-shoring when the allure of low-cost labor beyond our borders was worth the effort to train and export. The following chart published in April by the IMF in their global economic outlook report suggests that the effects of off-shoring became material from 1990 and thereafter: 
There is another mantra worth repeating here from the halls of MBA academia that purports, "If you can't measure it, you can't manage it." The fact is that our government, and everyone else's for that matter, has had difficulty measuring off-shoring activities. The Bureau of Labor and Statistics has no viable method for tracking outsourcing efforts. Economists measure the change in import prices as their only recurring indicator, but details are lacking for the personnel component, especially when service-type jobs are at issue. Obvious errors in reported productivity gains for manufacturing industries that have closed were a revelation some years back, but the loss of service jobs has no ongoing measure that might be near as compelling that requires more attention. There is one company out there that attempts to measure these trends. It is Technology Partners International, Inc. This firm publishes a quarterly report that updates industry-wide contracts awarded in various business sectors with a total contract value (TCV) exceeding $25 million. The report is entitled "The TPI Index", and it attempts to provide "an informed view of the state of the global commercial outsourcing market." Their most recent report for the quarter ended June 30 states that: After a record first quarter, contract restructurings are back in line with historical trends. Second quarter was soft, continuing a market recovery that is very slow, and uneven; outlook is cautious.
The report goes into more detail related to both information technology and business process outsourcing statistics, breaking these figures down by geographical region and by category of business activity. While the data is informative about the outsourcing industry and which vendors are the key players, it does not attempt to measure what level of outsourcing activity is actually being moved offshore. The awarding of a major infrastructure contract may still be within our domestic shoreline, just placed outside the corporation that elected to invest in a local consultancy rather than depend on internal resources. The answers related to off-shoring can only be arrived at by inference. From this perspective, the following chart makes a compelling case that the Americas are not pulling back on the outsourcing throttle, not even in 2009 during the height of the recession. The first quarter of 2010 was a record high, and although the second quarter of this year showed a slight decline, year-over-year growth was over 20%, and the overall trend for the six quarters is upward. We can only intuit that the same can be said for the trend in off-shoring activity as well. 
To a degree, this is not new news. We have grown accustomed to speaking with English-illiterate customer service representatives on a daily basis. Accents may now be Hindu instead of Hispanic, as the outsourcing market moved from Mexico and the Caribbean to Asia and India. The loss of manufacturing and technology jobs is well documented, but highly technical and professional service jobs have always been the bulwark of our society. The tides of change are washing away this foundation, too. There was a flurry of articles last month in the biotech sphere when a federal judge blocked domestic tests in the stem cell research field. The area of medical research, long a bastion of our universities and hospitals, has silently relocated over the past decade to state-of-the-art facilities in Singapore and Korea, with China and India busily working to replicate their successful designs. It appears that no area of our economy, no matter how entrenched, can rebuff the onslaught of off-shoring forces in the market. If the GDP growth projections in the IMF chart above are to be believed for the developed countries of the world, then we are staring at lackluster growth for the coming five-year period. Barely 2% growth is the prospect on an annual basis, when a minimum of 1.5% is said to be necessary to provide new jobs for a growing population. What about the 8.4 million jobs that were lost during this last recession? Where is the growth to recover those jobs? Hey Houston, this problem is much bigger than we thought! Perhaps, a new set of tax incentives is the only way out of this mess, but our political infrastructure seems destined for gridlock status for the next five years. Will the rest of the developed countries of the world figure out how to thrive and prosper under these limited growth projections? Australia is the only one of us that skirted the recession, but they are bent on exporting their raw materials to fuel the economic engines in Asia. Not sure all of us have that option. If anyone does untie this Gordian knot, it will be obvious for all to see and quickly replicate. United we stand; divided we fall or falter. What does all this mean for forex traders? It may mean that "BRIC" will become a common phrase in our everyday speech. Brazil, Russia, India and China are on their respective rises to fame and fortune, as will be their currencies if you can figure out how to trade them effectively. Long on developing and short on developed may become the new mantra for long-term carry-trade strategies. Trading developed pairs may mimic our present sideways action, with occasional bursts when favorable economic data are released. Sounds like more of the same for quite a while to come
SDI Glossary: "price" Definition
SDI Glossary: "GDP" Definition
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