MUMBAI - With India becoming
an increasingly important outsourcing destination, it
has become politically prudent for many pressure groups
within the developed world to engage in India bashing.
The question is, how justified is it to oppose an
increasingly important trend that many corporates are
undertaking purely on the basis of economic
considerations?
Outsourcing is now talked about
in terms of a national disaster. In fact, there has been
a push in some industrial countries, in the US and
Australia, for example, to introduce legislation
limiting the outsourcing activities of firms with
government contracts. The point that's conveniently
forgotten is the economic benefit that comes with
outsourcing, such as lower prices, leading to lower
inflation, resulting in an increase in real purchasing
power for people with relatively stagnant wages. It also
begets lower interest rates, culminating in higher
investment and economic growth and lower mortgage rates.
The latest research undertaken by consulting
firm McKinsey shows offshoring is as beneficial to a
country like the US as it is to the destination country,
probably more so. The most obvious benefits of
offshoring accrue to businesses and destination
countries. Lower wages in foreign countries translate
into significant savings and, often, improved quality. A
software developer in the US, for example, costs US$60
an hour whereas one in India costs $6 an hour. This, and
other benefits, could translate to a net impact of a 50%
increase in profits for American businesses.
Back in August 2003, McKinsey Global Institute
(MGI) published an analysis of the economic benefits,
both direct and indirect, of offshoring back office
service and IT functions from the US to India. Of the
direct benefits, MGI found that every dollar of spending
that US companies transfer to India creates as much as
$1.46 in new wealth. India receives 33 cents - through
wages paid to local workers, profits earned by Indian
outsourcing providers and their suppliers, and
additional taxes collected by the government. The US
economy captures the remaining $1.13 - through cost
savings to businesses, increased exports to India,
repatriated earnings from offshore providers in which US
companies have invested, and the additional economic
output created when US workers are re-employed in other
jobs. In other words, the US captures 78% of the
incremental value.
According to McKinsey,
offshoring will allow the US to capture economic value
through multiple channels:
Reduced costs - Savings from reduced costs can be
passed to consumers or to investors to reinvest. In the
US, companies save 58 cents for every dollar of spending
on back office service functions and IT jobs they move
to India. These savings can be reinvested in new
business opportunities with higher value-added, passed
on to consumers in the form of lower prices (which then
spark growth in demand), or distributed to shareholders.
New revenues - Offshoring creates demand in
destination countries for US products, especially for
high-tech items. Offshoring thus boosts exports.
Outsourcing providers - whether in India or in Poland
and whether subsidiaries of multinational companies or
independently owned businesses - buy many goods and
services abroad. A call center in Bangalore, for
instance, might purchase Dell computers, HP printers,
Microsoft software and Siemens telephones. Not
surprisingly, exports from the US to India grew from
$3.7 billion in 2000 to $5 billion in 2003.
Repatriated earnings - Several providers serving the
US market are incorporated in America, which means they
repatriate their earnings to the US. An additional 4
cents of every dollar spent on offshoring services to
India thus returns to the US in the form of repatriated
profits.
Redeployed labor - US workers who lose their jobs to
offshoring will take up other jobs, which will in turn
generate additional value for the economy. In fact, it
has been found out that many in the US whose work is
outsourced move on to other, higher value-added
activities. From 1979 to 1999, 69% of US workers who
lost their jobs as a result of trade in sectors other
than manufacturing found new work within half a year. On
average, they received similar wages in their new jobs,
though roughly half took pay cuts, while the rest found
better-paid jobs.
The current debate on
outsourcing is misplaced because the problem is neither
trade itself nor globalization more broadly, but rather
the question of how a country should allocate the
benefits of global trade. Trade in services, like other
forms of international trade, benefits the US as a whole
by making the economic pie bigger and raising the
standard of living. Outsourcing jobs abroad can help
keep companies profitable, thereby preserving other US
jobs. The media, and vulnerable workers, naturally focus
on jobs lost to overseas workers. But even the job shift
hasn't been a one-way affair. Four and a half million
Americans work for European companies in the US; a
million-plus work in companies involved in global trade.
And, foreign companies are continuing to invest in
America, despite higher wages. There's investment in the
auto sector, with plants like Mercedes-Benz, Honda, BMW,
and Toyota. Then there's foreign investment in financial
services, pharmaceutical, chemical, and energy
companies. They're all growing. And this is on top of
the $600 billion invested annually in the US to support
its trade deficit.
There is understandable
anxiety in the US now that it no longer controls the
high-tech, white-collar openings that were supposed to
absorb those who lost manufacturing work. Everybody is
aware of a new, global, highly skilled labor force that
earns as little as a tenth of what the US pays. The fuss
over outsourcing must not be allowed to obfuscate the
real reason for the disappointing job and wage numbers.
