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Last Updated: Monday, 29 March, 2004, 12:57 GMT 13:57 UK
Outsourcing: Long-term gains for all

By Kaushik Basu
Professor of economics, Cornell University

I met Paul O'Neill just once.

As the then-US treasury secretary, he had invited a small group of economists to hear their views on the Indian economy and the possibility of greater Indo-US economic interaction.

Paul O'Neill
O'Neill: Took keen interest in India's economy
I wanted to make myself heard to the person who held, arguably, the most influential economic policy position in the world; so I went.

But I was apprehensive. I had enough experience to know that when men of power say they want to "listen", they usually mean "talk".

Also, if I discussed the Indian economy, I would speak about information technology and the surge of business enterprise, but also of the persistence of poverty and growing inequality.

And I wondered if a Republican administrator would have the patience for that.


In the event, it turned out to be one of the most engaging policy meetings I have attended.

I was completely taken by O'Neill's interest in India, his ability to listen and his concern for the marginalised.

I had subsequently wondered if I had been foolish in forming such a favourable opinion of him, based on one meeting.

Software programmers at work at Planet Asia, an Indian software company, in Bangalore, India
Outsourcing to India and greater trade with China do cause an immediate loss of jobs, but these are more than made up for by the creation of new jobs

It was therefore good to have my impression confirmed by Ron Suskind's meticulously-researched, gripping book, The Price of Loyalty, on O'Neill's tenure in Washington.

O'Neill opposed the reckless tax cuts for the rich and ballooning fiscal deficit, tried to hold CEOs to higher standards of accounting honesty and (in a more muted way) opposed the Iraq invasion, which, according to the evidence provided by O'Neill, had been decided way before 9/11.

These 'un-Republican' positions cost him his job. The book presents an impressive amount of evidence on O'Neill's effort to battle the intrigues and scripted debates (where innocent people are gently led to pre-determined decisions), which characterise contemporary politics.

As the momentum for the next election picks up in the US, one misses the likes of Paul O'Neill in government.

In terms of economic policy, the focal point of this election is turning out to be trade and outsourcing. The humbug being churned out is impressive.

One day Greg Mankiw (chairman of President Bush's Council of Economic Advisers) makes a statement that outsourcing is a form of free trade, and free trade is good for America.

The next day an elaborate political machinery goes into action explaining how that is not what he meant.

Jobs tally

The fact is - what he said is the truth.

It is true that outsourcing to India and greater trade with China do cause an immediate loss of jobs, but these are more than made up for by the creation of new jobs elsewhere.

The textile sector once employed a large number of American workers, and the US car manufacturers once dominated the world.

When an industrialised nation opens itself to economic interaction with a poor country the scope for gains are the greatest
If the jobs that were lost in these sectors were protected through trade restrictions, there could be more textile and automobile workers in the US today, but there would be fewer jobs on the whole.

This does not mean that government has no responsibility towards workers who lose their jobs, but simply that government must not cut off trade and outsourcing.

In the late 1980s and early 90s it had seemed that Japan (and maybe even Germany) would overtake America.

According to World Bank data, in 1992, US per capita income was $23,200, while Japan (which was rapidly catching up) had reached $20,300.

But in 2002 the US economy, with a per capita income of $35,100, had surged ahead of Japan (and also Germany), which had incomes hovering around $26,000.

What caused this?

First, this was a period of excellent fiscal management in the US.

Second, when an industrialised nation opens itself to economic interaction with a poor country the scope for gains are the greatest.

Fair shares?

The freer trade with China and the unprecedented collaboration with India's information technology sector, in the form of both admitting computer scientists to Silicon Valley and outsourcing work to India, gave the US the competitive edge.

US car plant
Lost manufacturing jobs are an election issue in the US
It is this openness that the US has used time and again in its history to keep the lead.

Trade and exchange help both sides. A recent McKinsey study estimates that for every dollar of value created by US outsourcing, the US manages to capture 78%, and 22% accrues to the receiving country.

Naturally, for India the 1990s were a period of economic boom.

