Back to the Main ET Page


Outsourcing: The Culprit for Jobless Recovery?


Arvind Panagariya

Wednesday, March 24, 2004

In the 1980s, when the software industry was just beginning to emerge, policy makers in India decided they would require the software firms to employ domestically sourced computers. They thought this would create a larger number of well-paid jobs in both software and hardware industries. But the policy backfired. Thanks to the poor quality of domestic computers, the software industry failed to take off. Neither hardware nor software jobs got created until after India opened up computer imports.
.Some influential politicians in the United States are advocating policies that threaten to repeat the mistake made by India nearly two decades ago. They argue that outsourcing is behind the massive losses of white-collar jobs in the US and would like to impose restrictions on it. But the argument is flawed.

Thus, for example, suppose the US bars Dell Computer Corporation from outsourcing some of its low-end tech-support jobs to Bangalore while its competitor countries impose no such restrictions on their firms. In today’s super-competitive world, this cost disadvantage may be sufficient to put Dell partially or wholly out of business. The end outcome would be less, not more, white-collar jobs.

Pointing the finger at India for the recent job losses in the US is problematic for yet another reason. Many of the jobs being currently performed in Bangalore had disappeared from the United States long before outsourcing arrived on the scene. More than 15 years ago, I wrote my papers in long hand and then a secretary typed them. But then came the desk computers and we were asked to choose between the machine and secretarial services. Most of us chose the computer and eventually secretarial services disappeared. Today, outsourcing has made it possible to perform typing services in India at an affordable price creating some well-paid jobs there (by Indian standards). Shutting down outsourcing will not bring these jobs back to the United State.

Alternatively, take the call centres. Today, if you try to call an office in the US , be it public or private, you are thrown into an endless cycle of recorded messages. Call your electric utility company and it will tell you to press 1 to report an outage, 2 to start new service, 3 to stop service, 4 to obtain billing information and so on. Once you choose one of these options, be prepared to press many more buttons to verify your phone number, account number and zip code. And if you make a mistake in pressing a number, you will have to start all over again since in all likelihood the option to speak to a human voice will not be offered. The latter facility was available a decade ago but no more because it has become unaffordable, at the current US wages. Again, call centres in countries such as India offer an alternative but without impacting on the jobs in the United States .

Facts simply fail to support the case that outsourcing to India is the principal or even an important source of the workers’ current plight in the United States . Since March 2001, the number of payroll jobs has dropped by 2.35 million. India ’s entire software industry, including BPO, employs approximately 800,000 workers. It is difficult to see how this level of total employment could explain the much larger change in employment in the US.

The truth remains that much of the increase in white-collar unemployment in the United States resulted from domestic factors, especially the bursting of the tech and stock market bubbles. Robert Samuelson, a columnist for the Washington Post put the matter succinctly recently when he wrote, “Here is a question to measure offshoring: How many white collar workers do you know whose jobs have moved to India ? For most Americans, the answer is probably ‘none’.”

This analysis notwithstanding, the current frenzy over outsourcing in the United States raises important policy issues for India . For one thing, it underlines the importance of the reforms ranging from cutting the fiscal deficit to more flexible labour laws and an end to the small-scale-industries reservation, necessary to stimulate labour-intensive industries. Because our direct competition in these industrial goods is with other developing countries such as China , domestic protectionist pressures in the rich countries are less likely to haunt us.

But we also need to work hard to lock our market access in services through the ongoing Doha negotiations. A recent US law was able to exclude India as an outsourcing destination for certain federally funded contracts because market access for government procurement is covered by a WTO code that only 30 plus countries (not including India ) have signed and that permits discrimination against non-signatories. It may be time for India to reassess the long-term costs and benefits of signing the code.

More important is to lock our market access in the services activities where we have a comparative advantage. This means aggressive negotiation in the Doha talks on services. India has much to gain from further opening up of its own services markets in areas such as banking, insurance and telecommunications. As such it holds the necessary bargaining chips to seek access for its own software and other services exports. We should not shy away from making commitments in return for commitments from our trading partners.

Finally, the recent chastising of the Indian trade policy by Robert Zoellick, the US Trade Representative, deserves condemnation. Admittedly, agriculture is highly protected in India but the large US farm subsidies are nothing to write home (or abroad for that matter) about either. India ’s industrial tariffs and services barriers are also high but again these are being brought steadily down through the national reform programme. This is a lot better than raising barriers, as the United States has effectively done, against weak and poor countries that are living by global trading rules and have insignificant shares in the world market.