Ricardo in Bangalore

I teach international trade and my students have often struggled to understand Ricardo’s theory of comparative advantage. They should visit Bangalore.

The modern era of free trade is premised on Ricardo’s theory, which presumes that each country should specialize in the production of the goods and services in which it has a comparative advantage and then trade with other countries for goods and services in which they have a special advantage. This is great for consumers worldwide, but creates huge risks and opportunities of worker displacement.

While exploring the streets of Bangalore this weekend, I was overwhelmed at the application of Ricardo’s theory in practice. My host, a bright enthusiastic young pharmaceutical salesman, spent the day explaining life as a young professional in Bangalore. Several completely anecdotal and unrefined (if you want refined see here and here) thoughts on life in Bangalore:

First, it is hard to describe the construction and development that is occurring in Bangalore. The amount of construction resembles the phenomenal construction era of past decades in the boom towns of Dallas, Atlanta and Houston. This is on top of numerous industrial parks already built. Clearly thousands of foreign corporations have wagered that there is a long-term comparative advantage in placing jobs in Bangalore.

Second, the salary of an Indian IT professional is dramatically lower than an American counterpart. My host guessed that his friend who is a top young gun working at Microsoft in Bangalore is making about $45,000. Most make less, much less. But the cost of living is dramatically lower as well. The Indian rupee trades at about 45 to $1 but in my view the buying power feels like approximately 10 to 1. That is, a typical casual sit down lunch will set you back $1.50, compared with $15 in Los Angeles. Any American who has traveled to London knows the sticker shock of nearly every product costing twice as much. Imagine the sticker shock of most things costing 10 times less. Now imagine what this price differential does to concentrate the mind of a cost-cutting foreign corporation.

Third, one can scarcely describe the number of upwardly mobile Indians in Bangalore. Sunday night at the brand new Forum Mall in Bangalore is like December 24th in an American mall. Wall-to-wall shoppers in the thousands. Since the 1990s, there is a new economy clustering effect taking place, and these professionals are at the high value chain in the Indian IT industry. They are yuppies who yearn for rupees to burn. It appeared that these rupee yuppies were thirsting for all things Western (especially American). My host could not yet afford to travel abroad, but if he could his first stop would be New York. At the multiplex cinema at the Forum Mall every showing of every movie was sold out (including disappointing ones like this). Every American fast food outlet were packed to overflowing (KFC, Pizza Hut, Subway, and McDonalds (featuring the McVeggie)). In some cases it appeared that it did not matter if the product was American as long as it looked American. For example, at the Tommy Hilfiger store – a quintessential American store with an Americana theme – the young sales clerk was curious to know if the Tommy Hilfiger brand was sold in the United States. Moreso than Chennai, the young women in Bangalore are increasingly trading their saris for Wranglers. The result is that American goods and services are being sold to upwardly mobile Indians in overwhelming numbers. Their mobility is our opportunity.

But the result is also that many fungible American service jobs are quite clearly at risk to the competition from these young professionals. Their mobility is our risk. A day in Bangalore will underscore for any American service sector employee the danger of being replaceable. Woe to the fungible. As Tom Friedman put it, we no longer should be telling our kids to finish their dinner because there are people in India who are starving. We should be telling our kids to finish their homework because there are people in India who are starving for our jobs.

Well, actually we should be telling our children both, as my visits to the bonded laborers in the remote villages of Tamil Nadu and to the gilded laborers of Bangalore confirmed.