The changing structure of global politics, which has brought Indian and American interests into alignment, will probably ensure that the two countries will collaborate for some time to come, no matter who is in power in Washington and Delhi, and, despite the rhetoric, trade will remain largely free.

The bigger, more latent, danger is the large fiscal deficit.

With O'Neill not around to hold the line, this could go out of control and crowd out productive investment in the US.

If this were to happen, India will feel the strain. The only consolation will be that so will the rest of the world.

To read Kaushik Basu's future columns, bookmark bbcnews.com/southasia

If you would like to send a comment about this column, please use the form below this selection of views received so far.

Companies will go wherever they can get the thing done cheaper. In India labour is cheap because of the currency conversion factor and quality is same or even better. Companies will go there and if India builds a better infrastructure than even more jobs will go there. Time for India to take the action now. Brits sucked 10 Trillion plus dollars out of India & they left because there was nothing left in India. Come on Brits lets compete now :)
Rohit Panwar, USA, India

This is one of the ways in which parity of both worlds can be acheived. If the same work can be done at a cheaper cost of labor, it means those in India/China are not enjoying the standard of living in the U.S. or U.K. So what this process would do in the long run is end the ludicrously high standard of living even for a low end worker in the West compared to the developing world. Free trade is more fair than an average man in one country can think. Where were these people when the third worlds' economy was crippled by Imperialism?, there has to be some way to get even - and this is one.
Nilu, USA

There are a lot of issues revolving round the outsourcing business. Maybe there is a change required in terms of the skill set people have. If you have a skill set that is being outsourced, it makes more sense to enhance your skill set till you reach a point where that skill set is not being outsourced. As such all the work cannot be outsourced.
Parag Panda, India

Being flexible,adaptable, and outsorce in this (whether you like it or not) globalised Globe is a means to stay alive!
raja, malaysia

Outsourcing frees up resources which should, in theory at least, allow those resources to become more productive in other or new areas of the economy. The governments of those countries being adversely affected by outsourcing (with the loss of jobs in the short term) should focus on creating an environment that fosters and promotes an innovative, entrepreneurial culture to enable this migration to better jobs in the long term. Better tax incentives, funding channels, start up promotion and less red tape - all these and more will help to combat job losses.
Robert, Uk

Outsourcing does not change anything for the better!The whole debate is about the rich and the poor.tHE GAP CONTINUES TO WIDEN! The rich get richer by making a few more people poorer (in their home countries) and exploits the poorest who do not have anyone to protect their rights. The so called developing countries do not have a choice but to allow the exploitation in absencee of which they will not be able to compete for the multinationals to invest in their countries.

To those that are loudly proclaiming that the job loss to countries like India is solely due to lower costs and not due to better skills, well I have to say that even if we assume "better skills" as a debatable point, there is one key factor that is being consistently ignored - The NUMBER of qualified professionals. It is a fact that there is a general shortage of skilled professionals in the west (especially in the US & UK - and which I believe is partly due to an over-emphasis on Arts education, at the expense of Science/Math/Engineering realms). Consequently, American companies have been hiring foreign nationals on H1B visas for decades. Let us not forget that this hiring was not because of any cost considerations, but was purely because of a GENUINE SHORTAGE OF REQUIRED SKILLS in the US. Outsourcing, in a way, is only a logical extension of this trend of hiring foreign nationals. Thus while cost is a key factor it has not been the only key factor leading to outsourcing, ! unlike what some would want us to believe.
Piyush, India

It's not only startling but sad as well to see how can people not understand the basic priniciple of market efficiency. India and China are not scoring over just because they can provide cheap labour but because overall they are more productive. Unless the developed countries understand that they cant do anything but to whine. At the moment India and China are catering to the low end markets but very soon we will see thier presence in high end markets as well. And that would just not be beneficial to them but to world economy as well.
Somnath Banerjee, London

