|
Evette Treewater is a junior double-majoring in economics
and political science. Her focus is on international political economy.
Americans are now aware that the voice on the
other end of the phone might not be American. As technology life cycles shorten,
technical support conversations lengthen, and people spend hours
resolving software glitches with the ‘Invisible Man’ who could be
troubleshooting from the opposite side of the planet. A service is rendered, an invisible
transaction is made, and the forces of international trade thrive though
no physical good is exchanging hands.
Such is the nature of
service exports, which have acquired a starring role in the global
economy during the last decade.
Last year, all forms of outsourcing totaled $150 billion, growing
at an annual rate of twenty percent. (Bielski, 2003) The United States
enjoys an increasing and sizable surplus in cross-border services. In recent years, India capitalized on
the globalization of information-technology services to become a strong
provider. The country’s workers
perform satisfactory service at beyond-satisfactory rates, causing a
natural flow of jobs out of the United States and into the booming tech sectors
of India’s larger cities. Some view this phenomenon as India’s gradual
integration with the world economy, and as mutually beneficial to the
United States and its consumers.
Others see a tragedy: Americans lose jobs to underpaid workers
overseas, causing a depressed job market at home on the stage of an
election year. In either case,
outsourcing between the United States and India challenges both countries’
existing policies and economic structures, and will continue to shape
their roles in the world economy.
To understand the timing and significance of
the trend in outsourcing, we must examine India’s path to liberalization. Only fifty years ago, India used a
development strategy based on economic self-reliance and regulations that
insulated its economy from the rest of the world. Foreign investment was as bizarre an
idea as computer software, but the two would one day go hand-in-hand in
India. Political leaders believed
that India’s underdevelopment was a result of Great Britain’s free-trade
policy. To serve national
priorities, they implemented a centrally planned economy based on public
ownership of production and quantitative restriction of the private
sector.
Deregulation began in the mid-1970s for two
external reasons: the end of the Bretton-Woods system of fixed exchange
rates and the hike in oil prices. (Srinivasan, 2003, p 15) Both served to depreciate India’s
rupee, which policymakers kept overvalued. India slightly relaxed some counterproductive
regulations and exports increased, but many of the regime’s restrictive
policies remained in place. Nearly
all economic activity required government approval. India was considered “one of the most regulated
economies in the world.” (Srinivasan, 2003, p 30)
During the 1980s, India moved from conservatism
to expansionist fiscal policy, which resulted in accumulated and
unsustainable debts. The rupee
quickly devalued, capital fled the country, and the economic crisis of
1991 began. With the collapse of
the Soviet model and the economy already in shambles, India’s leaders
were open to market-based reform.
They borrowed capital from the International Monetary Fund and the
World Bank, forcing changes in macroeconomic management. In 1991, over
three-quarters of total capital inflows came from external assistance.
(Srinivasan, 2003 p 64) The
upsurge resulted in tight capital controls, which later enabled India to
escape the contagion effect of the 1996 East-Asian currency
meltdown. The changes were
effective, and India’s real GDP growth recovered from 1.3 percent in 1991
to 5.1 percent the following year. (Srinivasan, 2003, p 30)
The crisis necessitated reforms in India’s
domestic industrial investment and trade.
The government relaxed pre-1991 sector restrictions against
foreign investment, and automatic approval was given to new foreign
investors. (Srinivasan, 2003 p 33)
Tariff and non-tariff trade barriers were also reduced, attracting
the attention of foreign investors. However, India’s export market
remained behind that of Asian neighbors like China, Japan, Thailand, and
South Korea. The governments of
these countries abandoned import-led substitution and initiated
export-led industrialization earlier in the game. They successfully exploited
international trade and now have established industrial sectors. India seemed, however, doomed to play a
desperate game of catch-up until it started heavily exporting commercial
services.
“Invisibles transactions”—which are comprised
of commercial services, income, and current transfers—occurred at an
increasing rate during the latter half of the twentieth century.
