Sunday, March 17, 2013

Are First World Countries Paying the Price for Outsourcing Offshore?

Anna van Zoest from the Institute of Public Policy and Research states how it appears that “the dominant argument for companies to move business processes offshore are lower production costs caused mainly by low wages in countries outside of Europe, the US and Japan. An average ICT worker in India earns one seventh of the amount earned by his British counterpart, and a call centre agent even less. According to the McKinsey Global Institute, companies can save over 45% on production costs when moving business segments offshore, (McKinsey, 2003).”
This is supported by Katerina Rudiger of the Work Foundation, who highlights in a 2007 article that, “to this date, the phenomenon of labour arbitrage, the huge wage gap between industrialised and developing countries, has played an important role in offshore outsourcing. This is why Alan Blinder has called the phenomenon of offshore outsourcing the migration of jobs, but not the people who perform them, from rich countries to poor ones.”
Actual data seems to be very limited, as if the subject of outsourcing offshore is taboo and the less said the better. The problem with this is, in a depressed economy with high unemployment and areas of real poverty, the lack of data just fuels the flames of discontent, concern, misunderstanding and fear around ‘local’ jobs being sent overseas.
An article by Alex Lach highlights how in the US “data from the U.S. Department of Commerce showed that U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.”
Where, “according to a report on outsourcing by Working America, manufacturing employment collapsed from a high of 19.5 million workers in June 1979 to 11.5 workers in December 2009, a drop of 8 million workers over 30 years. Between August 2000 and February 2004, manufacturing jobs were lost for a stunning 43 consecutive months - the longest such stretch since the Great Depression. Manufacturing plants have also declined sharply in the last decade, shrinking by more than 51,000 plants, or 12.5 percent, between 1998 and 2008. These stable, middle-class jobs have been the driving force of the U.S. economy for decades and theses losses have done considerable damage to communities across the country”.
According to research from the Hackett Group, the cost gap between the United States and China has shrunk by nearly 50 percent over the past eight years, and is expected to stand at just 16 percent this year. Labour costs in China and elsewhere are rising, and coupled with rising fuel prices raising shipping costs, the economic argument for sending jobs overseas may be becoming less persuasive. Despite these increasing costs, the Duke survey found that only 4 percent of large companies had any future plans for relocating jobs back to the United States. The Duke survey does not identify the reasons for this reluctance to bring these jobs back to the US, but Alex Lach suggests that “a key factor could be the U.S. tax code”, which, as Seth Hanlon explains, “rewards companies for making investments abroad and leads to them shifting offices, factories, and jobs abroad even if similar investments in the United States would be more profitable absent of tax considerations.”
Although a complex topic, the basic equation for disaster is simple – if you create local unemployment because you outsource part of your business set-up overseas, then although you may have reduced you own costs, you have in the process reduced the disposable income available in your own country.
Once the cycle starts, it can become a never ending spiral of disaster, where with less domestic income available to spend, other organisations across the industry spectrum automatically presume the only way forward is to cut their prices to attract the diminished spending power. This will inevitably lead them to look at ways to reduce costs in order to keep their shareholders happy, and in the process they are likely to look offshore - where in a ‘heartbeat’ you’ve the potential to create more unemployment and even less disposable income at home – and so the cycle continues.
There are strong views on both sides, from the economic view of a free market economy and optimising shareholder value to the social view, concerned with the impact of unemployment on society. But the two shouldn’t be considered mutually exclusive, where government and business should focus on socio-economic solutions for their home country first, and then they are in a stronger position to help developing nations. But there is a real danger if you help develop other countries at the expense of your own citizens that sometime in the not too distant future your whole country could lose.
Lach, A. (2012). 5 Facts About Overseas Outsourcing. Centre for American Progress. [On-line:]
Rudiger, K. (2007). Offshoring, a threat for the UK’s knowledge jobs? Globalisation and the extent and impact of offshore outsourcing. The Work Foundation. [On-line:]
Van Zoest, A. (2004). Offshoring Practices in the UK – Where Are the Limits. Institute for Public Policy and Research. [On-line:]

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