The Hindu Business Line : The trouble with outsourcing

INFORMATION technology professionals in India greeted with jubilation the re-election of Mr George W. Bush as the US President. Their joy was in the hope that the new administration, wedded to free trade, would be supportive of American companies outsourcing from India. They were troubled by uncertainty during the run-up to presidency when outsourcing was a contentious issue. Yes, the wait is over. But is there ground for jubilation?

For India, the stakes are rather high. The outsourcing industry employs over 800,000 people. The industry, earlier confined to the metros and Bangalore or Hyderabad is fanning out into smaller towns and suburbs. It absorbs the streams of engineering graduates coming out of colleges. It mitigates, at the margin, the problem of the educated unemployed. The country's forex earnings on account of software and BPO service exports were around $12.5 billion for the year ending March 2004. Never did any sector grow in the country at such speed and in such a short span. Exports to the US alone account for 68 per cent and have been growing at 30 per cent per annum. In the euphoria thus created or what the NDA egregiously described as "India Shining", we failed to take note of the costs to the US society, especially to its white-collar professionals.

It was unavoidable that the aggrieved professionals would raise their voices in an election year. According to a recent IMF Working Paper (Fear of Service Outsourcing: Is it justified? WP/04/18, October 2004), in just five months, between January and May 2004, there were 2,634 reports in US newspapers on service outsourcing, mostly focussing on the fear of job losses.

Similar reports were heard from other advanced countries such as the UK. Though the hate mails and the venom in the writings of US journalists vitiate the atmosphere, on our part, we have failed to show to the distressed professionals. How real is their fear?

Their fear is real and continues to haunt them. It is tragic that job losses in the services sector coincide with that in the manufacturing sector, partly due to technological changes and partly due to relocation in China, etc. The collapse of the stock bubble and the `irrational' expectations of shareholders over dividends drove corporate executives to engage in fierce cost cutting. Digitisation was the cause as also the consequence of the new crisis. Against this mixed background, understanding of the phenomenon was muddled. Much of the blame came to be laid at the doors of services outsourcing. India became the whipping boy. Curiously, while there was anxiety over outsourcing, even reputed economists did not diagnose the phenomenon in depth. Their analysis and prescriptions were clichéd.

When the controversy over outsourcing broke, the initial attempt of the academia was to minimise its impact. Daniel Drezner wrote in Foreign Affairs (May/June 2004) allaying the fears about "The Outsourcing Bogeyman." Economists like Mann and Schwartz at the Brooking's questioned the estimates of job losses given by consultants like Forrester. Further, they compared the current job `losses' against the future estimated increase in jobs and attempted to show how negligible the loss would be in reality.

There were other efforts to downplay the impact of outsourcing. Three well-known Indian economists (Jagdish Bhagwati, Arvind Panagariya and T. N. Srinivasan) analysed the "Muddles over Outsourcing" (The Journal of Economic Perspectives, Fall 2004) and tried to dispel the fears. They said: "Since outsourcing is a `trade phenomenon', it follows that its effects are not qualitatively different from those of conventional trade in goods."

In their article, as well as in the IMF Paper referred to earlier, the endeavour is to establish that the US has substantial surplus on the services account when comparative global BOP data are studied. Curiously, the IMF paper informs that "International outsourcing of services has increased in the United States but still remains low!" It concludes that "The risk of service outsourcing dramatically reducing job growth in the advanced economies has been greatly exaggerated." (No apologies to Mark Twain!) However, they recognise the scope for temporary `dislocation' in some segments and plead for programs of retraining for re-deployment. The belief of Gregory Mankiw, Alan Greenspan and a host of other neo-classical economists is that the American capitalist model fosters flexibility, promotes entrepreneurial dynamism and could meet the present challenge also. Displaced US professionals find it difficult to share this faith. As Marcus Courteney, President, Washington Alliance of Technology Workers in Seattle, a group that lobbies with Congressional groups against outsourcing, puts it: "These other economists have these theories that may be great if you are an academic, but they aren't so great if you have to work for a living and earn a pay check."

Ground realities support this view. "Bangalore operation has become vital to the future of America's biggest, most profitable companies." So reported BusinessWeek in a vivid coverage. (The Rise of India, December 3, 2003) It was no longer the menial odds and ends of e-service jobs that were getting shifted. Global research centres such as GE, Intel, and Texas Instruments were getting relocated. Traditional trade theorists could not recognise the paradigm shift brought about by digitisation in the services sector. The Berlin wall, which separated "tradable" from "non-tradable" from the days of David Ricardo, had collapsed. Physical presence is no longer necessary to render most of the services hitherto considered non-tradable. As Mr Nandan Nilekani of Infosys Technologies explained it in the 2004 World Economic Forum: "Everything you can send down a wire is up for grabs."

Long before the presidential debate, the question began to trouble the American public and was debated. That indeed was how it came into the election debate. It is significant that ten Nobel Laureates had supported John Kerry in his campaign against outsourcing and all of there are neo-classical theorists and not trade unionists. Much earlier, Prof Robert Z. Lawrence, a respected free trade advocate who had served in the Clinton administration, was more realistic. He felt that "If foreign countries specialise in high skilled areas where we have an advantage, we could be worse off."

Surprisingly, in the paper by Bhagwati and two other Indian economists referred to earlier, such a notion, that is, India and China acquiring sophisticated skill, is dismissed as "ludicrous."

Unfortunately for the neo-classical theorists, the doyen of economics and a Nobel Laureate, Paul Anthony Samuelson, has joined in the debate to upset the apple cart. In an article in the same journal (Summer 2004), he dismisses their claims about the US gains being large enough to compensate the losses as "dead wrong." His thesis is that a low-wage nation that is rapidly improving its technology has the potential to change the terms of trade in technical fields and reduce per-capita income in the US. "The new labour-market-clearing real wage has been lowered by this version of dynamic fair trade."

When developing countries were removing trade barriers on their own or under the new discipline of GATT or WTO, the labour in advanced countries especially the US, was shielded by a rigid visa system. Even skilled labour and highly qualified technical personnel were denied entry into the US and not allowed to migrate. The US became an island of high-wage labour. Even the so-called yuppies engaged in routine key punching operations in banks were paid fabulous salaries. Others received salaries disproportionate to their contribution to the economy.

Developing countries such as India could not succeed in their efforts to get the visa rules liberalised. When it came to the crunch, global companies resorted to digitisation and to shifting jobs abroad. In fact, they jumped the visa walls. This was the trend towards lower income in the US that Dr Samuelson predicts. There are many other economists like Dr. Robert C. Shelburne of the UN Economic Commission for Europe who suggest, "The very low wages in China and India, and their huge population sizes, and now the increasing number of sectors subject to foreign competition, suggest that wages in the developed countries are going to be subject to significant downward pressure for years to come" (Global Economy Journal, Vol.4, Issue 2, 2004). Globalisation is no longer the one-way traffic it was seen as some years ago.

It is difficult to anticipate the response of the new administration to the challenges created by outsourcing. The remedy goes far beyond any reliance on `free trade.' Any hope, as expressed by our IT executives, that the US administration would be sympathetic to countries like India is misplaced. One hope is that US companies that are deeply involved in India will defend their own turf as they did last year when China came under pressure to revalue its currency.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)