Outsourcing; welcome to the world

by Maria on February 18, 2004

These days, US fears of offshore outsourcing are echoed by European worries about an influx of poor Eastern Europeans when the accession countries join on 1st May. White House economists are pilloried for publicly stating The Bleedin Obvious, and the Daily Mail is convinced Britain will be overrun by Roma. What links these two issues? Fear of competition. Or, as our friends in literary theory might have it, dread of The Other. Suddenly, after 50 odd years of dispensing aid and the omni-prescription of market-opening commitments, liberalisation, harmonisation, free flow of capital, government investment in education and training and all the rest of it, the worst has happened. It worked. (Albeit at great cost, in a limited way, and for the chosen few.)

But instead of gratitude and docility from semi-developed countries like Thailand, India, and the Ukraine, the payback is more competition. They take our jobs whether they emigrate or stay at home. Apocalyptic flows of people and jobs are predicted, all in the ‘wrong’ direction. The cry goes up; ‘something must be done.’ But the real displacement going on is not of people, but of issues.

The US has begun its election year with the traditional lurch towards protectionism. And outsourcing is a very convenient bogeyman for an incumbent presiding over a jobless recovery – ‘it’s not that we didn’t create enough jobs, we’re losing them overseas’. But the Democrats are taking the bait, accusing Greg Mankiw of heartlessness and rubbing their hands in glee. The debate in the US, insofar as there is one (Republicans; ‘outsourcing is bad.’ Democrats; ‘no, it’s really, really bad.’) has taken quite some time to move up a gear and start talking about some of the benefits of outsourcing to the US economy.

Meanwhile, the rest of the world looks on with a bemused grin. ‘Multinational corporations are faithless and fickle and will move on to the next source of low-cost labour as quick as you can say ‘globalisation’.’ No shit. Other countries have lived for years with the risk that that the big IT firm they attracted to their spanking new industrial park (having won a bidding war against Glasgow, Lodz and Bratislava) will up sticks before even paying their negotiated rate of lower corporation tax. Entire national economies are structured according to the roll of the dice, or the simple luck to be in the right place at the right time and have a relatively cheap, eager, English-speaking workforce. But every European finance minister is looking over her shoulder for the next upstart country with a pocket full of structural funds and a crazy dream to be the next tiger economy. That’s just life.

But the benefits of outsourcing to the US economy are not the big issue here (bearing in mind that ‘here’ isn’t in the US). I wonder; what did we all think was going to happen with those aid programmes and World Bank mantras? Did we forget that the ‘developing’ in developing countries is a verb, not just a description, and that one day it might actually happen? Did we really think they’d play nice and be content to be merely another export market for the West? Wasn’t it clear that forcing open others’ markets for FDI in manufacturing and services while keeping our own markets closed in agriculture would make it rational to develop the former? And wasn’t it inevitable that forward-looking people in those countries would think to leap frog up the value chain with their technology parks and their Information Super Corridors? Because all that guff about bridging the digital divide isn’t just guff in developing countries. It is gospel. And, in small but important ways, it is starting to work.

Just as we seemed to lose sight of what it means to preach the benefits of information and communication technologies for economic growth and development, I think we’re also forgetting what is so good about outsourcing in developing countries. It is creating and supporting a middle class in countries with young or fragile democracies, or no democracy at all. Outsourcing is the market-friendly face of ‘soft power’, of making friends around the world by giving people just as big a stake in peace as the most lucky and affluent. If political arguments in the US are to trump economic reasoning that increased trade is not a zero sum game, then we need to look further afield at the political consequences of this phenomenon.

Doha showed us a lot of things, but the key lesson was that trade liberalisation in non-Western and developing countries cuts both ways. The Thailands, Brazils, and Indias are not pawns to be pushed around the board, nor are they grateful supplicantsm but real, live, self-interested actors making their own choices and finding their own way.



