Wednesday, April 07, 2004

Outsourcing Good For U.S. and World Economies

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 Magazine 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 life-styles. 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.

The author of the article, Daniel Pink, 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.