US economy: Outsourcing of jobs overseas is now a reality

These are some of the recruitment briefings published in the June 2004 issue of Tribune magazine. Thus, we see that the art of shipping jobs overseas has become the rage of American business practice, and the closing down of a manufacturing or service industry, or part of it by firing the bulk of its employees, has become almost a common feature of the US economy.

Levi's, an internationally known manufacturing company of jeans closed down its last manufacturing unit in the United States a few weeks back. If it had kept the plant going, paying its American workers $15 an hour and other benefits, it would be selling its jeans at $80. And would any American buy them? Probably not. The typical American will go to any chain-store, like Wal-Mart, for $12 a pair jeans, made in anywhere but the USA, where they pay the locals -- Bangladeshis, Chinese, Indians, or Thais -- at least several times lower than the American wages.

In the name of stock prices, corporate profiteering and bonuses, the backbone of American business is no longer performed in the United States alone. India, China, Indonesia, Egypt, Korea, and other countries have virtually become the homes for manufacturing and service sector jobs. Workers are no longer considered a valuable asset to corporate America and have become an expendable commodity, who, some say, are sacrificed on the altar of corporate greed at the expense of American families and communities.

Convansys, a company based in Farmington Hills, Michigan, was one of the first companies in the US to specialise in helping American businesses move parts of their operations offshore, setting up an Indian facility in 1992. Today, about half of its employees are based in the US and the other half overseas.

The outsourcing process began with the information technology (IT) industry. The roots of the successful development of an IT industry in India go back to the late 1970s when the Indian government put in place a policy requiring majority ownership of all foreign ventures. Fearing nationalisation, companies such as IBM pulled out, leaving the country with a small technology infrastructure with no one to maintain it .Thus, India was forced to build an industry to maintain the existing base, and the government actually caused the education system to turn on a dime to produce IT experts.

The next major event that eventually led to the growth of outsourcing was the Y2K phenomenon. Fearing the collapse of major computer systems as the new millennium dawned, there was a huge demand for technologists to help update systems quickly. And it was some enterprising people who took the risk and real initiative, and the whole industry took off.

Almost simultaneously came the explosion of the Internet, along with a boom in telecommunications capacity that made doing technology work remotely infinitely cheaper for everyone, and communications between the US and offshore locations much more efficient. At the same time, some of India's universities updated and changed their curricula, graduating students with a much wider and deeper array of technology skills.

The American supporters of outsourcing of jobs overseas argue that these practices help the overall global economy and, therefore, new and supposedly better jobs will replace the old. They are of the view that "if you can get work done somewhere else with the same quality for one third of the cost, why would you not do that."

In an August 2003 report entitled "Off-shoring: Is it a Win-Win Game?" the McKinsey Global Institute concluded with great specificity that every dollar of off-shoring results in 58 cents of savings to the American economy. But that report acknowledged that 31 percent of workers who lost their jobs in earlier waves were never fully reemployed, with 80 percent taking pay cuts.

For many multinationals, like Dell and Lehman Brothers , they face two big fears. First, they fear being associated with the loss of US jobs. Second, and worse still, they have also the worry about offending huge markets if they pull back from employing workers in places such as India, China, Korea, and Indonesia.

The irony is that outsourcing of jobs overseas is not an American-only concern. In manufacturing, the jobs have jumped like on a trampoline from country to country. In a world where people are treated as any other factor of production, making a scapegoat of one country is pointless. Already jobs that just five years ago went to Ireland are now done in India, as Irish wages rise. New and cheaper sources of well-trained workers are springing up in such places like the Philippines and China. And the people of these countries are naturally happy to do the job.

Denouncing "exaggerated alarmism," Daniel Drezner, Assistant Professor of Political Science at the University of Chicago downplayed the economic effects of outsourcing of positions to other countries, in the May/June issue of Foreign Affairs. "The creation of new jobs overseas," he predicts, "will eventually lead to more jobs and higher incomes in the United States."

