THE NEW LIQUIDITY — INFORMATION, SKILLS, OPPORTUNITIES

Michael Milken, the financier, is chairman of the Prostate Cancer Foundation and of the Milken Institute. Myron Scholes was awarded the Nobel Prize in 1997 for his study of derivatives. Gary Becker was awarded the Nobel Prize in 1992 for his work on non-market economic behavior.

Michael Milken: In the 1970s, talking by phone to India from the U.S. cost $10 a minute. Today, for the average company, it is down to 15 cents. The cost of calls and data transmission in the future, with voice traveling over broadband, will come close to zero.

As an increasing percentage of the world’s output is digitized, there are enormous economic ramifications. High-end designs for everything from clothes to cars to computers are done in the U.S. and transmitted electronically to Asia for production, then exported back.

With outsourcing and call centers in India or the Philippines, we see the processing of everything from tax returns to insurance claims for clients in the U.S.

Where will this all lead?

Myron Scholes: It used to be that when you traded commodities at the Mercantile Exchange in Chicago, you had to be there. Now there is such a liquidity of information — thanks to telecom advances — that you can trade from anywhere in the world. Kids who played video games with great facility now have grown up to manage these digitized markets.

From California, for example, I can be in instantaneous contact with colleagues in Guangzhou, China, through voice-over broadband, which costs almost nothing. I can even call a land-line in Russia for 2 cents a minute. There are virtually no barriers.

All this has made business so much more efficient. Consequently, you can create larger values than ever before.

Milken: Increasingly, it is not only information costs coming down from this global liquidity, but also other costs such as for medical treatment — what is being called "medical tourism."

A heart-valve transplant in the U.S. cost $200,000 last year. You can do it in India for $10,000. Same expertise — usually doctors trained in the U.S. or the U.K. — but vastly different costs. Last year 150,000 foreigners received medical procedures in India.

Surely, companies will one day be sending their employees to India for major treatment as a way to save on their medical costs, including malpractice insurance, in the rich countries.

It is not just communication of information, then, but people seeking less costly services anywherein the world where it can be done most efficiently. That creates new opportunities for business anywhere. You might call this a liquidity of opportunity. That is new.

Gary Becker: All this is part of the outsourcing phenomenon. Not only is output being digitized through greater information flows. Instead of human capital just migrating to the developed world, some patients or customers from the rich countries — as is the case of medical tourism — will go elsewhere for services.

That is a good thing overall. It hasn’t weakened the incentives of talented individuals from the poor nations to come to the rich nations, however. The reason the costs are so much lower in India are because salaries are lower. A good Indian physician can earn eight times more in the U.S. than in India, so many still want to come to America. For the same reason, very few American physicians want to go to India to set up a practice.

The challenge is how to integrate both aspects — increasing outsourcing with the still strong attraction of migration by the best and brightest to the richer countries. We should have a mixture. That is the benefit of international trade, for everyone to be able to get what they want.

Ultimately, it will all settle out. Inevitably, as has been true in all economic history, countries will move up the product ladder with ever greater value-added and skilled activities, from manufacturing to information services. As they move up, others follow behind. The U.S., for example, as recently shown by the poor earnings statement of GM, has lost some, if not all, of its advantage in producing cars. China will come along one day, I’m sure, and take over a major role as a producer of cars.

The global optimal division of labor will always be shifting, as it has in the past. It is part and parcel of international specialization and the gains from trade. It just now will happen faster.

Milken: Nine countries will make up 50 percent of population growth in the next 45 years. India has the largest projected growth. China is flattening.The growth in Congo, Uganda, Ethiopia and Nigeria will be enormous — even though Africa is largely stagnating or going backwards economically.

What will be the economic impact?

Myron Scholes: As we eliminate poverty, population growth will slow down. Educating women dramatically slows down population growth.

Gary Becker: These population projections are, I believe, overstated. The United Nations has been wrong in its projections often because it hasn’t calculated the effect of economic growth on population reduction.

Fertility rates will come down more rapidly in the future than they have in the past as the African nations will emulate India and China. As Asia has demonstrated, economic growth is not rocket science. We know how it works: freer trade and freer markets plus an educated workforce.

Fearing the population bomb, China has had a very effective one-child policy over the past two decades. But the result now is that there are going to be more old people than young people in the coming decades. Is that good or bad?

There is a positive effect. It’s an old theorem of economics that the division of labor as well as research and development is limited by the extent of the market. Innovation is thus linked to the size of the market it can supply. It is driven by the demands of that market.

The larger the older population, therefore, the more research and development funds are directed to the market for health or curing and treating diseases. The growing older population, whether in China, Japan, Western Europe or the U.S., is driving the medical advances from genetics to pharmaceuticals we all enjoy today.

(c) 2005, Global ECONOMIC Viewpoint
Distributed by Tribune Media Services, INC. (aPRIL 26, 2005)