(Srinivasan, 2003, p 58) Two
trends in commercial services intersected and brought global attention to
this sector. First, India’s global
market share of commercial service exports exceeded its merchandise
exports. Second, India’s share of
worldwide commercial-services exports was a high .87 percent in 1983,
then declined until 1996, but skyrocketed to 1.22 percent in 2000. Every year from 1997 to 2001 showed
acceleration in commercial-services exports. During those years, there was an annual
increase of $12 billion in average foreign-exchange receipts from
invisibles. Analysts predict
another $12 billion in Indian service exports this year alone. An estimated 70 percent of transactions
are with the United States. (Economist,
February 2004)
A slower rate of growth in export goods did not
affect invisible transactions. This led some to believe India could
become the leading exporter of commercial services. Within commercial services, the “miscellaneous”
subgroup (including software) increased fourfold. Annual average export revenue from software
alone expanded six times over, according to India’s National Association
of Software and Service Companies. (Srinivasan, 2003, p 60) According to these reports, India
successfully exploited invisible transactions instead of focusing on
labor-intensive manufactured goods.
This maneuver resulted in gains many times greater than that of
merchandise trades.
Service liberalization is of greater economic
importance than liberalization of policies related to manufacturing. Services are playing a larger role in
both developing and post-industrial economies, and due to economies of
scale have potential to yield impressive gains. (Global Economic Prospects, 2002, p 170) Historically, most countries have
transitioned from exporting a few specific, labor-intensive goods to
providing high-end services that reap larger gains. An economy that is focused on services
also creates better and broader economic and human infrastructure. Japan, for example, began by cornering
the market on cheap, small radios.
If India accelerated its development process by focusing on the
service sector, its people would quickly enjoy benefits that were
previously experienced only by economies that took centuries to develop.
India’s situation has already changed with the
advent of increased foreign investment.
As the economy grows at a rate of seven percent a year,
consumerism is rising in a traditionally conservative society. Young, well-educated, and
English-speaking workers are making more money than the previous generation
thought possible. Their parents
had a very high savings rate because they were expected to pass an
inheritance to their children, but consumer spending is now growing at
twelve percent annually. This development
has a curious result: a “second unification” for India: the “young and affluent across the
country define themselves not just by caste, creed and language, but by a
shared consumer culture.” (Economist,
January 2004)
The United States now finds itself competing
with India, where service workers demand a much lower pay rate than do
American workers. The average wage
of computer programmers, for example, is up to $80,000 annual income in
the United States. In India, the
same programmer earns up to $11,000. (Thottam, 2004) That wage gap is significant enough to make
corporations focus on “multinational” business strategies. IBM, for example, employs 6,000 Indian
workers in fourteen different cities. (Wahl, 2004) This labor advantage has created the
current trend of outsourcing, which is often not only cheaper, but also
more efficient. In general, the current
trend of outsourcing offers “better and cheaper services, because they
are focused on a particular process or area of expertise that is their
core competency.” (Lawler, 2003, p 49)
Corporations, in theory, can make better use of the principle of
economies of scale. A more
intangible benefit of outsourcing is knowledge transfer, which often
allows the company to improve its organizational processes.
These factors correlate well with the law of
comparative advantage, in which all players theoretically benefit. President Bush’s economic advisor, Gregory
Mankiw, explained this concept to Congress, saying that “if a thing or a
service could be produced more cheaply abroad, then Americans were better
off importing it than producing it at home.” (Economist, February 2004)
American businesses could reduce labor costs, which would
contribute to lower overall operational costs. A side effect of such a
policy is that more businesses stay profitable and that services are
available at reduced prices for consumers. Adam Smith might have gone on to say
that free trade in services not only creates consumer surplus, but also
expands markets. This “stimulates
productivity growth because it makes possible enormous economies of scale
in manufacturing, services, and marketing, and enhances competition.”
(Madrick, 2004) This competition
ensures that America remains on the front economic edge, bettering her
industries and enhancing education so it does not fall behind.
Nonetheless, this is an election year, and
voters do not think in terms of the global economics. Outsourcing has
become one of the defining issues of the presidential race. When
President Bush was sworn in, America had 2.3 million more jobs than it
does now. (Economist, January 2004)
The unemployment rate at that time was 4.2 percent, an unnaturally
low number considering that the rate consistent with stable inflation is
approximately 5 percent.
Unemployment currently floats at about 5.7 percent as the 2001
economic recession fades. There
were 21,000 jobs created in February—a dismal figure given our present
economic health. (Economist, March 2004) Many Americans expected job growth to
bounce back along with recent economic growth, but it has lagged behind,
and this period has gained the nickname “the jobless recovery.”
