if this does not generate irate email, nothing will --- Who wins in offshoring?

[Dave Farber <dave () farber net>]

> Delivered-To: dfarber+ () ux13 sp cs cmu edu
> Date: Tue, 28 Oct 2003 11:00:41 -0300
> From: Claudio Gutierrez <cgutierrez () improvement cl>
> Subject: Who wins in offshoring?
> To: dave () farber net
>
> A totally different view on offshoring from the McKinsey Quarterly:
> "Offshoring, far from being bad for the United States, creates net value
> for the economy."
>
> http://news.com.com/2030-7341-5096283.html
>
> Widely cited figures predict that by 2015, roughly 3.3 million U.S.
> business-processing jobs will have moved abroad. As of July 2003, around
> 400,000 jobs already had.
>
> Other research suggests that the number of U.S. service jobs lost to
> "offshoring" will accelerate at a rate of 30 percent to 40 percent
> annually during the next five years. Vast wage differentials are
> prompting companies to move their labor-intensive service jobs to
> countries with low labor costs: For instance, software developers, who
> cost $60 an hour in the United States--the country that does the most
> offshoring of jobs--cost only $6 an hour in India, the biggest market
> for offshore services.
>
> Such projections have caused alarm in the United States. In February
> 2003, the cover of Business Week asked, "Is your job next?" In June, the
> U.S. House of Representatives' Committee on Small Business held a
> hearing called "The globalization of white-collar jobs: Can America lose
> these jobs and still prosper?"
>
> Several U.S. states are considering legislation to prohibit or severely
> restrict their state governments from contracting with companies that
> move jobs to low-wage developing countries, and labor unions, notably
> the Communications Workers of America, are lobbying Congress to prevent
> offshoring.
>
> Yet pandering to protectionism would be wrong. Many people believe that
> money spent to buy services abroad is lost to the U.S. economy, but such
> views are easily disproved. Companies move their business services
> offshore because they can make more money, which means that wealth is
> created for the United States as well as for the country receiving the
> jobs. A McKinsey Global Institute study reveals the extent of the mutual
> benefits.
>
>
> As the study shows, for every dollar that was previously spent on
> business processes in the United States and now goes to India, India
> earns a net benefit of at least 33 cents, in the form of government
> taxes, wages paid by U.S. companies and revenues earned by Indian
> vendors of business-process services and their suppliers. What of the
> impact on the U.S. economy? First, it is important to put the figures in
> context, since fear of job losses makes many people overstate the
> effects of offshoring. Some 70 percent of jobs in the United States are
> in service industries such as retailing, catering and personal care.
> This work, by its very nature, cannot be moved abroad.
>
> In addition, any job losses must be seen as part of an ongoing process
> of economic restructuring, with which the U.S. economy is well
> acquainted. Technological change, economic recessions, shifts in
> consumer demand, business restructuring, and public policy (including
> trade liberalization and environmental regulation) can and frequently do
> result in job losses. Even when the economy is growing, mass
> layoffs--usually from restructuring--are much higher than the job losses
> predicted from offshoring.
>
> In 1999, for instance, 1.15 million workers lost jobs through mass
> layoffs, out of a total of 2.5 million lost. Liberalized, competitive
> economies with flexible labor markets can usually cope with such
> restructuring; the U.S. economy, the world's most dynamic, certainly
> should be able to do so. Indeed, history suggests that, over the medium
> to long term, a flexible job market and the mobility of U.S. workers
> will make it possible for the United States to create new jobs faster
> than offshoring eliminates them.
>
> The United States today has more than 130 million employed workers.
> According to the Organization for Economic Co-operation and Development,
> the United States has the highest rate of reemployment of any member
> country by a factor of almost two. Over the past 10 years, 3.5 million
> private-sector jobs a year have been created, on average, for a total of
> 35 million new jobs, so most workers who lose their positions find
> another within six months. Jobs lost to low-cost foreign competitors are
> not so easy to replace.
>
> Nonetheless, from 1979 to 1999, 69 percent of the people who lost jobs
> as a result of cheap imports in sectors other than manufacturing were
> reemployed. The mean wage of those reemployed was 96.2 percent of their
> previous wage.
>
> Finally, remember that the population of the United States is aging. At
> current productivity levels, the country will need 5 percent, or 15.6
> million, more workers by 2015 to maintain both its current ratio of
> workers to the total population and its living standards. By 2015,
> despite current fears about job losses as a result of offshoring, the
> U.S. economy will need more, not fewer, workers. Offshoring is one way
> to meet that need.
>
> But focusing the offshoring debate on job losses misses the most
> important point: Offshoring creates value for the U.S. economy by
