The international division of labour

What are the main determinants of the international division of labour? In which types of economic activity has this division of labour progressed the most and what are its global advantages? Give examples based on the experiences of one or more countries.

The international division of labour is, for the most part, predicated on the benefits of economic specialisation. National economies most fully integrated into the global economy have experienced a shift towards the most efficient use of its resources, be they human resources, national capital, or geography. Economic activities that are easily transferrable between persons and require minimal capital investment are the likeliest to thrive in a globalised environment, as business will naturally flow to the most cost-effective solution. This partly explains the rise of manufacturing in Asia, the rise of financial services in the developed world, and the rise of information technology services in India, among other trends.

Economic specialisation pertains to any kind of economic activity performed by human agents where voluntary exchange of goods or services takes place. Any mutually beneficial exchange that has a locational advantage will be more successful--i.e. derive more profits--in that location. So, for instance, one may suppose there are two factories operating with identical constraints and producing identical products. However, if one factory is closer to the town marketplace, it will derive an economic advantage from lower transportation costs to the market and will be able to undercut its opponent. This is the essence of economic specialisation. However, specialisation includes not just factors of distance, but also human and physical capital. If workers are more skilled in one area of production in a particular country, they are likelier to derive greater benefit from focusing on production in this particular area of expertise. They needn't have an absolute advantage over other countries in production of this product, as long as they have a comparative one.

Thus has the international division of labour seen manufacturing jobs flow to countries where unskilled manual labour is cheaper--the developing world; and where domestic regulations favour direct business investment--East Asia. Cheap labour, combined with a stable macroeconomy and thus a favourable business climate, have been largely responsible for the rise of manufacturing in China in the past two decades. In contrast, areas such as Latin America, while possessing a surplus of cheap unskilled labour, fared comparatively less well in attracting manufacturers due to their comparatively higher wages for unskilled labour and their often unstable macroeconomies.

The comparative specialisation of financial services in the developed world stems again from the labour force. The developed world possesses a firm advantage in skilled labour, and given that financial services are highly flexible enterprises due to the international nature of financial capital, financial firms are likeliest to headquarter in highly active urban centers with the most advantageous proportion of skilled labour. Thus New York, London, Tokyo, and so forth are well-positioned to take advantage of this trend.

Information technology services are perhaps the most easily diffused and least cost-intensive of the new economy. A country such as India has many natural advantages in providing this service, e.g. a large population versed in English and a depressed wage level for unskilled labour. This has resulted in extraordinary savings for information technology firms (and thus consumers of such technology) as they are able to service many more customers via India than would otherwise be possible. At the same time, it has awarded India a comparative advantage in the area of information technology services via network effects.

Availability of certain forms of physical capital can also be a crucial comparative advantage in certain industries. Depending on their geography, countries may possess farming, ranching, mining, and other advantages over others. Countries near the equator will be better at producing bananas, and countries with mediterranean-like weather conditions will produce better wine. Geography can also be crucial in specialising labour towards trade services. Places like Singapore, Hong Kong, Panama, and Sinai possess natural geographical advantages that encourage growth and investment in trade and all aspects of services associated with trade.

Economic specialisation, whether it be absolute or comparative, is largely responsible for the current international division of labour. Countries, just like individuals, will specialise in whatever discipline or area best suits them based on their endowments and levels of investment in education and physical capital. The most cost-effective solution will tend towards the most profits and the most success, both domestically and internationally.