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A McKinsey Global survey on off-shoring / outsourcing has revealed that far from damaging US economy and that of other outsourcing countries, the trend enables companies to direct resources to next generation ideas and technologies, as long as government policies do not put an end to it.
With the digital revolution and international telecommunications experiencing a dramatic fall in costs, white collar jobs once shielded from global competition are now being performed off-shore in low cost countries like India, where labour costs are one-tenth of those in USA or Europe. As call centre agents, data processors, medical technicians and software programmers find their jobs going overseas, despite a recovering economy, slow job growth is getting blamed on off-shoring / outsourcing.
Ardent free trade enthusiasts are beginning to waver in their beliefs as critics warn millions of Americans could end up unemployed, and without any kind of rationalised thought, everyone has jumped on the bandwagon, vociferous against the trend. But, they are wrong to fight a trend that works to help USA retain a bigger portion of the economic pie, as well as, raise living standards by keeping in control consumer prices.
Off-shoring / outsourcing is a mutually beneficial trend that keeps US companies profitable, thereby preventing other job losses. Off-shoring / outsourcing works to raise productivity and allows companies to invest more in future ideas, next generation technologies that can lead to new job creation. Despite a trade deficit, USAs innovatively flexible economy has run up a surplus in international trade of services, all because of off-shoring / outsourcing.
A McKinsey Global Institute (MGI) 2003 study shows the trend created wealth in USA, as well as, India, the country that captured the jobs. It reports that for every dollar spent on outsourcing to India, US economy reaped three-fourths of the benefits, gaining $1.14 in return. Far from being a zero benefits trend for USA, off-shoring is a mutual economic benefit.
Even though, it does lead to a few job losses, given the benefits, American labour and economy must become more flexible, in order to cope with the changes free trade ushers in. The following is a break-down of the benefits that US corporates and American economy accrue as a result of off-shoring / outsourcing.
1. American Benefits from Outsourcing
When a US corporate spends $1/- on moving a service job to India, the latter only captures 33-cents through wages, profits and taxes, while US economic gains are much larger.
2. Corporate Savings
American companies cost savings are an obvious source of value for off-shoring / outsourcing. For every $1/- spent on outsourcing, 58-cents are saved for low cost, high quality services. This means companies can hire qualified staff and spend more money on supervision and training. And, often, off-shore employees are more motivated than American workers giving stellar performances for even low-skilled jobs that suffer from a high turnover in USA. A British bank confirms its call centre agents in India process 20% more transactions and 3% more accurately than their UK counterparts.
3. Great Deals for Customers
In a competitive economy like USA, companies pass on the benefits to customers in the form of lower prices. New research by Washingtons Institute for International Economics shows how IT hardware costs have been reduced by as much as 30% since 1995, boosting US GDP by $230-billion in that brief period.
Service trade will have similar effects as a tech in India will read a magnetic resonance imaging (MRI) scan for a fraction of what it would cost in USA. In simpler terms, a job may be lost but a nation benefits when lower priced life-saving technology can be offered to many more sick people.
4. Increase in Exports
Indian service providing companies return the favour by purchasing goods and services ranging from computers, telecommunications equipment to financial, legal and marketing expertise from American companies. For example, a Bangalore call centre uses Hewlett-Packard computers with Microsoft software, telephones from Lucent Technologies and is audited by Pricewaterhouse Coopers. Out of the 33-cents profit for providing services, Indian service providing companies buy 5-cents worth of American goods and services. Young Indian workers employed by off-shoring / outsourcing buy goods imported from America or Europe. In 2003 American exports to Indian corporates and individual buyers stood at $5-billion compared with just $3.7-billion in 2000, a 22% hike in the brief span of time, 2000 to 2003.
5. Repatriated Profits
As many Indian off-shoring / outsourcing firms are owned in part or in whole by American or European companies e.g. General Electric, EDS, they repatriate their earnings to America. As foreign owned operations, mostly American generate 30% of the Indian off-shoring industry, additional 4-cents out of a dollar spent on off-shoring makes its way back to American economy.
6. Increased Productivity, New Jobs Creation
Thus, the direct benefits to American economy from corporate savings, exports and repatriated profits totals to 67-cents, twice what India makes by providing low-cost, high quality service. These corporate savings can be invested in new business opportunities to boost productivity and create new higher value jobs, as in the case of auto assemblers replacing carriage makers and factory workers replacing farmers.