A couple of points. While there may be a concern over unemplyment rates in the US, they are by no-means terrible considering the country is only just coming out of recession. For those who have concerns about the UK then just take a look at unemplyment levels here and try and argue that outsourcing has been bad for our economy. So, while the negative impacts have been limited the beneficial aspects are only just starting. Firstly, companies who generate added value by outsourcing will eventually be able to pass on the savings they make to their customers. It will take time but it should happen if they want to gain a competitive advantage. Secondly, the economic advantages that the developing country will gain will stimulate the world economy as a whole and should result in increased trade with them. I do have concerns about trade deficits and budget deficits but I believe it is to be expected when we are attempting to stimulate weaker economies around the world.
! Carl Eastwood, Scotland

Susan from London, are plumbing courses REALLY oversubscribed? I think you'll find, that there is a huge shortage of skilled manual labour in this country, and pay for qualified plumbers/electricians/brick layers is very good. I'm not implying for a moment that the economic situation can be aleviated by us all becoming plumbers, I'm just implying that I hope you don't have a pipe burst whilst you're in a hurry one day.........
Lee Hayes, Uk

Arguments of the form of 'better for everyone in the long run' never seem to answer the question of how western economies will re-orientate themselves in an environment where another country can perform non location-specific functions cheaper and better (through access to a highly skilled local workforce, as India undoubtedly possesses). India is already moving up the value chain towards strategic consulting, and outsourcing IT development (where it initially made it's name) to Russia and China. Fundamentally the question becomes one of 'what can we do cheaper / better than another nation sustainably (i.e for 10 years into the future). I can only see the UK retaining those activities where having a local presence is a prerequisite (e.g. checkout operator, salesman....), and don't see these activities commanding good salaries in an environment where unemployment / the dominance of low paid jobs is creeping upwards. In the VERY long run maybe prices / wages will equalize acros! s the whole world and we will truly be competing on local competences in different countries, until then the playing field is very much NOT a level one.
Trevor, Uk

All these words and not yet a single use of the term customer or quality - worrying, isn't it? The raison d'etre of outsourcing is to reduce cost, service is of secondary or tertiary importance. I believe it is a practice which will eventually and catastrophically bite back at the organisations who choose to use it. As a professional working in the outsourcing sector, it is clear to me that outsourcing in the long term is simply not a sustainable business proposition. The more the competition, the smaller the margin, the greater the risk. Businesses which base their entire income on this will eventually fail... big time.
Garry Doherty, Uk

Sorry I simply do not agree with your view. Outsourcing causes just two things; Unemployment and deflation. Why? Because any white collar job can be moved abroad. This leads to mass unemployment and the movement of well educated people into manual professions. Is it any wonder that plumbing courses are so oversubscribed??? As for the deflation element, well when you can hire a Eastern European Consultant for just $10,000 a year compared to the $100,000 earned by Consultants in the UK what incentive is their to increase salaries? The same goes for IT and any other industry. People in the UK and US are not losing their jobs because they are somehow inferior or workshy. They are losing them because companies realise they can get someone to do the same job for a fraction of the cost elsewhere. The bottom line is that the only people who benefit from outsourcing are corporate profits and short term countries like India and China. I hear that Russia is now undercutting Indian IT programmers! For the rest of us we either need to fight back now or resign ourselves to much lower salaries and / or long term unemployment in the near future.
Susan, London, England

While most people will agree that outsourcing of white collar jobs will be beneficial to the US in the long term, what solution do yoy offer to the Americans who have been unemployed for a long time. Earlier it was the blue-collar manufacturing jobs that went away to Mexico,China, Asia. But nowadays it is the middle class jobs - software engineers, accountants, call center workers, medical transcription/radiologist etc. that are getting outsourced to India, China and other countries. Most economists suggest that many Americans need to be retrained. Retrained for what .. when they know that their new skills will be in demand in countries like India, Eastern Europe and China. Most of the big CEOs for the past couple of years have been receiving hefty bonuses for laying of thousands of workers. The big firms have shown that they don't care about anything except their bottom line.
Subbu Iyer, White Plains, NY, USA orig. from India

