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Wednesday, Mar 10, 2004

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Outsourcing, nationalism and globalisation

Ruddar Datt

OUTSOURCING implies obtaining goods or services by contract from an outside source. Firms resort to outsourcing within the country as well. Producers of cars do not produce all the parts within the firm, but may outsource some from the producers specialising in them. This helps firms to cut costs.

In the information technology (IT) sector, outsourcing has acquired an international dimension. American firms find it more profitable to contract IT software and services in developing countries such as India and China. The costs for these services in developing countries are much less than in the developed world. A recent study by McKinsey estimated that every dollar spent on offshoring (outsourcing) implies a cost-reduction of 58 cents to US businesses. Thus, US firms and those in the European Union regularly carry out contracts with IT firms in India. According to the Reserve Bank of India Bulletin (January 2004), during 2002-03, India's earnings from software services were about $9.6 billion. With merchandise exports touching $52.51 billion, software services represented 18.3 per cent of total exports. This was a big achievement for the Indian IT industry as it proved its competitive strength in the world.

There was an outcry in the US that outsourcing resulted in export of American jobs to other countries. One American agency predicted that at least one out of ten technology jobs in the US will move out by 2004. Another estimated that at least 3.3 million white-collar jobs, accounting for $136 billion in the form of wages, will move out of the US to low-cost developing countries by 2015. Obviously, the debate over outsourcing got directly linked to the loss of jobs in the US in favour of developing countries.

In 2003, Maryland, Florida, Indiana, Michigan, New Jersey, New York and North Carolina introduced anti-outsourcing Bills, but none of these could be passed. It was, therefore, felt in the developing world that outsourcing would continue since business firms were opposed to passing any anti-outsourcing Bill, since it impinged on their freedom to reduce costs.

Responding to the impact of the law on Indian software exports, the National Association of Software and Service Companies (Nasscom) observed that as it covered only two departments, and the share of the Federal Government contracts in IT software and services is less than 2 per cent, its impact on the IT business would be negligible. But the issue is if the law is of a general nature covering all departments or is restricted to only two.

Another point of worry is that the law passed by the Federal Government can act as a pace-setter and, thus, prompt State governments also to pass anti-outsourcing legislation. Since this happens to be an election year in the US, the probability of adopting an anti-outsourcing law to woo the voters by avoiding the export of jobs appears very high. Some 15 states have voted on laws to ban government work being contracted out to non-Americans.

Mr John Kerry, the Democrat front-runner, said that while he would not ban outsourcing, he would provide tax incentives to companies to keep their jobs in the US, and close "every single loophole" that facilitates companies moving jobs overseas. The net impact of Mr Kerry's proposal is to subsidies companies so that in practice, they do not feel the need to outsource and the state compensates them, one way or the other, for the loss of not outsourcing.

The basic question raised in India and elsewhere is: The advocates of globalisation emphasise the removal of all barriers to trade in goods and services, but whenever their interests appear to be affected by global competition, they protect their interest either through heavy subsidies (as is being done by the US for its farmers) or by creating other kinds of barriers such as labour standards, patent rights, and so on. In other words, nationalism takes over from globalism. Such being the case, the anti-outsourcing law goes against the spirit of the WTO and the goals of globalisation.

The IT Minister, Mr Arun Shourie, therefore, said: "Anti-outsourcing law was a move against the spirit of global trade... This was not the way for Washington to advance the cause of multi-lateral trade negotiations."

The Nasscom President, Mr Kiran Karnik, said: "The passage of such Bills would shut off a huge opportunity for Indian companies to get projects from the US Government, which spends billions of dollars on technology every year."

The Electronics and Computer Software Export Promotion Council, more forthright in its comment, stated: The new legislation would send wrong signals to the "globalisation efforts, particularly of countries such as India, which have undertaken a number of liberalisation measures in a short span of time, garnering political will to push ahead the reform process."

Thus, it is obvious that the Republican Senator, Mr George Voinovich, the major advocate of anti-outsourcing law, has introduced a clause to ban contracts on the basis of Federal Government spending. National interest and democratic pressures of an impending election forced the US Government to accord its approval.

This move has dangerous consequences for India because as the movement of anti-outsourcing snowballs in the US, it is likely to produce a substantial impact in India. Saving jobs for US professionals will mean loss of jobs in the IT software and service sector in India. Gloomy forebodings, but signals to the future.

The saving grace now is that the contagion against outsourcing has not spread to the European Union, the second biggest customer of IT services. The British Prime Minister, Mr Tony Blair, has indicated that there is no proposal to ban outsourcing. But one cannot predict what is likely to happen. Maybe, the European Union and/or its members may follow the US example.

National interest may dictate popular governments to take shelter behind democratic pressure and act in a manner which sacrifices the WTO rules on globalisation. History provides us ample examples when nations abandoned free trade and embraced protectionist policies to further the interests and stay in power. But, as indicated by Mr Shourie, these policies are bound to hurt the movement for liberalisation and globalisation.

Instead of integrating the world, such anti-outsourcing measures are likely to generate pressures in India and other developing countries to create roadblocks at WTO negotiations and demand the application of a uniform policy for all members. It may lead to prolonged trade negotiations deadlock.

The Commerce Minister, Mr Arun Jaitley, in response to the US Trade Representative, Mr Robert Zoellick's plea to reduce Indian tariffs, further brought out the contradiction in the American stand, when he said on February 16: "It is strange that on the one hand people are talking about opening of market, and on the other banning Business Process Outsourcing (BPO). Our agriculture is fragile as it is not subsidised like in the US". Mr Zoellick, however, tried to explain that the anti-outsourcing law had its quota of "sensitive politics" especially in an election year.

To this, the Indian response was that opening agriculture was a `sensitive' issue for India since 60 per cent of its population depends on agriculture.

Indian economists strongly believe that opening up of Indian economy for farm exports may be beneficial to US interests, but it is bound to have deep adverse structural impact on the farm sector in India. Such a course would be suicidal for India.

(The author, a former president of the Indian Economic Association, is Visiting Professor, Institute for Human Development, New Delhi.)

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