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Outsourcing Is An Old Story With New Critics
The most important fact about the present outsourcing debate is that it is not new. The world economy has been through the same phenomenon before, and when politicians attack White House chief economi
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The most important fact about the present outsourcing debate is that it is not new. The world economy has been through the same phenomenon before, and when politicians attack White House chief economist Gregory Mankiw for pointing out the potential economic benefits of relocating some jobs to lower-wage countries, they betray a lack of knowledge of American history.
Many decades ago, technological improvements dramatically drove down the cost of cargo transported by ship and air. Suddenly, the electronics assembly work that was done in Maryland could be done cheaper in . That led to massive growth in trade in goods.
Production chains broke up, with specialized manufacturing taking place across the globe, exploiting opportunities for the lowest costs. Companies that did this benefited -- they were able to cut costs and reduce prices. Consumers benefited from cheaper goods. The manufacturing work which went to poor countries helped ignite economic development, particularly in , and the four Asian tiger economies -- Hong Kong
That process was obviously unkind to the blue-collar workers in the West who lost their jobs. And it is equally unkind to the many middle-class workers who are now losing their jobs due to outsourcing. The difference is that these middle-class workers are closer to the political elites in their country, so they are in a position to make a louder fuss about it.
But what those who complain forget is that, throughout this earlier transition, world gross domestic product grew. Output and productivity -- in both rich and poor countries -- rose. The workers who were formally in manufacturing got absorbed into other parts of the economy.
Throughout this episode, populist politicians periodically complained about job losses, and fitfully tried to do something about it. But the basic logic was loud and clear. The essence of capitalism is a ceaseless quest for cost reductions. The companies that manufactured at the lowest cost venues were the ones that prospered.
This identical story is now being repeated afresh, through a different technological impetus. The driver here is the incredible progress in telecom, where high bandwidth is now available virtually across the globe at extremely low prices. Suddenly, it became possible to think of "global production chains" for services as well.
Once again, we are seeing production being sliced up into pieces, and each piece is placed at the best production venue available globally. And once again populist politicians are exploiting the understandable concern about job losses in an attempt to score cheap political points. That has been demonstrated in Washington over the past few days, as those who should know better rushed to condemn Mr. Mankiw's observation, at a news conference Monday, that sending service jobs abroad "is probably a plus for the economy in the long run." Prominent among the critics was Democratic presidential front-runner Sen. John Kerry.
Their short-sighted criticisms ignore the fact that the companies, such as General Electric, that have taken advantage of the incredible progress in telecommunications to relocate jobs have benefited by being able to cut costs and prices. Consumers in Western countries have benefited too -- from cheaper goods and services, to more responsive help lines they can call. The services work that goes to countries like is helping to ignite economic development. Thanks to this, World GDP is growing.
The benefits of outsourcing are not limited to companies. Governments and public-sector entities in the West are also finding that sending work to is a way of making ends meet. When health-care work gets done in , all consumers in the West benefit from cheaper health care.
The deepest consequence of this new outsourcing is perhaps found in research and development. The cost of doing R&D in is roughly half that of doing it in the West. Startups in Silicon Valley are now routinely structured as a marketing operation in the , and the entire engineering work is done in . When research is cheaper, the CEO can place more bets. More avenues are explored, and more risks are taken. This can lead to an acceleration of technological progress, which could have a profound impact upon world GDP growth in coming decades.
What is perhaps different here is that when blue-collar workers were losing jobs, they were far removed from the political elites of advanced countries. In contrast, job loss in services strikes closer to home with respect to middle class, high-skill families. This is a novel feeling of insecurity for many prosperous people.
It is perhaps unsurprising that populist politicians will try to harness the insecurity in the minds of many workers. But the basic logic is clear: Companies that will exploit global production chains will out-compete companies that don't. Corporations and citizens alike have a direct interest in blocking the new protectionism. Perhaps Sen. Kerry should remember that before he abandons his former free-trade credentials to attack a trend that can only benefit -- and the world -- in the long run.
Ms. Patnaik is senior economist at the National Council of Applied Economic Research in New Delhi .
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