It's productivity. The increase in output per worker
has, until recently, exceeded gross domestic product
(GDP) growth. This means fewer jobs, including 800,000
management and executive positions in the past four
years - jobs that would not be outsourced to other
countries. Why? Companies will simply not hire new staff
until they have confidence that sales will increase
faster than gains in productivity.
Productivity
has brought about huge job losses in manufacturing, not
just in America but worldwide. Some 22 million
manufacturing jobs vanished between 1995 and 2002 across
the globe. In the 1990s, the US began outsourcing memory
chips, laptops, and other high-tech equipment
manufacturing to China and Taiwan. The fear then was
that this might lead to the loss of their technological
edge. But US semiconductor makers shifted into
high-value microprocessors and sparked a productivity
boom. All sorts of businesses found new ways to apply
this technology, resulting in multibillion-dollar
Internet markets and thousands of new jobs. The same
thing is likely to happen again.
History shows
that as economies grow, some job categories shrink or
vanish and new ones appear. There were fears in the US
about the migration of its industries to Japan in the
1950s and 1960s, OPEC buying the world in the 1970s and
jobs going to Mexico in the 1990s. But every time, the
US was able to adapt, creating new industries and jobs
that never existed, while abandoning others. The same
thing is happening now as jobs in call centers, back
office operations, and some IT functions move offshore.
Opportunities for redeploying labor and investing
capital to create higher value-added occupations will
continue to emerge even if it isn't always possible to
say exactly where.
According to MGI, even if the
re-employment of workers remains at its current rate,
the US economy gains an additional 45 to 47 cents of
economic output over time for every dollar of corporate
spending offshored. This is probably a conservative
estimate of the value created, since white-collar
service workers are more likely to find new jobs, at
higher wages, than manufacturing workers. A recent
International Monetary Fund (IMF) study says that
India-bashing on outsourcing of jobs from America is
unjustified. In fact, the US and Britain have the
largest net surpluses in business services and hence
would suffer the most in terms of the lost dollar value
of such trade if other countries cut service
outsourcing.
An article in Finance &
Development, an IMF publication, said between January
and May 2004, there were 2,634 reports in US media on
service outsourcing, mostly focusing on the fear of job
losses. Call centers and computing services in India
were the most frequently reported examples. It was found
that firms based in industrial countries that outsource
services have been accused of exporting jobs to
developing countries. But in reality, the growing
outsourcing of services is simply a reflection of the
benefits from the greater division of labor and trade
that have been described for manufactured goods since
the time of Adam Smith and David Ricardo.
According to the study, outsourcing does not
appear to be leading to net job losses. Jobs lost in one
industry are often offset by jobs created in other
growing industries. US business service imports as a
share of the GDP have almost doubled in each of the past
several decades, from 0.1% in 1983 to 0.2% in 1993 and
0.4% in 2003. India itself outsources a large amount of
services. Its business services grew from 0.5% of the
GDP in 1983 to 2.5% in 2003. Like trade in goods, trade
in services is a two-way street. In addition to being a
large importer of services, the US is also a large
exporter of services and it has a net surplus in all
services, in contrast to its goods trade, in which it
has a net deficit. Hence it would suffer the most in
terms of the lost dollar value of such trade if other
countries cut service outsourcing.
Liberalized,
competitive economies that have flexible labor markets
can cope with the natural process of job creation and
destruction, and the US economy - the world's most
dynamic - is arguably in the best position to do so. The
US has the highest rate of re-employment among
Organization for Economic Co-operation and Development
(OECD) countries by a factor of almost two. Over the
past 10 years, 35 million new jobs have been created,
and, according to the OECD, job growth was the fastest
in high-wage occupations.
Results from US and
United Kingdom studies conducted by IMF suggest that
service outsourcing has the potential to make firms and
sectors sufficiently more efficient, leading to enough
job creation to offset lost jobs. These countries have
reached a stage of economic development, where
productivity and efficiency gains would be the main
trigger for GDP growth. Slow productivity growth has
long been seen as the Achilles' heel of a service
economy.
Clearly, protectionism isn't the
answer. Outsourcing is a powerful way for companies to
reduce their costs, improve the quality of their
offerings, and extend the scope of customer services.
This is also the best way for companies to stay
competitive in the global market and hence save the
existing jobs. For European companies, it could also
create a new source of flexibility now hindered by the
thicket of labor laws at home. And Europe's rapidly
aging populations mean that offshore labor increasingly
will be needed in coming years to make up for a
dwindling workforce. Far from viewing offshoring as a
threat, the political leadership should use it as a
catalyst for the structural reforms that advanced
economies need.
Protectionism may be an easy
call, but it's also a delusional one.
Kunal Kumar Kundu is a senior
economist with a leading bilateral Chamber of Commerce
in India. He has a Masters in Economics with
specialization in econometrics from the University of
Calcutta.
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