Jeremy Osner 02.18.04 at 1:24 pm

I have asked this before — I don’t fully understand the mechanism of outsourcing. How does it create a middle class in a developing country to have an externally-owned factory there? Is the new middle class the factory workers? Providers of service to the factory workers? Contractors to support the foreign owners? All of the above?


des 02.18.04 at 1:34 pm

The outsourcing in question isn’t manufacturing so much as call-centres (“centers”) and programming or engineering jobs moving to India, etc., and the middle classes are the people being employed.


Sam Dodsworth 02.18.04 at 2:03 pm

That’s the first time I’ve heard working in a call-centre described as a middle class occupation – and let’s be clear, the first candidates for outsourcing are the semi-skilled “first line” jobs. (I suppose their managers count as middle class, though.)


paul 02.18.04 at 2:16 pm

If the “middle classes” created are the people being employed in call centers or the like in India, this model of outsourcing is clearly unsustainable. It will last only as long as a wage that is less than a quarter of the poverty level in a developed country is well above the median in the developing country in question.

Of course, the developing country in question can hope that by the time the cheap-labor gambit runs out it will have developed self-sustaining internal markets and a thriving export sector based on a more solid foundation, but those things require healthy consumer markets in the developed world — which are exactly what the current outsourcing model undermines.

(Note also that thus far the countries that are doing well in the intellectual-outsourcing game are those with a human-capital infrastructure developed by centuries of building an internal or colonial clerical class. This suggests the possibility that countries without that infrastructure will be left even further behind by this model of development.)


Justin Hart 02.18.04 at 3:53 pm

Outsourcing is an effective cost cutting measure indicative of the commoditization of various elements within specific industries. For example, 6 years ago, HTML programming, basic web design, and simple database development were prime, even rare, talents. Today, these are baseline elements that my 10 year-old can do. For example, you could pay between $65-$85/hour for a graphic developer here in the states. The Inidian outsourcing base charges maybe $10-$14/hour. By our standard this seems like robbery. By the Indian standard this is a decently high wage. What’s more, if you are part of a corporate organization, you have a fiduciary resposibility to make the most of your investments. Think of the upside, if you save nearly 80% on your investment to build web pages for your company… where could that 80% go in turn? Economics is a cool thing… once you get beyong the political implications…


Kranti 02.18.04 at 3:55 pm

Paul – the workforce behind business process outsourcing in India (the case I know about) is anything but a “colonial clerical class”. The world has moved on. The people who develop software for the world’s largest banks, conduct drug development and trials, and crunch numbers for Wall Street are not by any stretch of the imagination a ‘clerical class’.
A lot of people think of outsourcing on the model of dead-end sweatshops. That is just false. A call center job in the US/UK/EU is a dead-end job but in an economy growing at 8%, a call center job is often only the first step up the value chain for a jobseeker.


Kevin Brennan 02.18.04 at 4:22 pm

I’m a professional in the software industry, and I think the fears of all development being outsorced to India are overblown.

Certain kinds of development jobs are likely to move there in the long run, that’s true. I think the ones most likely to be hurt are the “commercial” package development–the systems designed to generically fit lots of different customers.

However, there will continue to be a great deal of work in customizing systems and gathering requirements. Also, overseas projects are very very hard to run effectively, and a couple of massive cost overruns will have people shifting back to local development. It’s the same reason pre-packaged business applications have never really taken over the market; you give up a great deal of control.


Mike 02.18.04 at 4:26 pm

Shorter Maria: The West thought it meant “More Markets” but it actually meant “We take your jobs!”.

Sounds about right, in one sense. I think the increasing propensity towards multinational corporations can lead to some interesting speculation on the increasing relative importance of multinats versus nation states. Forty years down the road, we’ll be talking about people immigrating from IBM to AT&T.

It’s too bad a candidate wouldn’t get up and try to explain the outsourcing problem (if it is one) in a more intellectual manner. You know, say, “Hey, we’re getting jobs too!”.

