The Sandwiched Middle

Geoffrey Garrett
About a paradoxical collateral effect of Globalization

«Teching Up is the only viable strategy for those in the middle»

Interview by Jorge Nascimento Rodrigues, editor of Gurusonline.tv, December 2004

Al least 45% of the world - almost all of emergent Latin America, Eastern and Central European former Soviet bloc, as well as the Asian tigers and candidates, much of the oil rich Middle East, a few countries in the European Union - are "middle-income" in various degrees, and got sandwiched between the developed world and the big emergent countries of Asia. Globalization was not fair to them. This consequence is particularly evident today with the emergence of global strategies from China (the "daguo xintai" paradigm) and India (the "Bollystan"paradigm).

"As a result, the middle-income countries have been forced into unwinnable battles with China for market share in standardized manufacturing and increasingly with India for low-wage service-sector exports", wrote Geoffrey Garrett, vice Provost of the International Institute at University of California at Los Angeles (UCLA). Why this happened? "The failure of middle-income countries to compete in global markets for either knowledge or low-wage products", answers the director of the Ronald W. Burkle Center for International Relations at UCLA in an article at Foreign Affairs magazine November/December 2004 edition.

And Professor Garrett underlines a geo-political consequence: "Ignoring those in the middle pushed aside by globalization will have immense implications - economically and politically".

The article is a summary of a forthcoming book to be published by W.W. Norton in the end of 2005, and titled. "Globalization's Missing Middle: Why the global middle class is loosing from free trade and finance".

What kind of middle-income groups of countries you studied in the book? Have you a particularly middle-income case that impressed you more in your research?

There are really three basic types of middle-income countries - those in the Middle East, those in East-Central Europe and those in Latin America. I consider the Middle East to be sui generis because of the security dimension. The European countries are different because of the European Union. I am concentrating on Latin America because of the disconnect between the predictions and promises of the Washington consensus and the realities of globalization in the region.

After 20 years of globalization, the main victim was the middle-income nations? Why was globalization been disappointing for those countries got in the middle?

The venerable theory of comparative advantage says that all countries should be able to find a winning niche in the global economy. My research indicates, however, that there are only two ways to compete successfully - having the capacity to innovate in the knowledge economy or having low enough costs to win in standardized manufactures. The middle-income countries have trouble doing either. On the one hand, they tend not to have educated enough labor forces or sufficiently strong financial and legal systems to compete in the knowledge economy. On the other hand, labor costs tend to be too high to compete in the low wage manufacturing economy.

They have not found a niche in world markets. They have been unable to compete in high-value-added markets dominated by wealthy economies. As a result, they have had little choice but to try to compete with China and other low-income economies in markets for standardized products. But because of their higher wages, the middle-income nations are bound to lose the battle.

So, what was the fate of the middle?

The answer seems to be that they have not found a niche in world markets. They have been unable to compete in high-value-added markets dominated by wealthy economies because their work forces are not sufficiently skilled and their legal and banking systems are not sophisticated enough. As a result, they have had little choice but to try to compete with China and other low-income economies in markets for standardized products. But because of their higher wages, the middle-income nations are bound to lose the battle.

In this decade do you think the middle-income countries can "catch up" the upper level, following the examples of the Nordic States, Ireland, Singapore and a few others in the last decade?

If any group of middle-income countries is to catch up in the next decade, it will probably be those in east-central Europe that have just joined the European Union. In addition to fiscal transfers and access to West European markets, the acquis communitaire gives the new members the kind of institutional stability that might encourage knowledge economy investors.

Education is clearly critical, but it is not enough on its own. Middle-income countries need to develop sophisticated financial systems so that they can efficiently channel investment and cope with the volatility of global markets.

What's the challenge for those in the middle?

To find ways to "tech up" and enter the global knowledge economy, so as to escape the trap.

To "tech up", what is the main strategy for middle-countries?

Education is clearly critical, but it is not enough on its own. Middle-income countries need to develop sophisticated financial systems so that they can efficiently channel investment and cope with the volatility of global markets. They also need strong legal systems that protect property rights and create incentives for investors to make the kind of long-term investments that are essential to the knowledge economy.

Portugal and Greece in the European Union new members wave of the 80's didn't perform so well as Spain or Ireland. So, particularly Portugal with only 20% of working people with high education, was "blocked" in the. What do you suggest for a typical "sandwiched" country like Portugal?

Portugal is not alone being sandwiched. I think Mexico, for example, is in a very similar position in Latin America. The way out cannot be to try to compete with India and China because this is a losing battle due to the differences in labor costs. Teching up is the only viable strategy. But it is expensive. This is where the EU's system of fiscal transfers is of potentially great help to Portugal. But Mexico does not have anything akin to the EU to help it move up the global skill chain.

How you see the Latin America situation, despite eternal vaporware about "emergent" countries like Brazil, Mexico, Chile or Argentina?

Latin America will continue to struggle until it can improve its educational system, reduce corruption, and build strong financial and legal systems. One consequence will be that Latin American immigrants will continue to try to enter the United States. At some point, this may lead the US to provide more assistance to Latin America.

India has the chance to leap over the manufacturing phase of development and become a service oriented export economy. If this happens, knowledge workers in the West will get squeezed.

Do you think the "junk" jobs in the developed and upper middle-income countries will be the working class majority? What could be the social and political consequences?

The interesting thing in the US is that job growth has been about the same in professional/business services as in the junk jobs. What is happening is that the manufacturing middle class is disappearing. The problem with junk jobs in the first world is that they are increasingly done by migrants, or in the case of India, "off-shored.". In the middle-income countries, manufacturing employment is growing rapidly, but workers are not seeing the benefits in terms of higher wages - because of downward pressures from China in particular.

Due to the post-crash crisis in the New Economy, the "tech slaves" situation is worsening in developed and middle-income countries. The impoverishment of large parts of the new middle class - even knowledge workers and technologists - is becoming evident. What could be the social and political consequences?

India has the chance to leap over the manufacturing phase of development and become a service oriented export economy. If this happens, knowledge workers in the west will get squeezed because people in India will be willing and able to do their jobs at much lower wages. This would significantly increase the portion of the population that is adversely affected by globalization in the West, and could lead to a real backlash. But that is probably decades away.

But what Latin America needs is the kind of deep integration that has characterized the EU in the past two decades.

What global measures do you suggest to world institutions to deal with this middle countries' paradox?

I think regional integration is the key. Though it took a long time, the EU is doing the right thing by expanding to the East. This is the best hope for the middle-income countries in Europe. The US is trying to build similar regional integration schemes in the Middle East, but not much progress will be made until the security situation stabilizes. In Latin America, the US wants a bare bones FTAA that is free trade-only. But what Latin America needs is the kind of deep integration that has characterized the EU in the past two decades.

References in the Web:
- Article at Foreign Affairs magazine: "Globalization's Missing Middle" (Volume 83, number 6)
- The Chinese "Daguo Xintai" (mentality of global power) strategy
- The "Global India" strategy (Bollystan=culture + land in farsi language)

Professor Geoffrey Garrett can be contacted by email at ggarrett@international.ucla.edu
You can visit his profile at www.international.ucla.edu/profile/ggarrett/index.asp

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