Arbitrage is defined as "attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms."
A simple example is the buying of a currency in one market and selling it in another for a slightly higher price; success is knowing the prices in various markets and having buyers and sellers therein. Arbitrage thrived when communication was limited and it was difficult to know what each market was doing. As time and space have shrunk, arbitrage has had to evolve.
As one form of arbitrage was threatened, others grew. It began with the ability to safely and economically ship goods across oceans, combined with countries with predictable governments, cheaper workers, and easy access to ports - thus was formed outsourcing 1.0 - manufacturing. Improved telecommunications then lead to outsourcing 2.0 - services, which prevailed in countries with forward-thinking governments and cheaper, better-educated workers.
We all know that countries with lower costs of living were able to provide help desks, call centers, etc. to countries with higher costs, and both sides won. Western companies lowered expenses, reduced payrolls, and returned more to their shareholders, and "Eastern" companies created markets, employed people, raised local standards of living and returned more to their shareholders.
But... The East is able to provide these services to the West because they have a large, well-educated (better-educated, really) workforce who is used to getting paid much less than their Western counterparts. As communication opened up the possibility of outsourcing, it also opened the East to the salaries and lifestyles of the West, and as their "tide" of awareness and achievement lifted, so did their "boat" of expectations.
Thus people costs in the East are rising, margins are falling, and with the recent recession, the people costs in the West are falling and margins are rising. I'm not saying that the arbitrage opportunity is lost; I'm just saying the margins are shrinking, and growth in BPO (Business Process Outsourcing) is slowing.
I was having lunch with Pierre de Vries a few days ago, and among other things, our conversation went to a question that has been bugging me of late - whether a more educated society is more advantaged [more on this in future posts], and whether "white-collar" jobs add more value than "blue-collar" jobs.
Before we get to that, I'm sure you've noticed a trend over the last couple of generations. It used to be that goods manufactured in the East were of inferior quality, and their only buyers were those with no other choice. That changed very quickly - today goods made in Japan or Korea are considered to be of better quality and reliability vs. what you get in the West. The same thing happened with BPO - initially, you hated it when the call was answered by someone with an Indian accent because you weren't getting the same experience as with a Western call center; but now, their ability and capability have improved to the point where it's not as big an issue, and eventually, the outsourced call center will be preferred to the Western one.
As we have gotten used to the idea of some business processes provisioned "over there," the East is looking for new sources of growth - about 5-7 years ago, medical services began to be outsourced; today outsourced legal services are the new vogue; this in addition to successful outsourcing of software engineering, accounting/tax preparation, and design services to name but three. Outsourcing 3.0 is pure white-collar, and the acceptance of these services by the West is less and less an issue, which opens the door to even more white-collar provisioning.
A commodity is created "when a product becomes indistinguishable from others like it and consumers buy on price alone." From clothing to appliances to cars to help desks to accountants to radiologists to lawyers to ophthalmologists to... you?
When something becomes a commodity, the cost per unit drops, and the price per unit drops - that good or service is valued less, and those that do it are therefore valued less.
Doctors, lawyers, accountants.. What is more precious today? Having someone do your taxes, or knowing a really good, trusted contractor who will help make sure your house stays standing and in good repair? What is more valuable? The car or a great, trusted mechanic?
A successful economy requires sustained value creation combined with growth in unit value. If the worth of the thing being created is declining, the economy declines. A successful economy also requires that most of its constituents (citizens) be sources of value and not merely consumers of social services. For generations we've been led to believe that a doctor was "better" than a plumber. Our parents may even have discouraged us from pursuing these "lesser" vocations in favor of the "desk" job.
Can you have a purely white-collar economy? No. Consumers consume things - those things need to be created and provisioned. Let's go a bit further - you only have to start with lawyers to see that many white-collar jobs are actually self-fulfilling prophecies. As they become commodities, their value will diminish, and (hopefully), their role in society will diminish (speaking specifically of lawyers and tax accountants :-)).
There's a theory that white-collar jobs have more "leverage" than blue-collar jobs - that they earn more, create move value, etc. Doesn't that also mean that disproportionately more white-collar jobs implies greater unemployment?
Might we see less and less white collar jobs in the West and more and more blue-collar jobs over the coming generation? Is it likely that we will want to outsource white-collar jobs???
The extreme conclusion (of course this won't happen) would be that America (for example) becomes the agriculture and manufacturing capital of the world, and India and China become the white-collar services capitals. Each consumes the other's products, and needs the other to survive, but power resides in control of scarcity, which will depend on what is more commoditizable. Now this can't happen because it's not practical for someone in Beijing to wait for a plumber from Buffalo. But you get the picture.
I believe our value mechanism needs to shift to the point where we recognize what so many already know - white or blue, economic success resides in the scarcity of what you do, and not whether you need to clean your fingernails at the end of the day.