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Anti-Outsourcing Policies Can Prove Disastrous for US Economy

In the late 1980s and early 1990s, Japan and Germany were fast catching up with the US in terms of per capita income. The world bank data shows that in 1992, while the US had a per capita income of $23,200, Japan was just marginally behind with a figure of $20,300. However, by 2002 the US had attained a convincing lead over Japan and Germany. In that year, Japan’s per capita income hovered around $26,000 and the US was touching $35,1000.

What caused this?

This was the result of great fiscal management done by the US. The other important factor behind this economic miracle was that America stepped up its economic activity with poor conundrums. Whenever an industrialized nation collaborates with poor countries, the economic gains are enormous.

The US economy got a big boost through collaboration with India and China. The US industry gained a decisive edge over the competition by outsourcing information technology to India and by giving jobs to Indian IT professionals in the Silicon Valley. America has a history of adopting this openness to boost its economy.

Foreign companies would out-compete US companies if US companies stopped outsourcing. But by outsourcing US companies are able to maintain a competitive advantage over foreign firms. According to McKinsey Global Institute, for every dollar the US spends in India on outsourcing, it gets $1.12-1.14 in return. It only due to outsourcing that the American companies save money and churn out profit for both themselves as well as their shareholders. By outsourcing business processes to India, the American companies create greater demand in the local marketplace for products like telecommunication equipment and computers etc. As far a the local labor of the US is concerned, it can be realigned to more competitive and better-paying jobs. This is evident from the fact that between 1999 and 2003, around 70,000 computer professionals lost their jobs but during the same time period more than 115,000 software professionals got into better-paying jobs. Therefore, outsourcing adds to the competitiveness of the American service sector.

If US companies stopped outsourcing they would not be able to remain competitive, experience growth and create new jobs in the US.

Catherine Mann of The Institute of International Economics estimates that over the past seven years the US has added $230 billion to its GDP on account of globalization of IT production. The noteworthy thing is that this is a rather conservative estimate by the economist. She further adds that globalization of IT services will have a similar impact on the US economy. The decline in the price of IT services will prompt sectors like construction and healthcare to outsource their IT services. By doing so, these sectors will be able to lower the cost of production and improve the quality of their products. If a drug company gets cheaper IT services, it can greatly reduce the number of “adverse drug events.” Mann further predicts that if companies are able to bar code the prescription drugs and create a medical record system, the number of “adverse drug events” can be reduced by around 80,000 in the US alone.

By outsourcing to lower cost operations, businesses are able to reduce their overhead costs, compress time-to-completion with around-the-clock operations, and focus on core, strategic investments and hiring. Many manufacturers, for example, are running leaner, more competitive operations as the result of outsourcing IT services, focusing their resources on the research, design and processes for improving their products.

A study conducted for the 2004 Index of Economic Freedom established that per capita GDP increases with greater economic freedom. The countries that want to protect a few jobs by curtailing outsourcing, end up retarding their economic growth which eventually leads to job cuts.

Skill Shortage

A recent article in Business 2.0+, entitled “The Coming Job Boom,” even implies offshore outsourcing may prove critical to America in the face of a skilled worker shortage caused by the imminent retirement of baby boomers. This article cited research by labor economist Anthony Carnevale, former Chairman of President Clinton’s National Commission for Employment Policy, who forecast that America will face a skilled worker gap that will grow to 5.3 million by 2010 and 14 million by 2020. Outsourcing is thus essential for it enables the US to remain competitive and the largest economy in the world.

Offshore outsourcing is not the bogeyman that critics say it is. Their arguments, however, must be persistently refuted. The results of measures to counter outsourcing or prohibit outsourcing will be disastrous: less growth, lower incomes — and fewer jobs for American workers.

 


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