Posted on 02/04/2004 6:50:48 AM PST by ClintonBeGone
Outsourcing of information-technology services continues to be a hot topic — and a sore point for many IT professionals. As they stand in unemployment lines, they see their former jobs being shipped off to India, where they are now done by people making one-fifth as much. It has aroused much bitterness and led to legislative efforts to restrict outsourcing in the name of saving jobs for Americans.
I can't really offer any comfort to unemployed programmers, but the process of outsourcing is good for both the U.S. and world economies. Any jobs saved in the short-run by restrictions on outsourcing will come at the expense of better jobs in the future that will not be created.
The problem really arises because India, rather than, say, Canada or Germany, is the perceived threat. We don't generally worry about American jobs going to wealthy industrialized countries like Canada and Germany, because their workers are highly paid and cannot undercut us based on low labor costs. Because Indian workers are paid only a fraction of what a comparable American (or Canadian or German) makes, the competition is viewed as unfair.
But how did the U.S. and other wealthy countries get that way? It was by being the low-cost producer in some area. No doubt, the European farmers of the 18th century were bitter about being undercut by American farmers, whose cost of land was a fraction of that in Europe. They must have felt that this was as unfair as unemployed IT workers feel about India. But as time went by, costs equalized as capital and labor migrated to other countries and other industries. This is all part of the process of economic growth.
An article in the February issue of Wired makes this point well. It points out that Indians now doing jobs outsourced from America are seeing a rapid rise in their wages and standard of living. In the process, they are becoming more like Americans, which is translating into demand for American goods and lifestyles. The Indians also know that they can't compete only on price; the quality also has to be there, and they believe that they are delivering it.
Daniel Pink, the author of the article, goes on to make this important point: "Isn't the emergence of a vibrant middle class in an otherwise poor country a spectacular achievement, the very confirmation of the wonders of globalization — not to mention a new market for American goods and services? And if this transition pinches a little, aren't Americans being a tad hypocritical by whining about it? After all, where is it written that IT jobs somehow belong to Americans — and that any non-American who does such work is stealing a job from its rightful owner?"
Perhaps more starkly, Carly Fiorina, CEO of Hewlett Packard, recently said, "There is no job that is America's God-given right anymore."
It's worth noting that the U.S. is not the only country where outsourcing is happening. British and Australian companies are also outsourcing to India, while European companies are outsourcing to the Czech Republic and other formerly communist countries, where wages are low but education levels are high.
It's also important to know that when countries outsource work to India or China, they are only doing so for very low-end operations that require little skill or training. The high-end work and wages stay here — work that might not be retained if it could not be augmented by outsourced functions in low-cost countries like China and India.
A Jan. 30 report in the Wall Street Journal illustrates how this works, using the case of a computer mouse manufacturer called Logitech. It sells a wireless mouse called Wanda for about $40 that is assembled in China. Of the $40, China gets only $3. The rest goes to suppliers, many based in America, which make components for the mouse, and to domestic retailers. The biggest component of Logitech's cost is its marketing department based in Fremont, California, where the staff of 450 Americans makes far more than the 4,000 Chinese who actually manufacture the product.
Those 450 Americans, making good wages in California, might not have jobs at all if Logitech wasn't able to stay competitive by outsourcing some of its costs. Studies have also shown that workers displaced by outsourcing are often retrained for better jobs within the companies doing the outsourcing. Cisco, for example, is a leader in outsourcing, but has not reduced the number of its domestic employees because they have been redeployed into other areas, doing higher value-added work. These jobs often pay better than those that were outsourced.
I know that this is no solace to those who have lost jobs due to outsourcing. But the nation as a whole will be worse off if outsourcing is restricted.
TIMES NEWS NETWORK[ WEDNESDAY, JANUARY 28, 2004 05:18:58 PM ] MUMBAI: If you thought that the US Senate had finished with cracking down on outsourcing, think again. Things could just get worse for Indian software and BPO companiesAs for the private sector, see:On Friday, President George W Bush signed into law a Bill, which bars outsourcing by the US Treasury and Transport departments, though this does not apply to the whole Federal government as some reports had indicated.
However, another Bill, called "Truthfulness, Responsibility and Accountability in Contracting Act of 2003" (TRAC Act), introduced in the US Senate last year, could halt outsourcing by the entire federal government, if it becomes law.
The objective of the TRAC Bill is "to ensure that the business of the federal government is conducted in the public interest and in a manner that provides for public accountability, efficient delivery of services, reasonable cost savings, and prevention of unwarranted Government expenses, and for other purposes”.
