The “GDP Illusion” is a fault in perception caused by defects in the construction and interpretation of standard economic data. Its main symptom is a systematic underestimation of the real contribution of low-wage workers in the global South to global wealth, and a corresponding exaggerated measure of the domestic product of the United States and other imperialist countries.
John Smith gives an interesting example of the GDP illusion:
“What contribution do the 300,000 workers employed by Foxconn International in Shenzhen, China who assemble Dell’s laptops and Apple’s iPhones—and the tens of millions of other workers in low-wage countries around the world who produce cheap intermediate inputs and consumer goods for western markets—make to the profits of Dell, Apple, and other leading western firms? Or to the income and profits of the service companies that provide their premises and retail their goods? According to GDP, trade and financial flow statistics, and mainstream economic theory, none whatsoever. Apple does not own the Chinese, Malaysian, and other production facilities that manufacture and assemble its products. In contrast to the in-house, foreign direct-investment relationship that used to typify transnational corporations, no annual flow of repatriated profits is generated by Apple’s “arm’s length” suppliers. Standard interpretation of economic statistics, all of which record the results of transactions in the market place, assumes that the slice of the iPhone’s final selling price captured by each U.S. or Chinese firm is identical to the value added each supposedly contributed. They reveal no sign of any cross-border profit flows or value transfers affecting the distribution of profits to Apple and its various suppliers. The only part of Apple’s profits that appear to originate in China are those resulting from the sale of its products in that country. According to the standard interpretation of economic data, as Marx said, the value of commodities “seem not just to be realised only in circulation but actually to arise from it.”1 And so the flow of wealth from Chinese and other low-wage workers sustaining the profits and prosperity of northern firms and nations is rendered invisible in economic data and in the brains of the economists.
Apple’s products, and those of Dell, Motorola, and other U.S., European, South Korean, and Japanese companies, are assembled by Foxconn, the major subsidiary of Taiwan-based Hon Hai Precision Industries. Foxconn’s one million employees assemble “an estimated 40 percent of the world’s consumer electronics,” according to the New York Times.2 Its complex of fourteen factories at Shenzhen in southern China has become world famous both for its sheer size and for a spate of suicides amongst its workers in 2010. Foxconn’s Shenzhen workforce peaked that year at around 430,000 workers and is currently being scaled back in favor of plants elsewhere in China. In January 2012 Hon Hai chairman Terry Gou provoked a firestorm with his remark, during a visit to the Taipei Zoo, that “as human beings are also animals, to manage one million animals gives me a headache,” followed by a request to the zookeeper for advice on how to manage his “animals.” Want China Times commented, “Gou’s words could have been chosen more carefully…working and living conditions [in Foxconn’s huge Chinese plants] are such that many of its Chinese employees might well agree that they are treated like animals.”
The Apple iPhone and related products are prototypical “global commodities,” the result of the choreography of an immense diversity of concrete labors of workers on every continent. Contained within each handheld device are the social relations of contemporary global capitalism. Examination of who makes these products and who profits from them reveals many things. The most striking and significant of these is the huge scale of the shift of production processes to low-wage nations, and, corresponding to this, the greatly increased dependence of firms and governments in North America, Europe, and Japan on super-profits obtained from the living labor of these countries.
Research on the Apple iPod, published in 2007 by Greg Linden, Jason Dedrick, and Kenneth Kraemer, is particularly valuable because it reveals two things absent from many more recent iPhone studies: (1) their study quantifies the living labor directly involved in the iPod’s design, production, transportation, and sale; and it also reports (2) the vastly different wages received by these diverse groups of workers.
In 2006, the 30Gb Apple iPod retailed at $299, while the total cost of production, performed entirely overseas, was $144.40, giving a gross profit margin of 52 percent. What Linden, Dedrick, and Kraemer call “gross profits,” the other $154.60, is divided between Apple, its retailers and distributors, and—through taxes on sales, profits, and wages—the government. All of this, 52 percent of the final sale price, is counted as supposed value added generated within the United States and contributes towards U.S. GDP. They also found that “the iPod and its components accounted for about 41,000 jobs worldwide in 2006, of which about 27,000 were outside the United States and 14,000 in the United States. The offshore jobs are mostly in low-wage manufacturing, while the jobs in the United States are more evenly divided between high wage engineers and managers and lower wage retail and non-professional workers.”
Just thirty of the 13,920 U.S. workers were production workers (receiving on average $47,640 per annum); 7,789 were “retail and other non-professional” workers (whose average wages are $25,580 per annum); and 6,101 were “professional” workers, i.e., managers and engineers involved in research and development. This latter category captured more than two-thirds of the total U.S. wage bill, receiving on average $85,000 per annum. Meanwhile, 12,250 Chinese production workers received $1,540 per annum, or $30 per week—just 6 percent of the average wages of U.S. workers in retail, 3.2 percent of the wages of U.S. production workers, and 1.8 percent of the salaries of U.S. professional workers.6 The number of workers employed in iPod-related activities was similar in the United States and China, yet the total U.S. wage bill was $719 million and the total Chinese wage bill was $19 million.