Democratic candidate John Kerry hailed this
predicament as “the greatest jobs loss since the Great Depression.” (Economist,
April 2004) He coined the term “Benedict Arnold CEOs” for corporate
executives who send American jobs overseas. (Dobbs, 2004) Craig Barrett, CEO of Intel, would be
one of them. He says, "Let's compete—by
training the best workers . . . erecting the best infrastructure and
building an education system that graduates students who rank with the
world's best. Our goal is to be
competitive with the best so we both win and create jobs." Ironically, Kerry is a defender of
NAFTA, even though wages fell 21 percent in Mexico and 500,000 American
jobs were lost since the agreement was signed six years ago. Lou Dobbs is a CNN business-show host
who echoed Kerry’s criticism of outsourcing and Bush’s “do-nothing”
approach. He warns that America is
being “hollowed out” by international competition, and that the income
distribution gap will widen as middle class jobs go overseas and
investors cash in. He says Bush is
forgetting his responsibility to the people in favor of the lucrative
multinational corporations, showing a “lack of concern for hard-working Americans
who lost their jobs.” (Dobbs,
2004) This coverage is at least
alerting small American firms to the impact of outsourcing, a concept
they might not have considered otherwise.
Dobbs-like language has also led economists to discuss
the relationship between outsourcing and the U.S. job market. Many economists claim that outsourcing
creates more jobs than it destroys in the long run and point to three
themes. First, the majority of the
job losses this decade were cyclical in nature. Analysts look to the unnatural 4.2
percent unemployment rate at the beginning of Bush’s term and estimate
that two-thirds of the jobs lost were unsustainable in the first
place. (Economist, January 2004)
Bush’s tax cuts also gave companies incentive to place their money
into capital investments instead of people, but those cuts will expire at
the end of this year. The labor
market will rebound after the positive effects of a growing economy are
realized.
Second, outsourcing is not a wholly new
phenomenon on the American scene.
It was around four years ago, when the unemployment rate was low
and the economy was in full swing.
It accounts for a very small proportion of the jobs lost. The vast majority is attributed to “job
churning,” the process that regularly creates and destroys jobs in our
economy. This process affects
around two million jobs a month, reallocating capital and workers to
where productivity is maximized and costs minimized.
The third theme is the increasing role of
information-technology services in the global economy. Job growth continues in this sector as
information technology permeates all types of businesses. Though some
services will move abroad, more (and higher-end) jobs will be created
domestically. (Economist, February
2004)
Immigration is another weighty factor to
consider, and helps explain the “hollowed out” effect Dobbs points out. America’s economy, as Bush has said,
depends on immigrants to fill many of the lowest-paying jobs. In the last 20 years, over five million
immigrants assimilated into the American economy below the poverty
level. If these workers are
included in income distribution statistics, then the median income
appears stagnant. However, for native-born Americans, poverty rates are
declining and middle-income trends continue to improve. (Economist, March 2004)
Also, a near-record 75 percent (138.6 million)
of the adult population is currently employed. This is mostly because more teenagers
and married women are joining the workforce. A subsequent decrease in household
members, from three members 25 years ago to 2.6 members today, leaves
American household wealth at an all time high. (Economist, March 2004)
It seems that the anxiety Americans have about their earnings is
not about their dwindling incomes, but is rooted in the American habit of
living beyond available means.
Americans are not making less, but feel that they are expected to
have more.
Overall, less than ten percent of the jobs lost
over the last three years should be attributed to outsourcing. (Thottam, 2004) People are waiting to see if Bush’s
promise to create 2.6 million jobs within the year will come to fruition,
but even so, issues of outsourcing will not disappear. Forrester Research projects that 3.3
million service-industry jobs will move overseas by 2015. (Economist,
March 2004) This is almost an insignificant number, but not to the
displaced.
Some think restrictive government policy is the
solution. In January, the Senate
passed Bush’s bill (which cited reasons of national security) banning
some federal departments from outsourcing to poorer countries. Federal-government work makes up an
insignificant portion of current outsourcing, but the protective
legislation gives people hope that more will follow the lead of state and
federal governments. Others see
protective measures working against the very principles of free trade
that America pushes abroad. They
think those would create friction in multinational negotiations, much
like American agricultural subsidies have in the past. Alan Greenspan agrees, saying, “Protectionism
will do little to create jobs, and if foreigners retaliate, we will
surely lose jobs.” (Bailay, 2004)
The more important and time-sensitive issue is
how to alleviate the pains of job displacement. When a worker loses a job match there
are considerable costs, including long periods of unemployment, job
searching, and lost benefits. If
corporate benefits like health insurance and pensions became portable,
these costs could be minimized in the short-term. (Madrick, 2004) For the future health of the job market,
Greenspan challenges that “we need to be forward-looking to adapt our
educational system to the evolving needs of the economy.” He further stated that “we need to
discover the means to enhance the skills of our work force and to further
open markets here and abroad."