I wish John Kerry would say that, but only because I want him to lose.


cleek 02.18.04 at 4:34 pm

where could that 80% go in turn?

it could go to executive pay. it could go to creating more products for people in India to make, service or support. it could go to any number of things that don’t benefit the “home” country of the company in any meaningful way.


limberwulf 02.18.04 at 4:56 pm

It really is about more markets, not job stealing. Reduced cost of computer support, production, programming, etc. will allow more people to afford it. More affordablity therefore means higher demand, causing more jobs to be created. I have no problem with globalization, it benefits everyone as a whole, the more we cooperate.


Matt 02.18.04 at 4:57 pm

My post earlier at
see Chinese History and ‘money’ thread.



Charles Dodgson 02.18.04 at 5:19 pm

The tech-geek site Slashdot recently did an “ask the Indians” interview, soliciting questions to be posed directly to Indian tech workers themselves. The responses are here, and I’ve summarized a few salient points here.

The most striking thing, to me at least, isn’t the gap in salaries, but the gap in living expenses — basics like food and rent are one fifth to one tenth of what they are in the states, and while it’s not quite an apples-to-apples comparison, it’s not as clear as you’d think who wins. (Which does more for you: a dishwasher or a live-in servant?)

It’s difficult to see how a marked gap in purchasing power like this could be sustained for long, but it’s lasted a while now…


Chirs O 02.18.04 at 5:40 pm

Call centers in India are just the start. In short, if your job can be done from home, it can be done from overseas for far less money. For instance, paralegals, who make far less money than most programmers, are starting to sweat. In the global marketplace, skilled labor is just another commodity.

Even the highest levels of employment aren’t out of reach. Imagine an offshore radiologist who can examine images taken by a low-cost tech in the US for 1/5th the cost of a US based doctor. It’s an HMO’s dream and the AMA’s nightmare. (Surgeons catch a break here–it’s usually helpful to be in the same country as the patient one is operating on.)

That being said, I don’t think the sky is falling. There will still be jobs in the US, but the increased competition will cause a stir in the short term. I don’t think that there is any way to combat this trend. Protectionism might slow the process, but it might do more harm than good. Eventually the market will decide where the jobs are and what they pay.

What I really want is a crystal ball to tell me (a computer programmer) where those jobs will be.


humeidayer 02.18.04 at 5:43 pm

Let’s say Mikey Mensch from Southie goes to college and invests $100K on an education expecting to get a $100K job here in America, which is reasonable for him given the market conditions. Right when Mikey steps out of the university, policy makers change the playing field, liberalise trade and Mikey’s expected salary drops to $30K because his job’s been outsourced to Hadji in Bangalore.

Economists ramble on about what a great thing this is, increased economic efficiency and all that, which really helps out slovenly Richie Rich sitting on his arse by the pool on the other side of town, raking in the dough from his IT and pharmaceutical stocks, but it doesn’t do much for Mikey whose economic power compared to Richie is now a third of what it would have been before trade liberalization.

Then, of course, you’ve got the fictional person known as Big Pharmaceutical Corporation who started researching his drug about the same time old Mikey went to college. BPC will make damned sure you protect “his” research investment through international patent protection. We certainly can’t have anybody over in India starting up and cranking out copies of BPC’s drugs.

Real person Mikey Mensch: No protection of his investment, he’s kinda stuck with $100K worth of student loans. Fictional person BPC: Plenty of protection of “his” investment. University of Chicago economists: They’re happy because all they do is stare at numbers. Richie Rich: Getting richer all the time.


humeidayer 02.18.04 at 6:07 pm

What I really want is a crystal ball to tell me (a computer programmer) where those jobs will be.

You don’t need a crystal job for that one.
Richie Rich will still need services
He’ll need someone to push him around in his wheelchair.

“Would you like a shoe shine, sir?”


