Offshore Outsourcing Seen As A Glass Half-Full

Earlier this year, our sister e-newsletter O+F Weekly Update published a series of letters taking sides in the heated debate over whether overseas outsourcing was good or bad for the economy. Now the conservative British magazine The Economist has come out with a special series on outsourcing that definitively takes one side of that debate. According to author Ben Edwards, U.S. Business Editor of The Economist, “The global deployment of work has its critics, but it holds huge opportunities for rich and poor countries alike”.

Edwards contends that worriers, who fear for their jobs when companies move call center workers from America to India, forget that the same changes in production technology that destroy jobs also create new ones. He quotes Fed Chairman Alan Greenspan, who notes, “There is always likely to be anxiety about the jobs of the future, because in the long run most of them will involve producing goods and services that have not yet been invented.” To back this up, Edwards notes that William Nordhaus, an economist at Yale University, has calculated that under 30% of the goods and services consumed at the end of the 20th century were variants of the goods and services produced 100 years earlier. “What hardy late 19th-century American pioneer,” Edwards asks, “would have guessed that, barely more than a century later, his country would find employment for (by the government’s latest count) 139,000 psychologists, 104,000 floral designers and 51,000 manicurists and pedicurists?” Edwards points out that today’s list of human desires includes instant messaging, online role-playing games and Internet dating services — all unknown 20 years ago — and promises, “there will be many more tomorrow.”

Edwards points out that the arguments now being used against offshore outsourcing were, until recently, seen as positives. “The fiber-optic cable running between America and India that used to be hailed as futuristic transport for the digital economy,” he says, “is now seen as a giant pipe down which jobs are disappearing as fast as America’s greedy and unpatriotic bosses can shovel them.” The same media that greeted the rise of the new economy in the 1990s, he notes, now mourn the jobs that supposedly migrate from rich countries to less developed ones. He quotes Amar Bhide of Columbia University: “Graphs from a few years ago that used to predict explosive growth in e-commerce have apparently been re-labeled to show hyperbolic increases in the migration of professional jobs.”

But, says Edwards, the alleged loss of jobs is not what it seems. He cites Catherine Mann of the Institute for International Economics, who points out that the widely quoted number of half a million for IT jobs “lost” to India in the past couple of years takes as its starting point the year 2001, the top of the industry’s cycle. Most of the subsequent job losses were due to the recession in the industry rather than to an exodus to India. Measured from 1999 to 2003, the number of IT-related white-collar jobs in America has risen.

Between 1993 and 2001, Mann calculates, spending on software and services grew by 12.5% a year, nearly twice as fast as hardware spending, pushing the share of software and services in overall expenditure from 58% to 69%. And, Mann points out, the movement of IT hardware manufacturing to low-cost Asia helped to finance this shift in demand, because falling hardware prices freed up money to spend on software and services. Thus, Mann is quoted as concluding, the migration of commodity IT services to low-cost places such as India will leave companies with more money to spend on top-end services, which will help to expand this category of work. And Mann thinks that demand will continue to grow as falling prices help to spread IT more widely through the economy, and as American companies demand more tailored software and services. This is likely to lead to a shortage of appropriately trained IT professionals in the U.S.

Edwards also points to a McKinsey & Company report calculating that for every dollar American firms spend on service work from India, the American economy receives $1.14 in return. This calculation depends in large part on the ability of America’s economy to create new jobs for displaced workers. “America’s labor market is a miracle of flexibility,” says Edwards, “it creates and destroys nearly 30 million jobs a year.”

Over the next ten years, Edwards expects Russia and China to emerge and compete with India as important hubs for producing services such as software engineering, insurance underwriting and market research. “These services,” he says, “will be consumed at the other end of a fiber-optic cable in America, Japan and Europe. Just as Dell and Wal-Mart are obtaining manufactured goods from low-cost countries, companies such as Wipro, TCS and Infosys, for instance, are already providing IT services from low-cost India.”

Though outsourcing inspires more fear about jobs than hope about growth, Edwards sees the agents of change as the same as those that brought about the 1990s boom: New-economy communications and computer technologies are combining with globalization to bring down costs, lift profits and boost growth. And, he says, although the opportunity to source large amounts of white-collar work from low-cost countries has arisen quite suddenly, the work will in fact move over gradually. This will give rich economies time to adjust to new patterns of work, and should keep the politics of change manageable.

Edwards asserts there is both an economic and a moral case for free trade. “Buying goods and services from poor countries is not only hugely beneficial to rich countries’ economies, it can also provide opportunities for millions of people in poor countries to lift themselves up and improve their lives,” he says, concluding, “It is a game in which everybody can win.”

The full outsourcing series by Ben Edwards is available at www.economist.com/printedition/displayStory.cfm?Story_ID=3351416.

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