The Hindu | March 15, 2004
IT IS a horror staring at U.S. professionals these days - the horror of receiving pink slips and their jobs going to lowly recruits abroad. They blame it all on outsourcing. Indeed, there are reasons for their despondency.
Leading journals have been writing on "global white-collar migration,'' "the new job shift,'' and allied topics and giving details of job losses in several areas, which are increasing in number. The companies affected include many in the Fortune 500 list. A heated debate is going on in the U.S. among academics and politicians. Bills seeking to restrict outsourcing have been introduced in several States as also in the Senate. Against these developments, it is difficult to deal with the issue dispassionately. Unwittingly, Gregory Mankiw, Chairman of the President's Council of Economic Advisers, was caught in the crossfire over his remarks that outsourcing is "probably a plus for the economy in the long run.'' His remarks sounded so impolitic in an election year that President Bush distanced himself from him. However, Dr. Mankiw did not resile from his academic stand. In his reply to the Speaker of the House of Representatives, he admitted that "any economic change, whether arising from trade or technology, can cause painful dislocations for some workers and their families'' but added that there should be policies to help workers to prepare for the change. Alan Greenspan, Chairman of the Federal Reserve, joining the debate a few days later, said that protectionist cures might make the situation worse. He hopes that the U.S. would manage to replace lost jobs from lower wage foreign competition with jobs in advanced industries as it had done in the past. The poser is, "Can it do it?'' For an answer, there is need to go into the political economy of outsourcing.
Factors behind outsourcing
Global sourcing or outsourcing is as old as East India Company. Management theorists and economists have analysed the factors that promote outsourcing. The rise of the multinational corporation (MNC) would not have been possible without outsourcing. No company can hope to produce all its requirements in-house and has to procure raw materials and components from other parties. There are risks attached to contracts, especially if proprietary assets like knowhow, patents and brand names have to be safeguarded.
Ronald Coase, a Nobel Laureate in Economics, explained that there are "transaction costs'' attached to contracts and contracts invariably fail. It becomes necessary to internalise' the assets to appropriate the rents in full. Branches and subsidiaries are floated abroad under common ownership subject to control and co-ordination. In such a situation, commodity flows across countries turn into intra-company flows. In one of its studies, UNCTAD assessed that nearly 70 per cent of international trade is in the nature of intra-company trade and such trends have been on the increase.
Post war developments
The post war years saw relocation of manufacturing from developed to developing countries in areas like light engineering, shoes and apparel. Manufacturing was segmented globally and labour intensive parts were located in low wage destinations. Companies like Nike and Adidas were known for this style of operation. They had managers who provided designs for component manufacture in hundreds of locations and co-ordinated component-assembly in convenient countries. They were footloose in that they arbitraged on tax and labour regimes. These manufacturing patterns led to frictional unemployment in home countries. Those displaced could however be re-trained in other skills. In the process, within a reasonable time, they went up the food chain. The burgeoning service sector absorbed many of them.
The model described above held good even around the time the electronics revolution took over in the post war era. Electronics had its own special features and lent itself ideally to segmentation. Pioneers like Intel and Texas Instruments followed the FDI strategy of assembling chips in wholly owned subsidiaries in China, Malaysia and Hong Kong. Even as low wage locations concentrated on low skill segments, the labour back home worked on high value hardware. Successive reductions in the price of hardware generated continuing demand and sustained higher levels of growth and production. Wages rose in the Silicon Valley more than proportionately. High levels of consumption sustained the economic boom.
To conclude the story, outsourcing was the driving force behind the global computer development. There was common cause between workers in East Asia and those in the Silicon Valley. It is doubtful whether similar symbiosis could be replicated, as there is no new technology in sight, which might bring about a paradigm shift as in the electronic years. Computer technology has plateaued except for incremental additions in the manufacture of new chips with higher capacity and in bandwidths. Moreover, the convergence of information and communication technologies (ICT) distorts the structure and patterns of production when combined with the current economic recession.
For economists like Mankiw and Greenspan the hope is that the American capitalist model that fosters flexibility and entrepreneurism, innovation can meet the challenge this time also. This is more a matter of faith. The trends in ICT seem to work against any hope of economic revival in the near future.
The driving force behind outsourcing in the ICT sector is for global labour arbitrage. As Stephen Roach put it, it is "- a by-product of IT-enabled globalisation that is now acting as a powerful structural depressant on traditional sources of job creation in high-wage developed countries such as the U.S.'' It is overlaid on the earlier jobless recovery contributed, again, by ICT.
U.S. companies under financial stress began their cost cutting pilgrimages and took to digitisation as the road to Mecca. If in earlier years, they segmented production chains and shifted labour intensive parts to low wage locations, now they would digitise them and access services from abroad through wires. They would get the service at 20 per cent of U.S. wages. The revolution is that digitisation converts labour or service, which was considered non-tradable from the days of Adam Smith, into tradable units. For many services, physical presence is no longer necessary and the service personnel may be located anywhere in the world.
For those in developing countries, it started in a big way in the late 1990s when the Y2K fever gripped the world. Thousands of professionals entered the U.S. By 2000, the fever was over. It also coincided with the dotcom collapse. There began a backlash against foreign professionals. The U.S. responded by denying visas to professionals. Unfortunately, it coincided with the bursting of the stock bubble and the financial bankruptcy of many established firms. Those on survivor kits had to undertake fierce cost cutting programmes and digitisation provided a way out. They decided to jump the visa walls and export the jobs to cost effective locations like India.
Initially, the services were restricted to back office functions like call centres, help desks and customer support coming under the category of BPO. From BPO to other IT-enabled services such as engineering design, architecture and radiography it was a short hop. The most exciting developments are in research programmes where companies like GM and Siemens locate global centres.
The demand dimensions are mind-boggling. Earnings for companies like Infosys and Wipro have been increasing at unprecedented rates and volumes. The UNCTAD's Report (E-Commerce and Development Report 2003) provided very optimistic estimates of earnings drawn on the assessment of U.S. consulting firms. It predicted a market of $ 300 billion by 2004.
The National Association of Software and Services Companies, the industry association in India, predicts in its Strategic Review 2004' an earning of Rs. 33,010 crores, up by 24.4 per cent from 2003. In the same way the estimates of job losses create panic in the U.S., the employment and earning estimates cause euphoria in India. These lamps light a good part of India shining!' However, there is need for caution.
It is also a hot issue for the Indian public and politicians. For them, the stakes are high. The earnings, even if they get reduced over time, are valuable additions to the Indian economy. The country reaps the benefits of its past investment in higher education. It mitigates the problem of educated unemployment. However, prudence would suggest that it is not a remedy for all its ills. It is only peripherally linked with the mainstream economy. There is fear that it creates islands of affluence' amid a sea of poverty in the country.
There is a moral to this account. Erstwhile free traders' in the US may turn to protectionism. Vintage statists like Indians should not turn to crypto-free trade, as they have to safeguard their interests in more critical areas than ITeS in the larger context of WTO negotiations.The Hindu:
