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Outsourcing: A Boon or Bane?

14 Feb 2017Economics Essays

Globalization is an amazing phenomenon. It has changed the face of the world in the last there decades, becoming a blessing to the developed and the developing nations. The magic keywords of liberalization and globalization have transformed Technology and business in the present age, bringing in new ideas and innovation, and with it, a dissemination of knowledge and ideas across the Globe. This is an era of fast paced change, and businesses across the world are in a state of constant flux in the race to maximize profits and cut costs.

Indeed, Globalization has changed the fortune of nations worldwide, but has also proved to be a mixed blessing for the world’s Super powers. The birth of the new “baby boomer” generation in developing countries of Asia like India and China has led to the exponential rise in the availability of technically skilled labor there, at much lesser expense and with much less strict laws and regulations. Improving living standards and educational facilities in these developing giants of Asia has led to a surplus of cheap labor which is qualified to work in advanced technology, and also available at a low cost which is much too enticing for the American companies to ignore.

This marked change in global trends has sparked a new debate on “Offshoring”- defined as “The relocation of business activity to a location in another country with lower costs”.

Outsourcing of jobs from American companies has led to the direct competition of American labor from the Global Markets. Skilled personnel from diverse fields like researchers, designers, engineers, accountants, analysts, in fact professionals from every career which does not need a physical presence in the workplace are beginning to be hired from foreign countries.

The birth of the Internet and hi-speed computing technology has shrunk distances across the globe. Technology has now become globally mobile, and the advantage had been for those nations with an untapped pool of skilled resource, which is ready to work at a fraction of the wage paid to domestic US labor. In fact, one of the leading causes of Offshoring has been the glaring differences in the remuneration of American and Asian companies, and also the stark disparity in the cost of living.

Hiring foreigners to work for them is far more convenient, and profitable to these organizations, and that’s the reason why they have been investing capital offshore. The US labor now no longer seems to have the absolute advantage of superior technology, training, education and skill over increasing foreign competition. In the past, US always had an edge over other nations because of its excellence in software and computing, but now this "Digital Divide" is fast disappearing.

Hence, it is only natural that taking all the factors into consideration, capital and technology will move towards greener pastures where the labor costs are lowest, and hence business more profitable.

In the last fifty years, there has been a radical shift from the old "Manufacturing Based" economy, to a new "Information Based" economy. The major force of a company is now intangible assets like knowledge, intellect, creativity and brain power.. "...In an information-based economy, it is this human capital and knowledge that creates worth for the firm." (Raynor, 2002).

There is a relentless pursuit to hire and sustain employees which are of high technical value and a level of completion which the industry has never seen before. Under these circumstances, offshoring jobs to skilled personnel in foreign nations seemed to be the obvious choice for many of them, leading to an increasing sense of alarm in all sections of American society. There is a sense of fear that unrestrained outsourcing could be detrimental to the development of any "Knowledge Based" economy, and "Competition is most destructive when we are trying to promote creativity or sophisticated thinking and problem-solving," Kohn adds..." (LeClaire, August 3, 2003).

Also, the timing of this trend is considered potentially threatening, with concern that Economists have misunderstood the signs, and its time to re-think globalization from a new perspective.

It is indeed ironical that American companies working for American products now increasingly hire professions from foreign countries, which is now being viewed as a threat to the American labor force itself. The consistent loss of White Collar jobs has led to a new "Offshoring Scare" amongst Americans, which would have been unimaginable a few decades earlier. It has led to anxiety amongst US workers, with reports of more and more technical jobs getting "Bangalored". As these jobs move out with increasing regularity, the storm it has brewed up is the center of a fierce debate about whether offshoring is after all, a boon or a bane for the American economy.

At the heart of the debate are the advocates who strongly protest the very basic concept of outsourcing itself. They argue that Economists have been short sighted in assuming that that Globalism and Free trade will definitely benefit the American economy. According to them, outsourcing is not even a fair trade at all trade implies reciprocity, and there is no reciprocity here, just an export of jobs in this business relationship. "That's why the United States is currently running a $125 billion trade deficit with China alone, a Third World country. That's why the United States is turning over $1.5 billion per day in its accumulated wealth to pay for all the outsourced goods and services that return to our markets as imports."( NewsMax, Paul Craig Robert Friday, March 7, 2003).

According to them, the enormous labor pools in countries like India and China will never satiate with the influx of jobs, owing to the fact that their population far outnumbers that of the Unites States. Believers of this point of view are beginning to get alarmed, "Throughout history, peoples have been overcome by trends and forces that they were unable to recognize. Could the United States be losing its economy to forces economists mistake for benevolent free trade?...Eventually, as China and India become fully-employed first world economies, wages will bid up and labor will be paid according to its productivity. By then the U.S. might be a third world country." (Roberts, August, 7, 2003).

All these arguments paint the dreary picture of a future in which the output of the economy is increasing, without a proportional increase in jobs for the American Middle class, bringing it on the path of becoming a Third world economy.

Statistics have been cited, analysis made, and anxious US workers have vehemently protested this trend. Lawmakers have had numerous flurried debates, and some have even suggested tax benefits for companies who keep their jobs in the US. In the end however, is this anxiety and sense of consternation justified? Keeping in view the fact that America is still the world’s lone super power; will the moving out of white collar jobs to developing countries shake up the US economy?

If we take a liberal and more laissez-faire look at the changes coming in, probably not. In spite of the concerns coming in that well paying jobs are being siphoned off overseas, there is little evidence to show that US worker in the technology industry has actually been harmed, and is not doing as well as he/she was a few years ago -- before the Business Outsourcing storm. The number of jobs held by young educated college graduated has also grown consistently every year .

To cite specific statistics, "…there's little evidence that educated workers, overall, are worse off than they were after the last recession. The average unemployment rate for college-educated workers 25 years and older for the 12 months ended in July was 3.0%. That's lower than the 3.2% for 1992, the year after the last recession."( Michael J. Mandel, BusinessWeek Online, 25th August, 2003)

America is a country which has enormous potential to excel, and be the beacon for the growth of other nations as well. Its greatest strength is its pursuit for innovation, creativity, and technology and it will remain on the top of the ladder for quite a long time to come in the foreseeable future. It has been the centre of cutting edge technology, and creator of next-generation innovations which were considered impossible by other countries. It has still the best and the brightest of workforce across the world, equipped to cope with changes, engineer fresh products and strategies, innovate and excel!

Armed with intellect, driven by technology, and supported by a very stable government, the Americans technocracy has little reason to fear the change of winds.

After all, every industry goes through a cycle of economic evolution which allows older technologies to undergo a phase of maturity, after which they might be moved overseas so that newer technologies are generated. If a nation like America allows its highly skilled workforce to stagnate with older technolologies, where would we find room for innovation? If we analyze the current trends keeping this question in perspective and shed the sense of alarm and paranoia, then the answer to this question will hopefully calm the disquiet in the hearts of the skeptics, and bring this thorny issue to rest!

References:

  • Beckman, David. "IBM Plans To Accelerate Offshore Outsourcing" WashTech News. July, 22, 2003.
  • Mandel, Michael J. "Outsourcing Jobs: Is It Bad?" Business Week On-Line. August 25, 2003.
  • Roberts, Paul Craig. "Jobless In The USA." NewsMax.com. August 7, 2003.
  • Roberts, Paul Craig. "Notes for Free Traders" NewsMax.com. March 15, 2003.
  • Raynor, William. "Intangible Assets & Employee Value: An Accounting Paradox" BraveNewWorkWorld & NewWork News. April 15, 2002.
  • William Raynor " Outsourcing Jobs Off-Shore: Short and Long-Term Consequences", The State University of New York.

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