A study published by the Asian Development Bank (ADB) in 2010 reported on Apple’s latest product, revealing an even more spectacular mark up. “iPhones were introduced to the U.S. market in 2007 to large fanfare, selling an estimated 3 million units in the United States in 2007, 5.3 million in 2008, and 11.3 million in 2009.” The total manufacturing cost of each iPhone was $178.96 and sold for $500, yielding a gross profit of 64 percent to be shared between entities such as Apple, its distributors, and the U.S. government, all of which appears as “value added” generated within the United States. The main focus of this report was the effect of iPhone production on the United States-China trade deficit, finding that “most of the export value and the deficit due to the iPhone are attributed to imported parts and components from third countries.” However, Chinese workers “contribute only us$6.50 to each iPhone, about 3.6% of the total manufacturing cost.”7 Thus more than 96 percent of the export value of the iPhone is composed of re-exported components manufactured in third countries, all counting as Chinese exports to the United States, while none of it towards China’s GDP. The authors do not investigate in detail how these gross profits are shared between Apple, suppliers of services, and the U.S. government, but they can hardly avoid commenting on their spectacular size, noting that if “the market were fiercely competitive, the expected profit margin would be much lower…. Surging sales and the high profit margin suggest that…Apple maintains a relative monopoly position…. It is the profit maximization behavior of Apple rather than competition that pushes Apple to have all iPhones assembled in the PRC.”
This leads the ADB researchers to imagine a scenario in which Apple moved iPhones assembly to the United States. They assume U.S. wages to be ten times higher than in China and that these hypothetical U.S. assembly workers would work as intensely as the real ones do at Foxconn, calculate that “if iPhones were assembled in the United States the total assembly cost would rise to us$65 [from $6.50 in China, and] would still leave a 50% profit margin for Apple,”9 and finish by appealing to Apple to show some “corporate social responsibility” by giving up “a small portion of profits and sharing them with low skilled US workers.”10 They might just as well suggest Apple give a much-needed boost to demand in the Chinese economy by sharing its $110 billion cash pile among Foxconn’s workers.
Apple’s iPhone exhibits general trends and fundamental relationships, but in an exaggerated and extreme form. Hon Hai made $2.4 billion in profits in 2010, or $2,400 per employee, compared to $263,000 in profits reaped by Apple for each of its 63,000 employees (43,000 of whom are in the United States); this figure is expected to rise to $405,000 in 2012. On March 11, 2011, Hon Hai’s share price valued the company at $36.9 billion; meanwhile Apple, with not a factory to its name, was valued at $324.3 billion.11 Apple’s share price has soared in the year since, its market capitalization almost doubling to around $600 billion, overtaking Exxon to become the world’s most valuable company. Further boosting its share price, it has accumulated a huge $110 billion cash stockpile that it has no productive use for.
Meanwhile, in what one study called a “paradox of assembler misery and brand wealth,”Hon Hai’s profits and share price have been caught in the pincers of rising Chinese wages, conceded in the face of mounting worker militancy, and increasingly onerous contractual requirements, as the growing sophistication of Apple’s (and other firms’) products increase the time required for assembly.12 While Apple’s share price has risen more than tenfold since 2005, between October 2006 and January 2011 Hon Hai’s share price slumped by nearly 80 percent. The Financial Times reported in August 2011 that “costs per employee [are] up by exactly one-third, year-on-year, to just under us$2,900. The total staff bill was $272m: almost double gross profit…rising wages on the mainland helped to drive the consolidated operating margin of the world’s largest contract manufacturer of electronic devices…from 4–5% 10 years ago to a 1–2% range now.”
Seeking cheaper labor and to reduce dependence on the increasingly restive Shenzhen workforce, Financial Times columnist Robin Kwong reports that Hon Hai “has invested heavily in shifting production from China’s coastal areas to further inland and is in the process of increasing automation at its factories. As a result, Hon Hai last year saw its already thin margins shrink even further.”14 The combination of sharply rising wages, heavy capital spending, and relentless cost-cutting by companies like Apple is bad enough, but worst of all is the chronic sickness which Hon Hai’s and China’s principal export markets have fallen into. Kwong concludes, “it is not hard to see why the last thing Gou needs now, after building all those inland factories, is a slowdown in demand.”
“The GDP Illusion at least partly explains why dominant paradigms see the global South as peripheral and its contribution to global wealth of minor importance, despite the ubiquity of the products issuing from its mines, plantations, and sweat shops; and despite the fact that southern living labor are the creators of much or most of our clothes and electronic gadgets, of the flowers on our table, of the food in our fridge, and even of the fridge itself.
Labor’s share of GDP within a country is not directly and simply related to the prevailing rate of exploitation in that country, since a large component of “GDP” in the imperialist nations represents the proceeds of exploited southern labor.
As our three global commodities reveal in microcosm, the globalization of production is at the same time the globalization of the capital/labor relation. The main driver of this great transformation is capital’s insatiable quest for low wages and high rates of exploitation. Its main result is the heightened dependence of capitalists and capitalism in the imperialist countries on the proceeds of exploitation of nature and living labor in the global South. The imperialist division of the world that was a precondition for capitalism is now internal to it.38 Neoliberal globalization therefore signifies the emergence of the fully evolved imperialist form of capitalism.
Finally, the critique of concepts and statistics outlined here has major implications for our understanding of the global crisis. This global crisis is “financial” only in form and appearance. It marks the reappearance of a systemic crisis which the outsourcing phenomenon itself was a response to: replacing higher-paid domestic labor with low-paid southern workers helped support profits, consumption levels, and reduced inflation in the United States, Europe, and Japan. Along with the expansion of debt, outsourcing was crucial to the imperialist economies’ escape from the crises of the 1970s. Furthermore, outsourcing is deeply implicated in many ways in the return of systemic crisis. Giving a central place to the sphere of production in the analysis of the global crisis, a task preoccupying many Marxist economists, requires accounting for the enormous transformations that have occurred within this sphere in the past three decades of neoliberal globalization. And this requires that we dispel the GDP Illusion.”