(Bailay, 2004)
When Indians look into the future, they hope to
see further service liberalization. Last year, $6 billion in foreign
funds went into the Bombay Stock Exchange, giving it one of the best
performances among Asian stock markets.
(Bailay, 2004) Indians also hope the success they have already
seen will convince the government to open up other areas and put an end
to some outstanding regulatory measures.
India’s commodities market, for example, could represent a
$600-billion-a-year trading opportunity.
India is only beginning to tap the potential of its telecom sector
with millions of new mobile users every month. Still, India’s privatization minister,
Arun Shourie, wants to see telecoms opened to majority foreign
ownership. Some opposition party
officials who supported reform are now wary of it, but Shourie says
whoever comes to office will find that it is the only route. (Economist,
March 2004)
India also needs to have a solid presence in
multinational negotiations. The
adoption by the World Trade Organization of the General Agreement on
Trade in Services (TRIPS) is an opportunity to establish this presence. Middle-income countries look to India’s
and Brazil’s leadership in these settings. Also, India’s boom in
information-technology software came mostly from borrowed foreign
knowledge. It would be in India’s
interest to push against TRIPS and the protection of intellectual
property rights. The borrowing
mechanism of TRIPS, in many cases, functions by granting Indians movement
to the United States on special, non-immigrant visas. Almost 55,000 of these visas were
issued in 1999, and there is pressure to restrict this number.
(Srinivasan, 2003, p 87) India
would like to see a liberal agreement on the movement of natural persons
to continue this scale of temporary migration.
To express a
more mercantilist view, if the United States does not outsource and
benefit from cost reduction, someone else will. Americans cannot expect to remain
competitive without taking advantage of overseas resources available to
them. This scenario played out
with goods like textiles and Teddy bears.
“American” blue jeans are a thing of the past: they are
manufactured overseas. Many argue
that America has lost manufacturing jobs.
The creation, however, of more high-end jobs has more than
compensated for this initial loss, and the United States has enjoyed a
consumer surplus as a result. Plus, more jobs are outsourced to the
United States than shipped out, with white-collar services replacing
call-center work. (Economist, April 2004) Free trade in services not only creates
consumer surplus, but also expands markets, which stimulates
productivity, efficiency, and competition. This has proven true for America in
terms of tangible goods like textiles, and now this principle will be
reinforced with the trade of invisibles.
It seems there is no need to fear the Invisible Man if the
Invisible Hand is still at play in the global economy.
Works Cited
Bailay, Rasul.
“Trading futures.” Far
Eastern Economic Review. April 8, 2004.
Bielski, Lauren.
“Outsourcing’s new global reach.”
ABA Banking Journal.
vol. 95 no. 6 2003.
‘Consuming passions.” The
Economist. January 3, 2004.
Dobbs, Lou.
“The imbalance of trade.” U.S. News and World Report. vol. 163 no. 11. 2004.
Global
Economic Prospects and the Developing Countries.
Washington DC: World Bank, 2002.
Lawler, Edward and Susan Mohrman. Creating a Strategic Human Resources
Organization. Stanford:
Stanford University Press: 2003.
Madrick, Jeff.
“Economic sense.” The New
York Times. March 18, 2004.
“Face value.”
The Economist. March 13, 2004.
“On the other foot: India becomes a defender of
free trade.” The Economist.
February 7, 2004.
“Smile, these are good times. Truly.” The
Economist. March 13, 2004.
Srinivasan, T.N. and Suresh Tendulkar. Reintegrating India with the World
Economy. Washington DC: Institute for International Economics. 2003.
“The great hollowing-out myth.” The Economist. February 21, 2004.
Thottam, Jyotti. “Is your job going abroad?” Time. vol,163 no.9. March 1, 2004.
“When good news spells trouble.” The Economist. April 10, 2004.
Wahl, Andrew. “Bangladore or Bust.” Canadian Business. vol.77 no.4.
February 16, 2004.
|