Karl Weaver 02.18.04 at 6:49 pm

I think outsourcing is a virus, but like it or not you can not remove it as it will keep coming back, again and again in some form. It’s part of the greed of multinational corporations seeking cheap but competitve labor worldwide.
I suggest Americans do the smart and right thing to help their careers. Learn Mandarin Chinese and or find work in China or India. It’s not true that you can not find employment there; it just takes more risk and gamble. I think sitting around waiting for a phone to ring for a possible job interview is like watching the paint crack; it’s not productive. 20 years ago, I began to develop my career around the concept of the “Pacific Century”. This concept was actually coined 100 years ago by famous British sea captain. With the handing over of Hong Kong to China in 1997, we begin to see the Pacific Century. China and India will play an increasingly important role. If you can handle challenge, go to India and China and seek out your destiny – I did and I have never looked back. Don’t let any one say you can not become just as “flexible” in seeking international employment as people from outside the USA – you Can – you must!
Karl Weaver


dsquared 02.18.04 at 6:55 pm

That’s the first time I’ve heard working in a call-centre described as a middle class occupation

“Middle class” these days is an American term meaning everyone who makes more money than subsistence farmers but less money than investment bankers.


Another Damned Medievalist 02.18.04 at 7:42 pm

At some point, my fellow countrymen and women will have to learn that they can’t have it all. I find it interesting that outsourcing has become a much greater bugaboo now that it’s tech jobs on the line. I know this is an oversimplification (I do medieval history, not economics), but it seems to me that if people want to shop at the Walmarts and Targets, at those prices, they are going to have to accept that the people making those products are going be the cheapest possible labor force — i.e., not members of the ILGWU, or even non-union labor in the US. If we all want cheap computers with free support, (or just available support), we have to pay for it. If we want to sell our stuff on the global market, we have to accept the competition that comes with globalization.

That said, I’d feel a hell of a lot better if I thought that outsourcing was translating into better returns for the stockholders and customers — my gut feeling is that most of the savings go into the pockets of overpaid corporate executives and that my taxes help to subsidise these companies. Perhaps we should demand that companies that get big tax cuts to “stimulate job growth” not be allowed offshore tax shelter corporate HQs and be required to account for how they use those tax cuts/loopholes.


limberwulf 02.18.04 at 8:16 pm

The thing about “losing jobs” to outsourcing is that there is no imagination in place for new growth. The US is not going to jsut go under completely. There is always a balance, and those $100,000 educations can still pay off if those educated dont insist on taking the exact job they went to school for 4 to 6 years prior. Who does that? Why would you think that the identical growth industry of the current market will be the same in 4 or even 8 years when you are done school?

You never stop learnign and changing, unless you give up. There is always an opportunity. If you see an obstacle, find a way around it or a way to break through it. Complaining about the successful people doesnt help anyone.


Jason 02.18.04 at 8:20 pm

To me, the complaints about outsourcing seem to be more complaints about income redistribution, ie., where does the 80% saved go? If it went into the hands of the programmer who was outsourced, and provided the money for retraining, or allowed them to move to a higher level in the food chain, then this wouldn’t be an issue.

I’m not sure I have a panacea, but one way to deal with it might be to have higher tax rates, and use the extra money earned to pay for the displaced programmer (either income insurance, or retraining expenses, or retirement benefits). Of course, raising taxes is a tough sell.


Barry 02.18.04 at 9:04 pm

“However, there will continue to be a great deal of work in customizing systems and gathering requirements. Also, overseas projects are very very hard to run effectively, and a couple of massive cost overruns will have people shifting back to local development. It’s the same reason pre-packaged business applications have never really taken over the market; you give up a great deal of control.”

Posted by Kevin Brennan · February


If half of all programming jobs aren’t outsourceable in the next 5 years, that still puts enormous pressure on most programmers. If their jobs aren’t being offshored, they’ll face competition from the guys whose jobs were offshored. Also, every offshore project builds skills (both domestically and internationally) to do them better. Cost overruns are probably not much of an issue, since they occur domestically, and the the starting point is much cheaper labor.


BP 02.18.04 at 10:18 pm

limberwulf, since time immemorial laid-off people both blue and white collar have had to listen to well-meaning ideologues tell them that they are being too picky, inflexible, resistant to change, etc etc etc.