As a college educated technical worker who has been displaced twice in one year, I am having a hard time seeing the benefit of jobs in my profession being sent directly overseas. Right now, I have had to resort to a job that pays much less than half of what I made before. My question: they say that this outsourcing is leading to more jobs in the US. Where are they and are they of the same pay rate? I don't think we are trading equal for equal.
kass, USA

Although I do agree that in the long run every one is better off with outsourcing, in the short run the only ones who are benefiting are the shareholders of the big corporations. The big losers are those of us who invested our time and money in higher education in information technology in the hope of making a decent living. It is hard for me to digest the idea that I will be better off in the long run, while I still have to pay for my food, mortgage, car payments, student loans etc. in the short run with out a decent job. I cannot tell the banks that I will pay them in the long run, when the benefits of outsourcing trickle down to me. It would have been a lot more ethical and socially responsible, if at least a small percent of the savings were used to retrain those of us who ended up in the loosing side of this deal.
Ajish Thamarathu Pothen, USA

An open economy like an open mind creates a wealth of opportunity for those who practice it.
Hatinder Sandhu, uk

Paul O'Neill had the interests of the world at large.. Unfortunately, truth is not what the Administration was looking for..
bimla mehta, usa

Opening the markets, according to any rational economist, is not only a good way but THE ONLY way forward. Forces of the market are too strong to be controlled and any attempt to tamper with them will only be a mistake. I might be sounding like an economist teacher but that just highlights how fundamental are the issues related. Increased trade is always benefitial in the long run and hence I strongly urge the US to open up its markets. Developing countries like India, China, and Tanzania have a lot to offer and gain through such trade.
Devashish Kumar, Tanzania

With all due respect, I'm sure you could easily be replaced by a bright young boffin who could deliver his lectures over the Internet whilst sitting in his low-wage overseas office. And the University could lower their tuition fees proportionately. All those glowing statistics won't help you then.
Todd Kulik, usa

The general economic theory of free trade being good for an economy is sound. However, it is still theory and the theory assumes a number of provisos. For example that BOTH countries trade freely. In the case of India it is well known that this is one of the most protective of economies in Asia. Immediatley, therefore, we start to see the theoretical benefits not being realised in practice. The thoery also assumes that sufficient cost savings are made by the onshore based companies that allow the short term negative impacts to be outweighed in the long term. In the IT sector the evidence shows that sufficiently large cost savings are not being made. So although the thoery is sound we cannot simplify this to one statement : 'sending work to a cheaper cost base is beneficial for everybody, all of the time'.
Gurdial Rai, UK

I know we are becoming global. but my concern is that these big corporation are getting fat w/money that they give themselves big big bonuses which could save jobs/. remember these corporation are ruthless and they will leave your country in a heart beat if they don't get workers to work for low wages. making a profit is one thing but exploiting is inhuman. beware of fox in the hen house. thank you
j.p.evans, USA

I am increasingly annoyed at these articles and the argument that outsourcing benefits everyone. I live in the REAL world. I was one of the first people in the UK to be outsourced during the 1980's, when it was known in the UK under another name. Since then, i have seen this practice grow at an alarming rate. I have worked in the IT industry for 28 years and let me tell you that I have NEVER seen companies create new jobs for the staff affected by these outsourcing deals and if they do, then they usually involve a catastrophic drop in salary. Companies outsource because they want to reduce costs. We can't compete with India or China because our labour costs are higher. It has got nothing to do with 'better skills' being available in these countries (Mr Blair seems to think that we need better education so that we can compete with China and India). The throw-away line that there will be 'initially some hardship involved' is insulting. Many skilled and unskilled workers suffer! great hardship as a result of outsourcing and quite often such outsourcing deals are accompanied by stories of huge wage increases for CEO's and massive increases in the companies profits. I agree with fair trade but it isn't fair if we can't compete with the low wages of these countries. I don't know what the answer is but the politicians and economists who keep telling us that outsourcing is good for us need to spend some time living in the same world that people like me live in. In short, wake up and get a life!
Simon Morrell, Australia

Good economic analysis.
Tapan Basu, USA



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