An old pattern, US manufacturing employment shrank by 2-million jobs over 20-years, but net employment increased by 43-million jobs in professional and business services, educational and health services, leisure and hospitality, trade and transport, and financial services. And, manufacturing output increased despite the lower number of workers as factories became more productive. Higher productivity translates into higher national income which in turn means a higher standard of living.
The same scenario is going to unfold again as call centre jobs; IT functions and back-office operations move off-shore. Bureau of Labour Statistics forecasts 22-million new jobs in health care, business services, social services, communications and transportation will have been created between 2000 to 2010, as a result of labour re-deployment and capital investment. It also predicts that IT-related operations will be the fastest growing job categories, as code may be written abroad but systems integration has to take place onshore. Though off-shoring of manufacturing and service jobs increased in 1990, trade expanded rapidly and overall employment rose with unemployment dropping to 4% as wages rose.
Off-shoring / Outsourcing in Perspective
By 2015, it is estimated 3.3-million business processing jobs will have gone overseas but that is just a part of the job churn every flexible, liberal economy experiences on a cyclical basis. Entrepreneurial and innovative businesses will always create new jobs for the ones eliminated; just the same way US semi-conductor industry reinvented itself when faced with heated Japanese competition in the 1980s. Motorola, Intel and Texas Instruments exit the dynamic random access memory and began producing micro-processors and logic products, instead.
Myth Explosions
1. Trade in services is less beneficial to US economy than trade in goods. Wrong. USAs strong, well developed and productive service sector will lead to an increased service trade that will prove to be a more substantial plus for the country along with a comparative advantage in knowledge based industries unlike services based on manufacturing, finance, accounting, legal and others.
2. Many fear that Indias and Chinas huge labour workforce will result in persistent unemployment in USA and Europe. Wrong. True they have a huge supply of productive labour, which means a fast growing appetite for goods and services. The goods and services they produce for America and Europe will also generate more demand in their own markets. They will not be a drain on economic activity or jobs in the rest of the world.
3. China and India are stealing work from Americans due to low wages. Wrong. The truth is many of the jobs in India do not exist in America and are only there because of the low wage environment. It does not mean if half a million people are employed in the off-shoring / outsourcing industry in India, there could be half a million jobs in America or Europe. Without off-shoring, American and European companies would cut jobs or withdrawn services as 24 x 7 customer help. Moreover, technology is putting more American jobs at risk than off-shoring or outsourcing e.g. automated voice response units replacing call centre workers, online airline or hotel booking systems are replacing live travel agents and operators, and imaging software is replacing data entry workers.
4. Another myth is that service sector off-shoring has resulted in slow job creation and economic recovery. Wrong. The 2,000,000 American jobs lost since 2000 have been in manufacturing and not in the services sector. Employment, in the supposedly hardest hit sector IT expanded from 1999 to 2002 by 108,000 jobs. 71,000 computer programming jobs may have disappeared as a result of the bursting of the IT bubble but jobs in other IT-related fields multiplied. Higher paid positions like software engineers increased by 115,000, systems analysts and network administrators rose by 40,000 and 27,880 respectively.
In order to overcome any job losses and to help people make an effective transition, the government has to institute job re-training programmes, give continuing education grants, make health benefits and pension plans more transferable between jobs while generous severance packages can mitigate some of the pain of jobs lost. In addition, tax credits could be given to companies hiring people who lost jobs due to free trade.
Innovating and finding new ways to create jobs is the best way to fight job losses rather than indulging in protectionist measures, that will only result in harming the nations economy. Job losses must be weighed against broader consumer benefits, because not off-shoring can make US and European companies lose their competitive edge, thereby weakening and damaging the economy while endangering still more jobs and missing the chance to raise productivity and new job creation.
There are enormous benefits for America in helping create a healthy, stable world economy and alleviating poverty in countries. Countries that can become a new market for American goods once they are earning more than what it costs for the necessities of life. The same workers that are accused of stealing American jobs are the ones who will buy American products, goods they could not afford before the phenomenon of off-shoring / outsourcing took place. What goes around comes around! The same is the case with off-shoring / outsourcing! If you have understood that then let wisdom prevail!
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