> creating value for U.S. companies and freeing U.S. resources for
> activities with more value added. It creates value in four ways:
>
>
> Cost savings
> For every dollar of spending on business services that moves offshore,
> U.S. companies save 58 cents, mainly in wages. Offshore services are
> identical to those they replace--and at times better because offshore
> workers, enjoying higher-than-usual wages, tend to be motivated. Reduced
> costs are by far the greatest source of value creation for the U.S.
> economy.
>
> New revenue
> Indian companies that provide offshore services need goods and services
> themselves, ranging from computers and telecommunications equipment to
> legal, financial, and marketing expertise. Often, they buy these from
> U.S. companies. We estimate that for every dollar of corporate spending
> that moves offshore, suppliers of offshore services buy an additional 5
> cents worth of goods and services in the United States. Exports from the
> United States to India stood at $4.1 billion in 2002, compared with less
> than $2.5 billion in 1990.
>
> Repatriated earnings
> Many Indian offshore service providers are in fact U.S. companies that
> repatriate earnings. Such companies generate 30 percent of the revenues
> of the Indian offshore industry. Thus an additional 4 cents of every
> dollar spent on offshoring creates value for the United States.
>
> Redeployed labor
> Beyond the direct benefits to the United States in the form of savings,
> new exports, and repatriated profits, offshoring can indirectly benefit
> the economy: Capital savings can be invested to create new jobs, for
> which labor will be available. Indeed, this is exactly what has happened
> over the past two decades as manufacturing jobs moved offshore.
>
> The Bureau of Labor Statistics reports that overall manufacturing
> employment shrank by 2 million jobs in the past 20 years. But workers
> have found it easy to locate jobs in other areas, such as educational
> and health services. These service jobs, on average, pay more than the
> manufacturing ones they replaced, helping to increase the population's
> standard of living.
>
> The same thing could well happen again. As jobs in call centers,
> back-office operations and repetitive IT functions go offshore,
> opportunities to train labor and invest capital to generate
> opportunities in higher-value-added occupations such as research and
> design will appear.
>
> The Bureau of Labor Statistics estimates that from 2000 to 2010, there
> will be a net creation of about 22 million new jobs in the economy,
> mostly in business services, health care, social services,
> transportation, and communications. How much value will be created in
> this way depends on the country's future economic performance.
>
> Historical trends can serve as a guide. If we use the statistics on
> reemployment and wage levels already noted--69 percent of
> nonmanufacturing workers are reemployed at 96.2 percent of their
> previous wages--and bear in mind that 72 cents of every dollar that goes
> to offshoring had previously been spent on U.S. wages, the indirect
> benefit to the U.S. economy would come to an additional 45 to 47 cents
> for every dollar spent on offshoring.
>
>
> That is a conservative estimate because workers in IT and business
> services tend to find jobs more quickly than do workers in the service
> sector as a whole, and the demographic shift will increase the demand
> for workers.
>
> In this way, offshoring, far from being bad for the United States,
> creates net value for the economy. It directly recaptures 67 cents of
> every dollar of spending that goes abroad and indirectly might capture
> an additional 45 to 47 cents--producing a net gain of 12 cents to 14
> cents for every dollar of costs moved offshore.
>
> The total possible wealth creation does not, of course, ease the plight
> of people who lose their jobs or find lower-wage ones. The statistics
> showing that 69 percent of those who lost jobs in the nonmanufacturing
> sector were reemployed also show that 31 percent were not fully
> reemployed. And while, on average, those who found new jobs secured
> similar wages (96.2 percent of their previous wage), 55 percent took
> lower-paid jobs. As many as 25 percent took pay cuts of 30 percent or
> more.
>
> These issues must be addressed. Training programs and generous severance
> packages, perhaps accompanied by innovative insurance programs, are
> among the measures that could mitigate the effects of the transition
> without great cost to the economy. And while many people will
> undoubtedly suffer short-term disruption, it should be set against the
> consequences of resisting change: If U.S. companies can't move work
> abroad, they will become less competitive--weakening the economy and
> endangering more jobs--and miss the chance to raise their productivity
> by focusing on the creation of jobs with higher value added.
>
> The openness of the U.S. economy and its inherent
> flexibility--particularly that of its labor market--are two of its great
> recognized strengths. The current danger is that public policy will make
> its economy less flexible. To do so would endanger the economic
> well-being of the United States.
>
>
> - - - - - - -
> Claudio Gutiérrez
> http://www.improvement.cl

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