The Outsourcing War: Let Economics Triumph Over Politics

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Authors: Sanjib Dutta, Abdul Khader
Senior Faculty Member, Research Associate,
ICMR (IBS Center for Management Research).

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Introduction

Michael Wolfson, a computer programmer had a decent job with the financial powerhouse Bear, Stearns & Co. Now, he refurbishes computers at the basement in his house and sells it through e-bay. He plans to join as a school teacher. Michael lost his job in 2003. He was told that his job is being outsourced to India. Paul Schwartz, a mainframe programmer, who was earning $ 80,000 a year was told that his services were no longer required. He suspects that his job has been outsourced to India.

There is growing dissent among the Americans against the increasing practice of outsourcing. It has become an electoral issue in the coming presidential elections in the US. The Democratic candidate, John Kerry has made it an emotive issue, despite economists trying to portray the positive aspects of outsourcing. There are numerous reasons for the growing apathy towards outsourcing. The prevailing economic situation and the increasing joblessness in the US have added fuel to the fire. However, many analysts feel that joblessness in the US is cyclical in nature resulting from the recession of 2001 and hence, a recovery will create job opportunities.

Moreover, according to the U.S.-India Business Council, the increasing unemployment is also due to corporate restructuring and just a quarter of the job loss is due to outsourcing. Since, the beginning of 2001, the real job loss in US is estimated to be 2.3 million. In comparison, the actual job loss due to outsourcing is estimated to be only 200,000. Thus, it can be said that there are various other reasons for joblessness in the US. The outcry against outsourcing seems to be driven more by politics rather than economics.

Outsourcing forms a small proportion of the jobs that are regularly churned in the US economy. On an average, 24 million jobs are churned in the US every month. In the process, resources are allocated, for more productive purposes. To come out of the recession and raise the standards of living, higher productivity seems to be the only solution. The debate on outsourcing gathered momentum only in the recent past. A study by Forrester, a research group, in the year 2002, brought the issue into limelight. The report claims that by 2015, 3.3 million white-collar jobs in the US would be transferred to countries like India.

The Economics of Outsourcing

But is outsourcing so bad for the US economy? Gregory Mankiw, professor of economics at the Harvard University and head of President Bush's Council of Economic Advisers, recently told presspersons that outsourcing of jobs is in better interest of US. According to him, outsourcing lowers the cost for consumers, making the corporations more efficient. There were a series of articles in The Economist, highlighting the advantages of outsourcing.

There are many influential groups in the US who are perturbed by the recent outcry against outsourcing. Says Charles E Morrison, President, East West Center, a US based think tank, "Off-shoring is not an economic problem, but an economic opportunity". Many analysts in the US feel that anti off-shoring bills in the US would prove to be ineffective. Similar views were echoed by Michael T Clark of US-India business council. He says that, "Jobs lost to off-shoring were less than a quarter of all jobs lost in the US in 2002. The rest were lost due to corporate restructuring. The current debate in the US on off-shoring is informed by lack of facts".

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