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The Outsourcing Bogeyman

Author: Jagdish N. Bhagwati, Senior Fellow for International Economics
August 23, 2011
Project Syndicate

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NEW YORK – Outsourcing of services has been a persistent cause of panic and protectionism in recent years, especially in the United States since the 2004 presidential election. Back then, the Democratic candidate, Senator John Kerry, upon hearing that digital x-rays had been outsourced from Massachusetts General Hospital in Boston for examination by radiologists in India, denounced firms that outsourced as Benedict Arnolds, the most infamous traitor in US history.

Kerry's misstep was followed by alarm over outsourcing across the West. If free trade is to regain the support of statesmen who now hesitate over liberalizing trade with developing countries, the myths that turn outsourcing into an epithet must be countered.

Myth 1: Outsourcing will be like a tsunami. While even a shrewd economist like the former US Federal Reserve Board member Alan Blinder thought this, it is not likely for several reasons, both “natural” and manmade. Consider just two.

First, it is simply not possible to outsource everything. For example, the fact that I can call someone in Bangalore to tell me how to fix a computer problem presupposes that I can understand her instructions. I tried this with a Dell computer and gave up after repeated attempts. I was so desperate that I asked Michael Dell, whom I met at the World Economic Forum in Davos, for a replacement.

That is a remedy unavailable to others, of course. So Dell has now given up relying on call centers. Besides, many “electronic plumbers” have emerged who will come to your computer and fix the problem while you while away the hours working where your competence lies.

Second, there are manmade restrictions to outsourcing particular types of expertise: professional organizations often intervene to kill outsourcing simply by requiring credentials that only they can provide. Thus, foreign radiologists need US certification before they are allowed to read the x-rays sent from the US. Until recently, only two foreign firms qualified.

Myth 2: Outsourcing will be only from rich to poor. There is a lot of two-way trade in manufactures, even within a single industry. Economists call it “intra-industry” trade. But when it comes to services, the popular fear is that outsourcing will go in only one direction. This fear is baseless.

Indeed, there has been substantial growth in “reverse outsourcing,” i.e., “insourcing.” Indian firms like Infosys and Wipro, giants in the information-technology sector, are now looking for cutting-edge services and high-grade talent as they compete for local markets such as the US. At IQor, the hugely successful outsourcing entrepreneur Vikas Kapoor now has 12 US locations, which account for half of its 11,000 employees.

Myth 3: Outsourcing costs jobs. A standard argument used by US Democrats against Republican business CEOs who were running for Congress last year was that they had exported US jobs. Senator Barbara Boxer railed continually against Carly Fiorina, a former CEO of Hewlett-Packard, that she had exported 35,000 jobs. The obvious reply should have been: “Yes, I outsourced 30,000 jobs. But, if I had not, HP would have become uncompetitive in fiercely competitive markets, and I would have lost 100,000 jobs.”

Another “jobs fallacy” is that when a job disappears in a Western country and turns up in India, it must have been “exported” by nefarious businessmen. But, in many cases, the job has simply become uneconomic to maintain in the West, regardless of whether or not India exists.

If it costs a US nursing home $2 per call to get someone to remind a patient to take her medicine, the job of providing such reminders will disappear. But if Indians can make the call for $0.25, the nursing home might well sign on. This would make its patients healthier, drug makers more profitable, and India better off, because employment increases.

In short, everyone wins from outsourcing of services. Alas, few understand this.

 

 

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