Free markets are great and all that, and liberalization may indeed lead to a net benefit for society as a whole, but get it thru your thick skull that some people get screwed, screwed good, and screwed permanently, when the industry they work in disappears. A 50 year old plant worker in Buttfuck, Montana, with three kids and a mortgage, is fucked when the plant closes down. Period. Your living standard may rise, mine may rise, most of us may be better off as a result, but Mr. Buttfuck Montana is still screwed, and there’s no frigging point insisting it’s all in his mind, and if he wasn’t such a stick in the mud he could be making big bucks as a personal trainer in the Bay Area.


limberwulf 02.18.04 at 11:07 pm

Thats true bp, people get screwed. Some people are not in a position to readjust in time to keep their creditors at bay. So what is the solution?

Unions? Nice thought, but often the reason businesses are headed elsewhere is the increased cost of employees in Buttfuck, Montana. That increased cost is due to taxation, regulation, lawsuits, and high wage markets.

Increased taxation companies that outsource? Also an interesting concept, and certainly a revenue creator for the government. However, even if I trusted the government to use the funds specifically to help retrain and support displaced workers (based on historical actions, I have no such trust), there remains the issue of cost. Many items created in these factories are not necessities of life. If the cost of production is prohibitive, then the cost of purchase will be also. If that cost gets too high, the workers get laid off, not due to outsourcing, but due to business closing and downsizing.

Forcing minimum wage requirements to apply to overseas employees? See above argument.

The best thing to do is remove as much restriction as possible and make it as profitable and attractive as possible for companies to stay here. There are many companies that move due to costs of doing business in the US that have little or nothing to do with wage levels. Beyond that, I have seen little alternative other than finding alternate means of supporting oneself and one’s family. I am not unsympathetic to the plight of the laid off worker. I have been laid off, I have even been laid off of IT, and I am now in IT once again. Life goes on. I may sound cold, but Id rather be cold than utopian.


Tracy 02.18.04 at 11:20 pm

humeidayer – why don’t you mention how Hadji in Bangalore benefits, in your summary of the lifes of Mikey Mensch and Richie Rich?

As a non-American, Hadji in Bangalore strikes me as equally worthy of being added into the costs and benefits as Mikey or Richie. And some of those University of Chicago economists might actually be happy that Hadji now has enough money to feed his family, and consider that at least goes someway to offsetting Mikey’s problems with his student loans.


roublen vesseau 02.19.04 at 1:39 am

the thing is, outsourcing *is* a net economic benefit to the US, but the people who are benefiting are executives and perhaps upper managers, business owners, stockholders and perhaps consumers . The people who are losing are the workers whose jobs are being outsourced. The sensible solution is for the winners from outsourcing to share their winnings with the losers, but because the free market fundamentalists are in charge, who believe that property rights are inviolable, and that redistributing from those who have a lot to those who have a little is a bigger moral outrage than homeless people and children without health insurance, it’s not happening.


limberwulf 02.19.04 at 2:19 am

Just to satisfy a pet peeve, please note that mankind has survived for centuries without stinking health insurance, for the children or anyone else.

There are so many people in this country that are insurance poor. I have absolute minimal insurance, I was raised in a family that operated the same way. Not being afraid of every boogie man around the corner has done more to improve my success and free up resources than anything else. Yes, I have had to pay some medical expenses out of pocket, but I have been able to do so because I invest and save. And dont say “what about those who dont”, because, at the risk of sounding heartless once again, they should have. Medical insurance is reaching the point that if you invest what you put in your HMO, you wont have to stay healthy very long before you can pay your own expenses.


david foster 02.19.04 at 4:32 am

1)Maria…good post..brings up aspects of offshoring that receive too little attention.
2)Jeremy…you ask “How does it create a middle class in a developing country to have an externally-owned factory there?”

A factory normally consists of more than people performing minimally-skilled jobs. There are, for example, likely to be (on the “white-collar” side) production control specialists, purchasing people, and finance people. On the “blue-collar” side, skilled craftspeople (repair, setup, etc). And for management, various shift & department supervisors, and finally the plant general manager. All of these people probably fall somewhere in the middle class, except possibly the plant GM who may be above this leve.


derrida derider 02.19.04 at 6:53 am

Limberwulf –

You are clearly a good health risk. would you be so happy to self-insure (through saving) if you had a chronic health problem?