The TRAC Bill refers to outsourcing as one of the components of "contracting out" which will be monitored by the General Accounting Office (GAO). The new Bill says that certifying agencies will have to be formed in each department to monitor all projects contracted out.
These agencies will have to report to the GAO that the procedures followed for outsourcing are fair and transparent. These procedures have been put in place to make outsourcing as difficult as possible.
Currently two per cent of all outsourcing projects from India are from the US government. Typically, federal projects are not offshored to India in a major way as they often fall foul of the "buy American” provision that sets minimum levels for domestic content in products bought by the US government.
The Bill does not, in any way, affect outsourcing by private US companies except to the extent that it fosters a protectionist climate within the USA. Meanwhile President Bush has signed the omnibus spending Bill making it a law. The Bill is accompanied by a revised budget circular (called A-76) which will prevent outsourcing to India, or to any other country by the Treasury and Transportation departments.
A copy of the new law, which is available with The Economic Times , does not refer to India or even to outsourcing directly, but will nevertheless affect almost all developing and emerging countries including India.
The most damaging part in the new law is the following: "An activity or function of an executive agency that is converted to contractor performance under Office of Management and Budget Circular A-76 may not be performed by the contractor at a location outside the United States except to the extent that such activity or function was previously performed by Federal Government employees outside the United States."
This clause will prevent any offshore outsourcing by the US federal government to any other part of the world. The law also revises a circular called A-76. The revised circular reads, "That in all public and private sector competition for more than 10 positions, a private sector offer would have to be 10% or $10 million less than the government offer to be considered."
What this means is that, if the positions of more than the 10 employees are affected, then the private sector offer would have to be 10 per cent less than the government offer. The A-76 changes have been dictated by the federal employee unions and industry associations.
US employee unions, like the American Federation of Government Employees, have hailed the provisions as being far more equitable to US federal workers. It will also affect small and medium companies in the US which benefited from outsourcing.
Exactly right. I lost my job as a punch-card handler 20 years ago and still haven't found a new punch-card handling job. < /sarcasm>
Not to mention the national security concerns. As more and more of our industrial capacity moves to the other hemisphere, does anyone seriously believe that China will not eventually say "Thank you very much for all of those factories that your corporations built for us...they don't belong to you anymore. Oh, and if you even think about sending over any carrier battle groups within striking range of our countries, we will nuke you back to the stone age."
Really?! Can you give some examples from past of such successful predictions? If most such people can do it the examples must be many!
Don't laugh. I know of two engineers who are now running a SuperCuts in Monterey.
Arthur C. Clarke, geosynchronous satellites
Bill Gates made a prediction that it wouldn't be long before every home has a PC . . . when he first developed Windows.
That's only one place. Here are a couple of others:
And if this transition pinches a little, aren't Americans being a tad hypocritical by whining about it?
Two problems here, one economic, the other political.
The economic problem is that he's belittling economic self-interest. I'm afraid fear of being preceived as hypocritical has yet to demonstrate itself as quite as important an economic force. Americans would prefer America to prosper, even at the expense of foreign economies. Sorry, but that's just basic economics. Those in favor of outsourcing need to make the case for American prosperity (which is done elsewhere in this article) and accept this "hypocricy" as part of human nature.
The political problem is related. Very tough for a political party to survive in power through one of those "transition pinches" when your messages is, "There is no job that is America's God-given right anymore." Doesn't matter if that statement is true. It's a political albatross, which any opposition party will be happy to hang around the neck of any pro-outsourcer foolish enough to embrace it. And once the pro-outsourcer is out of power, his successor will be all too eager to introduce extreme protectionist barriers, and will be lauded as heroic for doing it.
The other big flaw in this article, as in most others on the topic, is that it is naive to the real-world situation. Meaning it looks at economic well-being in isolation of other issues like national security and the social problems that stem from the mass unemployment resulting from entire displaced industries. That works in a college text-book, but not so great in real life.
Outsourcing absolutely does have a place. It's not going away, and no serious people even intend for it to do so. But it is not going to work well every time it's tried. And when it fails it can have negative consequences for all involved. Failing to pay attention to the full impact of real world trade practices in favor of retreating into macro-economic theory is doomed to faiulure.
The problem is the clash between long and short term perspective. What is a fat from in the quarterly/yearly bottom line might be decade or more corn seed.
"Free" market by itself is an inanimate process.
I was asking about historical/social/economical predictions, and not about technological gadgets.
This may come as a shock to you, but entrepreneurs and investors are not in business to employ people; that is an effect of their endeavor. You seem to hold the aforementioned CEO and stockholders in some sort of disdain, as if they were up to no good. I can assure you if they were not making profits, the job outlook in their particular organization would be much worse.
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