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Outsourcing

Written by: Subhashis Kundu - IVth year, NALSAR, University of Law, Hyderabad
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Government by definition is a distortion of the free market. Its very existence is a perversion of free market economics-if you have a government; you have to fund it which means you need a strong system of taxation. Simple: Government = Taxation = Regulated Market. Real free marketeers would campaign for the total abolition of this system of government control in the market: let market sort it out.

There is a long list of other such things that those free market capitalists should be looking for that are key elements of a genuinely free market system, amongst them: no immigration control or borders of any kind (free movement of labour); no financial regulation; perfect information everybody needs to know everything otherwise you get unwanted distortions in the market) and perfect rationality.

Very few, if any, of those claiming to be free market proponents are actually in favour of these things. Generally everyone is protesting against specific regulations, which materially affect their sector. For example, if two companies are manufacturing any product say chairs, both completely within US. Company A moves its operations to India and reduces their labour costs from an average of $10 per man to 50 cents per month (the numbers so taken are for convenience of reader). Now this chair would cost the company A half of the earlier price. If this company passes this cost saving to its customers then ultimately the US customer is getting the benefit of price reduction. Even if this price reduction is not passed to customer, it would be passed to the shareholders of the company A, which would mean that now they have more money to spend and ultimately would stimulate demand. But what about company B? What if they cannot compete with the reduction in price?

Inevitably they. would also resort to outsourcing of their work to a country where there is cheap labour. The issue recently became contentious issue when President Bush's top economic advisor, N. Gregory Mankiw said that sending US service jobs abroad is probably a plus for the economy in the long run because foreign workers can do the same job more cheaply reducing costs for US consumers and companies.

Until recently, outsourcing technology jobs meant hiring an outside firm to handle very specific or very technical tasks that were considered not to be the core business of the firm. The power of the information technology and the ability to have workers on-line at any time (since US and Indian standard time differ by approximately by 11 hours) has changed the whole scenario. Today, in an effort to earn more money and to save costs, US companies import highly qualified information technology workers on temporary visas. Once they learn the host company's specific needs, the foreign workers often return home to establish an IT department of the firm. Once the overseas IT department is operational, the workers who trained these people are laid-off.

Ground Realities
The truth is that nobody knows how widespread the outsourcing phenomenon is or will become in future. It is important to distinguish between jobs lost by a sector of the economy and specific occupations affected within each sector. Catherine Mann, a senior fellow at the Institute for International Economics, says that there isnt much data to support many of the current arguments about outsourcing. When someone loses his job in California, it may appear in Bangalore or in New York. Lots of jobs are moving within the US economy.

The loss of jobs in the US to lower paid countries is nothing new: car makers and steel producers long ago began shuttering factories and sending work abroad. Today, whom does outsourcing affects more? Development, customer service and back office functions at information- technology and financial services companies appear vulnerable. Even the highest estimates of job losses to outsourcing are small compared with the gross number of jobs lost in a given year due to lay-off.

An average of 15 million jobs were eliminated annually in the US over the past decade, said Ben Bernake, a Federal Reserve Governor, in a recent speech. According to a report of India's National Association of Software and Service Companies estimates that between March 2000 and March 2004, employment of workers such as software developers and call-center operators, who serve clients outside India, increased from 353,000 to 505,000. About 70% or 247,000, of those additional workers were serving clients in the US, estimates Mr. Sunil Mehta, Vice President at the association. Its impossible to know if all those new Indian workers specifically replaced jobs in the US, suggesting that outsourcings impact could be lower than even these numbers suggest. Some of these workers have been hired as part of an overseas expansion or to fill positions that never existed in the US.

Outsourcing is creating US logistic jobs

The frenetic pace of global trade, coupled with outsourcing of manufacturing around processes around the world, has transformed delivery into a complex task. Companies shortlist logistic consultants to untangle supply chains and to monitor hipping lanes and weather patterns. The main reason for this complexity is the reason is the increasingly uncertain and variable demand for products. In 21st century, consumers want more variety of products and they want them immediately.

To meet this ever increasing demand and to cut costs, companies are outsourcing, which ads more players to the supply and distribution channels, making the whole process a complicated one. Meanwhile the products life cycle is short making the companies deliver the goods as soon as they get it from the manufacturer. A product introduced in one part of the world quickly can make obsolete an existing product, which are miles away ism some other country. A promotion that includes a 20% price reduction can raise demand tenfold.

These are precisely the varieties of value added jobs that US is expected to create to replace the manufacturing jobs that are moving abroad. These would not offset the number of factory jobs that are moving abroad. Still, they present a promising area of growth. Increased international uncertainty caused due to political instability, civil wars, terrorist activities compounds demand for these services. The best way to deal with these uncertainties is to have flexible supply chains and delivery channels. Most of the manufacturers have a back up plans, such as keeping a second source of suppliers. This mans that even if supply from one manufacturer is disrupted, supply from another manufacturer is continued. Even, if supplies are secured, the process of getting them might not be. To counter this problem, Toyota Motor Corporation, the worlds third largest car seller, has plants that not only manufacture cars for local markets but also makes cars for other parts of the world. Companies should focus on solving logistic and transportation problems to earn more savings and compete in the global market.

Outsourcing technology jobs strengthens US jobs

Outsourcing few white-collar jobs to other countries ahs thrown some Americans out of work, but ultimately in the long run this new trend would lower inflation rate, create jobs and boost productivity in the US. The Information Technology Association of America, in a survey, acknowledges that the outsourcing of tech jobs to low paid countries has eliminated 104,000 jobs so far. Outsourcing dramatically reduces labour costs, allowing American companies to sell goods at lower costs or higher profit margins. Theoretically a greater margin in profits allows companies to buy new equipments, build laboratories and invest in 
infrastructure projects.

Conclusion
While some people call outsourcing another chapter in companies quest to reduce labour expenses and earn more profits, others argue that companies are merely capitalizing on international trade flow, developing a more globalize focus and seeking out the most economical way to use their resources. A close look in the history takes us to the theories of David Ricardo, a 19th century economist who laid down the principles of free trade. He believed that countries should specialize in areas in which they wee relatively more advantageous than their international trading partners. He argued that when countries lowered trade barriers, everyone would benefit from it because they would be able to buy and produce goods more cheaply.

Businesses always seek to maximize profits and reduce costs. For more than half a century the manufacturing sector has been moving jobs to low-costs areas. The outsourcing of service sector jobs is the latest such migration and has come out because of lower wages and telecommunication costs. Policy efforts should be geared toward promoting job growth and easing the transitions, such as providing generous unemployment benefits and easier access to education.
Banning outsourcing as a policy is also the opposite of the constant drumbeat for the opening of markets that the US preaches to the world. We have to work towards making this and economic issue rather than as a zero-sum emotional issue.

The author can be reached at: kundusubhashis@legalserviceindia.com / Print This Article

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ISBN No: 978-81-928510-1-3