Globalisation and offshoring

The employment numbers for the US economy released the previous weekend, evidencing a much larger growth in jobs than expected, may hopefully cool down the heat in the debate in that country about business process outsourcing (BPO) to India and, hopefully, lead to more enlightened discussion on the subject.

To my mind, the issue needs to be looked at from several different perspectives:

• Politics.
• Economics.
• Our unrivalled ability to snatch defeat from the jaws of victory.
• The law of unintended consequences.
• The long-term future of globalisation of services.

But first the politics of offshoring, which has become important ahead of the presidential election in the US later this year. While the economy is growing strongly, last week's numbers apart, it has not created the jobs it normally should at this stage of the economic cycle.

The point is particularly touchy for President Bush as almost three million jobs have been lost under his stewardship -- and, obviously, the opposition Democrats would like to exploit the weak job market for electoral advantage. Offshoring becomes a convenient scapegoat, whatever the numbers or economic logic.

There is no denying that the debate is getting increasingly heated, more so, as the BPO wave is affecting the middle class. The strength of feelings on the subject is evident in the following quote from a letter a laid-off tech worker wrote to Fortune magazine's David Kirkpatrick: "If an enraged laid-off American engineer were to go up to his Indian replacement, and shoot him dead, if I were on the jury, the verdict would be NOT GUILTY!" The sentiment of those who have lost jobs could not be clearer.

To be sure, the US has been losing manufacturing jobs for the past half a century without attracting the kind of heat and criticism now being experienced. The reason, of course, is that, this time, the affected workers come from the white-collar middle-class, rather than the blue-collar working class. And, everywhere, the articulate middle-class always carries much more weight and political backing as compared to the working class, despite the latter being more unionised than the former. (Take our own case: much of the subsidies go to the middle-class rather than the poor; the middle-class has far more holidays than the working class -- as many as 13 in Maharashtra in February alone; despite the fiscal pressures and bankruptcy of state governments, a decision was taken to merge 50 per cent of the dearness allowance of government servants in the basic pay just before the election was announced; despite the huge over-manning and counter-productivity of much of the staff in government offices, there is no talk of rationalisation).

In short, the current rhetoric in the US is influenced by the election campaign, the jobless recovery, and the fact that BPO is hurting the middle-class. In the process, nobody is emphasising that India boasts of barely 800,000 jobs in the IT sector, as against 10.2 million in the US, and the aggregate turnover is less than 2 per cent of the global number.

Even for call centres, the numbers are equally minuscule -- and, the maximum number of jobs that could be lost in the US as a result of offshoring has been estimated at 3.3 million, that too, by 2015.

The most striking manifestation of the fact that the subject has been taken over by politics was the recent experience of Gregory Mankiw, chairman, Council of Economic Advisers. He argued that the normal rules of trade apply to services as well as manufacturing; and that just as it makes sense to buy cell phones from Finland if they are cheap and excellent, it makes sense to buy call centre services or software programming from India, if these are the best on the market.

Mankiw's economic logic is faultless; his political timing (first half February) was, however, completely wrong and he was forced to retract the statement the very next day.

At least for the US economy, the logic of offshoring business services is very strong. First, according to Commerce Department data, the US is net surplus to the extent of $54 billion on BPO with/from the rest of the world! Surely, it has little reason to complain.

While the basic economic logic of BPO is strong, every society has its modern counterparts of the Luddites, who, in the early days of Industrial Revolution, smashed machines because they were taking away jobs. The argument that you should deliberately break windows to create jobs for carpenters has always had its followers.

The problem, of course, is that the carpenters' jobs come at the cost of the less articulate tailors or restaurant workers who get less work because the consumer has been forced to spend money on window repairs.

The fact is that the principle of comparative advantage and specialisation is at the heart of all exchange of goods and services, and much of the increase in standards of living over the past 300 years has resulted from it.

And, apart from Mankiw, Alan Greenspan and other economists too emphasise the point. To be sure, we in India have little moral authority to fault the logic of "self-sufficiency" and import substitution regardless of costs or quality, which is what we practised for decades -- the Swadeshi Jagran Manch and the Marxists would like to go back to that era even now!

But more on BPO next week.

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