Imperialism in the Twenty-First Century

In other words, the incompatible yet inseparable definitions of productivity are conflated in the neoclassical account, subordinated to a measure exclusively based on the ability to attract money in the marketplace

When manufacturers outsource or offshore work, labor productivity increases directly because the outsourced or offshored labor used to produce the product is no longer employed in the manufacturing sector and hence is not counted in the denominator of the labor productivity equation

It uses a value-added definition of productivity to reach its conclusion that the productivity of workers in the tradable goods sector in countries such as Bangladesh is lamentably low, and it switches to a volume definition of productivity to rationalize its perception that the productivity of Bangladeshi service workers is similar to that of their Belgian counterparts.

As in Balassa-Samuelson, the prices of manufactured goods are equalized through international competition, but not so the prices of services—hence the title of Bhagwati’s seminal paper, “Why are services cheaper in poor countries?” They both agree that because labor is mobile between sectors but not between nations that wages in the service sector are determined by wages in the tradable goods sector, and in particular by wage levels in manufacturing industry, which provides the bulk of traded goods.

In other words, service-sector wages are determined not by the productivity of service-sector workers but by the productivity of workers in industry, and wage increases justified by the rising productivity of industrial workers are not justified by the stagnant productivity of services workers

investigation of the purchasing power anomaly provides persuasive reasons to question the mainstream doctrine that international wage differentials are mere reflections of international differences in labor productivity

Thus, when a firm outsources labor-intensive production processes, the productivity of the workers who remain in its employment rises, even though nothing about their specific labor has changed. Outsourcing therefore has what might be called a “ventriloquist effect” on measures of productivity. But this only scratches the surface of the productivity paradox. Labor-intensive production processes are practically synonymous with low value-added production processes, yet the more labor-intensive it is, that is, the larger living labor is relative to dead labor, the greater is its contribution to value and surplus value—but much of this is captured by capital-intensive capitals, showing up as a much higher value added per worker

Bhagwati et al.’s emphasis on factor endowments opens the interesting possibility that Bangladesh may be overendowed with a limitless supply of people desperate for work, and that it is this oversupply that explains why wages are so low, not the productivity of those in work. This would imply that wages are depressed far below marginal productivity, and gives rise to a notion of exploitation, since it would mean that Bangladeshi workers are not fully compensated for their product. Bhagwati et al. are rescued from this dangerous notion by their impressive faith in Say’s Law, that is, that everything produced for sale will be sold, including living labor, and thus that more and more workers will be drawn into employment until, at equilibrium, workers’ wages are equalized with their marginal productivities

therefore turns out that the suppression of the free international movement of labor, the great exception to the principle of globalization and whose cardinal importance is stressed in this book, is also at the heart of the purchasing power anomaly.

purchasing power parity (PPP)