Did you ever hear the term ‘adverse selection’? It’s an insurance term – it means that the higher the premiums, the fewer good risks buy the product, which in turn means that you have to raise the premiums, which then drives out the medium risks, which raises the premiums … and so on. You eventually reach the point where only the really, really bad risks take out insurance.

This is the formal economic argument for universal health insurance – compulsion forces the good risks to pool with the bad and so makes the system stable.


BP 02.19.04 at 10:20 am

“Just to satisfy a pet peeve, please note that mankind has survived for centuries without stinking health insurance, for the children or anyone else.”

Yeah, with a life expectancy of thirty years, and with only one in three kids surviving childhood.

“Not being afraid of every boogie man around the corner has done more to improve my success and free up resources than anything else.”

Here’s a nickel, kid. Go buy yourself a medal.


limberwulf 02.19.04 at 2:34 pm

good point derrida, I am a good health risk, not a chronicly ill person. However, health care that is perceived to be free, i.e. government paid health care, will tend to make people go to a doctor for lesser reasons. I know a great many people that go to a hospital or doctor for a great many things that are not at all serious. This creates a far greater load on the medical proffession, lending to greater costs of health care and to the insurance companies due to higher volume.

Also, in a system of tax-paid health care, the cost is not distributed accross everyone equally, as your formal argument would imply. The costs are heaviest on the wealthy and successful and the unemployed, poor, etc., have no liability at all. The premiums then, in the form of taxation, are still incredibly high on only a few people.

I may be blowing the curve by not opting for a lot of insurance, but I think that is no worse than those blowing the curve by opting to visit the doctor for every little thing and getting a drug for it. Please understand, I know there are people with legitimate needs, and were I one of them maybe my tune would be different, but I still dont see why the many should be sacrificed for the few, nor the few for the many.


Douglas 02.19.04 at 8:05 pm

limberwulf said: “those $100,000 educations can still pay off if those educated dont insist on taking the exact job they went to school for 4 to 6 years prior. Who does that?”

Anyone who has a professional degree rather than a liberal arts one.. How many civil engineers are employed as biochemists ? How many doctors are practicing law ? How many CS/IT graduates are employed in nanotech ? Do you think there’s a reason for these phenomena ?


Erik Rosaen 02.19.04 at 9:17 pm

Globalization is good. Prices are lower. Civilization depends upon specialization and the rest of the world needs jobs too. We were all willing to believe this when it was just the blue-collar jobs going away and we must stay the course now. The alternative (any actual protectionism) is so much more dangerous that a lame growth economy is nothing by comparison. Do we want our children to end up talking about the (Second) Great Depression? It can happen!


Ken 02.20.04 at 3:46 pm

“Anyone who has a professional degree rather than a liberal arts one.. How many civil engineers are employed as biochemists ? How many doctors are practicing law ? How many CS/IT graduates are employed in nanotech ? Do you think there’s a reason for these phenomena ?”

1. Some fields are restricted by law.
2. It takes time to switch.
3. The vast majority of these people are still gainfully employed and don’t need to switch.

During the IT heyday, and even today, lots of workers have non-CS degrees. Extending the IT regulatory regime across the board would improve matters for IT professionals wishing to switch and for the customers of other industries.


danny 02.28.04 at 1:35 pm

An interesting discussion on the same topic is over at techpolicy. The question – are there better ways to protect workers in developed nations in north america and europe?

How can we reduce the cost of employing workers in developed nations? Perhaps we can find more efficient ways of working, and offer easier access to education?

When the median new home price in Silicon Valley is close to .5 million dollars, it’s clear why low cost centers like India and Philippines can become so attractive to global minded businesses.

One proposed solution for developed countries – embrace telecommuting. It may be an idealist dream on my part. But, the benefits would be, more productive hours in a day for a worker (minus 1 hour + of commuting time and headache) and reduced living costs.


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