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Why offshore outsourcing is good for the US

December 09, 2003

The last three years have not been kind to the US economy. The latest data shows a recovery, but that is not reflected in the number of new jobs being created.

In fact, commentators are calling it the 'jobless recovery' of the economy.

In the recession the workers that were the hardest hit were IT workers. After the IT bubble burst, most companies reduced their IT spends drastically.

IT workers all over the country faced layoffs and a weak job market. While the economy posted solid GDP growth numbers last quarter, tech is certainly not back.

To make matters worse for IT workers, offshore outsourcing of IT is gaining momentum across the board.

Beyond IT, every job that is a non-manufacturing, desk job and can be done remotely over the phone and a network is a candidate to be outsourced to a business processing center outside the United States and typically in India.

This has got many people in the US worried about what the future holds for white collar jobs in the US.

The people who are worried are not just the kind of people who wore masks and rioted at the WTO meeting in Seattle. These are level-headed people from all walks of life who are concerned about the erosion of the 'American way of life.'

The 'American way of life' is an evocative sound bite in the US. It speaks of a suburban house, mowed lawns, kids and a dog playing in the backyard, a minivan, soccer practice, summer vacations. . . an idyllic life supported by a booming economy in the wealthiest country in the world.

A life that can come crashing down if you don't have a job. While there are safety nets like Social Security that soften the blow, losing one's job, especially a relatively high paying IT job, is not easy.

This is not the first time the American workforce is facing such a challenge. Manufacturing industries have been losing jobs to low cost producers outside the US for decades.

It began with low skilled, high labour-intensity manufactured goods like apparel and toys. But today, anything from consumer products to semiconductors and technology equipment is manufactured offshore, with China claiming the lion's share of these exports.

During most of the 90s, manufacturing jobs steadily migrated out of the US. However, a booming economy and growth in the services sector helped keep a lid on this.

In the last two years the sagging economy produced no new jobs, while manufacturing and then IT jobs continued to leave the US at a rapid pace.

Someone losing their job to a contract manufacturer in China or an IT services company in India today is less likely to find alternate employment in a hurry.

There is very little that you can say to someone who is not able to find a job that will make him feel better. Yet the case for international trade has been long established.

That free trade results in benefits to both the exporter and the importer, is generally not questioned by any economist and most governments. Chinese manufacturing may have led to a loss of hundreds of thousands of US jobs, but it has also lowered the prices of goods in the US for over a decade.

Lower cost of goods helps both consumers and businesses. A booming Chinese economy buys US goods and services. US companies who shift their manufacturing to China generate more profits that get invested for growth and create jobs.

In the final analysis, trade is beneficial for, both, the importing and the exporting countries.

However, real life is quite different from economic theory. In the pain-benefit equation of offshore manufacturing, the benefit of lower cost of goods is spread over hundreds of millions of consumers and businesses while the pain is borne by a few hundred thousand workers who lose their jobs.

Also, the pain of losing one's job (and not finding the next one readily) is a lot more than the few dollars a consumer saves on her monthly household budget.

The workers who are impacted have votes and a voice. That's what makes the job loss problem far trickier for a government than a lesson in economics.

The recent case of US tariffs on steel imports is a case in point. Till three months back, US steel producers were reeling from foreign competition. They were losing market share and were steadily shedding workers.

The industry and the steelworkers' unions convinced the administration that they needed the protection of higher import duties on steel from Japan and EU in order to survive.

Almost every newspaper editorial in the US railed against the folly of protectionism, yet President Bush went ahead with the tariff. The tariff has now been removed, but it just goes to show that international trade related issues are complex issues for governments.

The case for offshore outsourcing, from an economist's viewpoint, is a similar 'slam-dunk.' While offshore outsourcing does not directly lower the cost of consumer goods, it lowers the cost of operations for companies.

IT operations and other general and administrative operations are outsourced to a low wage country like India, thus reducing costs by anywhere up to 40 per cent. This increases their profits, allowing them to invest in growth.

The capital invested creates jobs. Sometimes, the increased profits (or decreased losses) could help a company survive. That saves all the jobs in that company.

You might say, what if the company doesn't invest for growth and keeps all the profit uninvested. In that case, the company's shareholders will get higher dividends or capital gains (as the profits accumulate). These shareholders will then spend more which will create more jobs in the economy.

Offshore outsourcing too has the same pain-benefit asymmetry at the individual level. The benefit is felt across the economy, over a period of time. The cost is borne by the individual white-collar worker who loses his job.

IT workers are not unionized like the steel workers, but are quickly organizing themselves by leveraging the Internet. They are also using the Internet to get their message to millions instantaneously. News items that are favourable to their cause get relayed around the country until they quickly become headline news.

A few months ago an IT worker in the Bay Area shot himself because he lost his job to offshore outsourcing. In October, it was this Pakistani medical transcriber who threatened a hospital that she would put personal medical records of its patients on the Internet if she wasn't paid her back wages. It seems there was an intermediary who had not paid her.

Then there are the actions of the governments of New Jersey and Indiana. Indiana recently cancelled a contract that it had awarded to TCS (Tata Consultancy Services), bowing to public pressure.

New Jersey legislators have introduced a bill that bars the state government from awarding contracts where offshore resources are used. The list is long and it will undoubtedly get longer.

In the next part of this two-part article, I will talk about how Indian companies and India should respond to the challenges to offshore outsourcing from the media and from the threat of legislative action.

Part 2: The response to offshore backlash!

The writer is Sr. Vice President at Infosys Technologies Ltd. These are his personal views and in no way reflect those of his company.

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