The Asian Century
The Politics of Business Outsourcing
Kaushik Basu
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Several years ago in Delhi, I called a pest control firm to treat my apartment for termites. A South Indian gentleman with a pleasing smile arrived with canisters of chemicals and a large syringe.
He went about his task meticulously. Each time he sprayed, a mist settled on everything. I asked whether this would really work. Breaking into a comforting grin, he said, “Sir, have no worry whatsoever. This is very strong stuff. It is totally banned in the United States.” I edged out of the room, as he reared the syringe to administer another dose.
I remembered this incident after I gave a lecture in Helsinki on global labor standards. As my talk concluded, I got into an animated debate with my audience on developing global standards for labor markets. A globalized world, with one country’s goods, capital, and pollution flowing into another, will inevitably need common norms and laws. But as my pest-control agent’s answer illustrated, one man’s poison can be another’s assurance. Common standards in a world as inequitable as ours will raise many contentious issues.
The impact of business process outsourcing (BPO) on many developing nations’ labor markets is a case in point. With technological breakthroughs in electronic communication and increasing bandwidth, many jobs that were done in industrialized nations, but that did not require face-to-face interaction, can now be moved to poorer countries, which have cheap labor, an educated workforce, and high rates of computer literacy.
America’s General Electric was one of the pioneers here. GE has saved $340 million annually since shifting some of its back-office work to India. Taking all costs into account, a call center in Kansas City costs more than three times as much as one in Mumbai. Not surprisingly, employment has boomed in India’s IT-enabled offshore services sector, soaring from 106,000 in March 2002 to 171,500 a year later. According to the latest projections, employment will cross the one-million mark in 2008.
India has been a major and growing outsourcing location for Microsoft, Hewlett Packard, British Airways, and other major corporations. But it its hardly alone. Over the last few years Motorola has been laying off workers in the US and moving operations to Brazil, China, and its plant in Chihuahua, Mexico.
Poor nations look to these facts and trends with hope, while many industrialized countries view them with anxiety. One audience member in Helsinki told me despondently that he had soured on globalization after some of his friends lost their jobs through no fault of their own, but merely because Ericsson decided to move some European plants’ operations to China.
Some economists dismiss such complaints as merely fuel for protectionism. Wrong. Poor workers in rich countries are the most vulnerable to BPO, and such matters, if not dealt with carefully, can fuel nativism and populism. On the Ku Klux Klan’s Web sites, economics now vies for space with race hatred. Indeed, the two combine to produce a neatly perverse analysis: globalization is bad because it gives our race’s jobs to other races in developing nations.
Opposition to BPO from rich countries has nothing to do with international labor standards, which deal with the poorest workers in poor nations. Unskilled laborers in poor nations do the kind of work that virtually no one in a developed country will do. So there is no conflict of interest with the poorest workers in developing nations because they do not compete for the same types of jobs.
But at higher skill levels, BPO does create a conflict of interest between workers in rich and poor nations. When a corporation outsources operations to a developing country, some of its incumbent workers really do lose out (at least in the short run). Of course, many other groups gain.
Workers in the host country, such as software technicians and call-center operators, clearly benefit from BPO, but so do shareholders and company owners (whose profits grow) and consumers (who pay lower prices). Many gain—and are well placed to compensate the losers. To this extent, developed countries’ bear a responsibility for cushioning the impact on their workers by providing adequate social welfare protection, together with relocation and re-training benefits.
Indeed, such measures are crucial in the long term, because if BPO makes developing countries better off, their demand for goods and services will grow. This will create new jobs in rich countries—and more than were lost to BPO. But they may not be in the concentrated, visible sectors that moved to developing countries. This makes BPO an easy target for populists, which is unfortunate because what developed countries really need is a flexible workforce.
This is not to deny that workers in industrialized countries are becoming relatively impoverished over time. I believe that there are forces at work that tend to make the total income that accrues to labor relatively small compared to the income that accrues to capital.
But this has nothing to do with the movement of back-office work to poor nations. If BPO were stopped, industrialized nations—and their workers—would be worse off in absolute terms.
Kaushik Basu is Professor of Economics and Director, Program on Comparative Economic Development, at Cornell University.
Copyright: Project Syndicate, February 2004.
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