A common fallacy often expressed when discussing outsourcing is that more jobs for foreign workers mean fewer jobs for American workers. But off-shoring is basically a two-way street. A study by Global Insight, a Massa-chusettsbased consulting firm published a report in March, "In 2003, global sourcing contributed to a $33.6 billion increase in real gross domestic product in the United States. What's more, by 2008, the firm expects GDP to increase by $124.2 billion." This is in large part due to off-shoring and the chain reaction it creates.

The opponents of outsourcing of jobs overseas, particularly some US economists, have some strong arguments as well, saying that American experiences of displaced workers reflect a totally dismal story of economic sufferings. They are of the view that a closer examination of the profiles of the jobs lost versus the new jobs created demonstrates that the average new job pays almost $2 an hour less than the job that it is meant to replace. A pay cut of $2 an hour turns out to be more than $4,000 less earned per year. It certainly is not better for workers or their families trying to feed their children or make home mortgage payments.

They argue that jobs lost in the United States reduce the purchasing power of the American people as a whole. By preserving purchasing power strength through lower unemployment, the nation gets more spending and eventually the comfort and stability that create a healthy economic cycle. Stability plays an important role in how the economy operates and this is reflected in how significant fluctuations in stock prices are driven by news of instability or strength. They also think that with outsourcing looming, many employees will hold their money close at hand and neither spend nor invest it. The result is further depression in the economy.

While the Congress and the White House have nothing new to add regarding the policy of outsourcing, Tennessee became the first state to enact legislation last month to penalise corporate employers for outsourcing. The law allots preferences in bidding for government contracts to firms that agree to keep the jobs in the US. According to a newspaper report, more than 30 other states are now debating similar bills.

Finally the issue of outsourcing of jobs overseas is one of the hottest topics around and it seems that the US media has leaped onto the subject. This year is hardly the first time that politicians have generated mass hysteria over job losses. It is also interesting to note here that the Republican Party and the Bush administration generally applaud the present trend of outsourcing of jobs overseas. N. Gregory Mankiw, chairman of President Bush's Council of Economic Advisors, is on record favouring outsourcing saying, "Shipping jobs overseas is the latest manifestation of the gains from trade that economists have talked about."

The Democratic Party Presidential nominee John Kerry, in a write-up published on June 18 in The Atlanta Journal-Constitution, expressed his firm opinion on the issue of outsourcing. He said, "Americans need a president who will fight for Americans' jobs as hard as he fights for his own. As part of my Jobs First economic plan, I will end laws that encourage companies to export jobs while plowing back every dollar we save into new incentives to help companies create and keep jobs in America."

Generally supportive of increased international trade as a Massachusetts senator, Mr. Kerry recently sponsored legislation that would require call centre employees to disclose to customers where they are located. He also was a co-sponsor of an amendment to the Worker Adjustment and Re-training Notification Act to provide protections for workers whose jobs are lost to the outsourcing of jobs abroad.

Interestingly, many US companies are now doing their best to stay out of the spotlight on this issue -- even as they rely increasingly on overseas workers. Rather than loudly proclaiming the benefits, or alternatively opting not to shift those jobs overseas -- many are simply continuing their outsourcing as quietly as possible. Even McKinsey, which extols the benefits of outsourcing, has publicly started to downplay its outsourcing efforts lately.

Outsourcing of jobs overseas has, however, re-energised an ugly strain of xenophobia in the United States, with anti-immigration groups using it to argue against foreign worker visas. Other groups, often company sponsored, use the word "protectionist" against opponents. Blogs and web sites such as http://YourjobisgoingtoIndia.com have sprung up to rail against evil corporate interests. Even some anti-foreigner groups have seized this issue as a way to promote their beliefs.

In any case, outsourcing is here to stay as long as the cost savings are real. Particularly for the American economy, it is now a reality and a hard fact. The various measures intended to blunt off-shoring appear to have been designed to ensure only one job: the politician's.

Zahid Hossain is a Senior Research Fellow at the Bangladesh Enterprise Institute.