Views | Apple and the economics of globalization

It used to be famously said that what was good for General Motors was good for America. The Detroit car company was one of the great institutions of the US industrial economy of another age. General Motors has been in relative decline for several decades now. Other companies have emerged as prisms to look at the US economy. One obvious example is Apple, the technology powerhouse that Steve Jobs ran till his early death last year. The economics of Apple has drawn a lot of comment in recent months. And the judgment is not as obvious as it was in the case of General Motors: What is good for Apple is not necessarily good for America.

A recent piece in the New York Times has led to a lot of debate on what effects the Apple juggernaut has had on its home country, at a time when the company announced fantastic results and said that it now sits of a cash stash of $97 billion. The gist of the article is captured in the headline: “How the US lost out on iPhone work”.

“Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares,” says the New York Times.

The article has led to a firestorm of online debate. It comes at a time when US President Barack Obama has upped his pitch against outsourcing to an electorate that is starved of quality jobs. A few months ago, three scholars had published a careful study on the economics of the iPod. Greg Linden, Jason Dedrick and Kenneth Kraemer estimated that the number of people employed in the US for iPod work in 2006 was only half of the number employed in the rest of the world.

However, the three researchers provided additional information as well. They showed that the 13,920 American workers earned $750 million while the 27,250 workers elsewhere earned $320 million. Further, half of the American workers earned just $220 million, leaving the other $525 million to the engineering elite, all 6,101 of them. So 15% of the total workforce earned half the wages. “Apple is not the pinnacle of capitalism. It’s the pinnacle of the marriage of Silicon Valley innovation with strategic Asian mercantilism,” former US trade negotiator Clyde Prestowitz wrote in his blog in response to the New York Times story.

Such data should be seen against the current debates on the nature of globalization. The American concerns are obvious: Apple does not create enough jobs. But look at it from an Asian viewpoint. The average Apple worker earned something like $11,743 a year. It could have been a step ahead in life for him or her.

At the heart of the matter is a fundamental economic dynamic: the efficiency of global supply chains will continue to send low quality jobs to countries such as China with lower wages while the power of technology clusters such as Silicon Valley will help focus high-end work in select location that have strong talent networks. The middle class in the rich countries has perhaps been dealt a poor hand in this arrangement.

Neither of the two forces will be displaced by rhetoric. The current system has emerged because of the economics of globalization. Falling barriers to trade and investments allowed hundreds of millions of Chinese and Indian workers to join the global labour force, in effect making it unattractive for companies to do all their work in the US, Japan and Europe. The dynamic between innovation and low-cost production has delivered immense efficiency. This global division of labour has harmed the US middle class, and hence the rhetoric against outsourcing by Obama. But the jobs crisis in the US cannot be solved by mercantilism. After all, Germany has managed to keep its jobs engine humming under very similar circumstances.

The Apple debate is important because it throws light on some fundamental issues about globalization, the job of a corporation, and government policy.