The Hindu Business Line : BPO and new protectionism

Though the workers in developed countries were concerned about the export of low-skilled manufacturing jobs, it was taken as an inevitable consequence of free trade. The trouble started with Indian software professionals going to the US and Europe on a massive scale. There were few complaints till the US economy was booming. With the dotcom bust they are becoming louder, says Alok Ray.

A NEW wave of protectionism is sweeping the US, and, to some extent, Europe and South-East Asia. This time it is directed against the relatively high-skilled professional jobs going overseas to lower wage countries through business process outsourcing (BPO). India has been the main target. Previously, the primary concern of American, European and Japanese workers was the export of relatively low-skilled manufacturing jobs to countries such as China. The resulting reduction in real wages — due to lower demand for such workers — led to such slogans as "US wages are being set in Beijing." However, professionals in the US were not that concerned since it was taken as an inevitable consequence of free trade based on the comparative advantage principle.

People generally accepted that countries, such as China, with low wages will be major exporters of labour-intensive simple industrial products in a globalised world. The flip side is that such low wage countries would be buying high-skill and technology-intensive manufactured products and services from the industrially advanced West. So, along with job loss for low-skill blue-collar workers there would be a job gain for high-skill white-collar professionals. In other words, countries such as the US were expected to switch from manufacturing to service economies just as the developing countries were to graduate from agriculture to manufacturing. Now this assumption is being seriously challenged.

The trouble started with software professionals going to the US and Europe on a massive scale on temporary work visas. They were often sent by Indian companies to do project-based work at relatively low cost. As long as the US economy was booming, on the back of the IT revolution, and there was a shortage of such people in the US, complaints were few and far between. With the dotcom bust and the US economy showing signs of going the Japanese way, complaints are becoming louder. The number of temporary work visas issued has come down substantially. In the US, the H-1B visa quota has been cut by about 67 per cent in a year. The current complaint is more against the "misuse" of L-1 visas under which workers are brought from low-wage countries through inter-company transfers. Some of them are then allegedly "loaned out" to other companies in the US. Unlike H1-B visa workers for whom there is a floor level of compensation, no such provision exists for the L-1 visa workers. The US politicians are complaining that such workers are often working at much lower wages there, pulling down the availability of jobs and wages of comparable American workers. Recently, the Indian media was full of reports of Indian IT professionals being harassed over alleged visa violations in countries such as the US, Germany, the Netherlands and Malaysia. In the past, when the going was good many such technical violations were overlooked by the authorities but not any more. The issue of Green Card to foreign professionals has also been severely restricted.

On top of this, the voice of complaint against the outsourcing of other IT-enabled service jobs such as those of accountants, stock analysts, actuaries, architects, designers, R& D scientists, radiologists, telephone operators, data entry and processing workers, is becoming shriller with each passing day.

The mainstream US media is talking about the loss of some 2.5 million jobs through outsourcing over the last two years. According to their estimates, some 5,60,000 of these are high-skill white-collar jobs. The US media hype started after a suicide by an American software professional who apparently lost his job to an Indian engineer, and then was forced to train him in his job. Senators from five US States — New Jersey, Washington, Maryland, Connecticut and Missouri — have moved Bills to ban overseas outsourcing of tech-service jobs by State governments. It is doubtful whether these will get the necessary political support to be made laws. Moreover, the legislators cannot stop private enterprises from outsourcing, as they, unlike government departments, will have to cut costs to stay in business.

Nonetheless, the popular mood against onsite foreign workers and outsourcing is becoming increasingly hostile. Even private companies cannot be totally immune to the local political and social pressures.

Nasscom and several major Indian IT companies are using counter-arguments and lobbying to control the damage. They are basically emphasising the indirect benefits which the US economy is deriving from both onsite Indian professionals working in the US and overseas outsourcing.

The US companies, they argue, are cutting costs by using lower-wage Indian professionals in the US and also through outsourced jobs done in India. Without this, US companies will lose their international cost competitiveness. Closures and job losses would follow. So, lower wage Indian professionals are helping Americans retain their jobs in the US. In addition, American consumers are gaining as a result of cheaper electronic goods made possible through outsourcing. Even Indian professionals on H-1 B temporary work visas have to pay social security taxes in the US but they are not entitled to the benefits.

Thus, it amounts to a gift to the US. Further, as against India's annual sale of $7 billion of software services to the US, India too buys hardware and software from the US. Indian workers in the US are spending their money and creating demand and jobs, especially when lack of demand for goods is the major problem. Indian companies, such as TCS and Wipro, hire American marketing and consulting professionals, creating jobs for them.

Though Nasscom is currently going for subtle diplomacy and lobbying with influential politicians and industry leaders in the US, there is the eventual possibility of taking the dispute to the WTO since restricting outsourcing amounts to violation of the General Agreement on Trade in Services (GATS), a component of the WTO agreement.

At the same time, India must realise that the job loss for high-skill professionals is qualitatively different from loss of blue-collar jobs. First, professionals are much more articulate and can create more media hype. Second, though the wage rate in China could be one - tenth of that in the US, the labour productivity of the Chinese is also much less, as they have less sophisticated machines and technology to work with.

Hence, low wages do not necessarily give an advantage to low - wage countries in all kinds of manufacturing jobs. But for high-skill professionals the salary is much less in India whereas the productivity is fairly comparable since the required infrastructure and technology can be easily duplicated here.

Hence, the advantage of outsourcing such jobs from abroad is all too evident. Correspondingly, the connection between outsourcing and job loss for white-collar professionals in the US is obvious to the public there. So, regardless of the actions taken by the Indian industry lobbyists, the popular support for protectionism will continue till the US economy grows at a sufficiently high rate to make unemployment a less urgent issue.

Is globalisation primarily responsible for this state of affairs? The answer is both yes and no. The protectionist lobby in the US holds the liberalised trade regime under the WTO and their multinational companies responsible for exporting jobs to countries such as China and India. Paradoxically, protectionists in India also think that Indians are losing jobs as a result of trade liberalisation and the entry of MNCs. Both cannot be right. Often, it is the technological changes which have made this kind of outsourcing feasible and economic. For example, the revolution in telecommunications has made it possible to have call centres in a different continent doing the back office work of a company.

Similarly, the Internet and the high speed and lower cost of transportation have enabled a company to quickly respond to changing fashions by getting the design done in France, transmitting it online to manufacturing plants in China and finally selling the finished garments in the US supermarkets within two weeks. Of course, freer trade in goods and international capital movements have facilitated the process. So, one can say that globalisation and technological changes have worked in a complementary fashion.

(The author is a Professor of Economics, IIM, Calcutta. His e-mail address: alokr@iimcal.ac.in)

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