Globalization Week 2004 Student Forum: "Outsourcing"

Event summaries from Globalization Week Spring 2004

Date: Thursday, April 15, 2004, 7:30-9:00pm
Location: Funger Auditorium 103

Outsourcing is one of the most controversial topics of the day. President Bush's chief economic advisor, Greg Mankiw, recently provoked a firestorm of criticism when he remarked that outsourcing would be "a plus for the economy in the long run," and was merely "a new way of doing international trade." And in March the U.S. Senate had approved a $328 billion spending bill, which includes a little-noticed provision by Senator Craig Thomas (R-Idaho) banning federal agencies from sending work overseas.

The U.S. economy's "jobless recovery," along with the extensive loss of manufacturing jobs to developing countries, has heightened fears of domestic job losses. The new popularity of outsourcing compounds these trends: Forrester Research has estimated that 3.3 million U.S. service-sector jobs will flee to foreign countries over the next 15 years, along with $136 billion in wages. An estimated 60% of these jobs will go to India, which has the second-largest English-speaking population in the world (second only to the US).

But many observers argue that outsourcing will bring benefits. US companies will be able to hire more workers because they are spending less money on goods and services now produced abroad. Consumers will also benefit from lower prices. And developing countries desperately need the higher-paying jobs offered by outsourcing to pull their populations out of poverty.

Who is right? This forum will bring together representatives from all sides of the outsourcing debate.

Panelists:

Moderator:

Event Summary

The panelists addressed an audience of faculty and students in Funger Hall Auditorium 103 at the George Washington University on Thursday, April 15, 2004. Dwight Gibson introduced the panelists and moderated the discussion. Each panelist gave a 10 minute presentation; a question and answer session followed.

Dr. Catherine Mann, Senior Fellow, Institute for International Economics gave the first presentation, titled "Global Sourcing and White-Collar Jobs: Economic Gains & Policy Challenges." Using PowerPoint, she outlined the macroeconomic gains from global sourcing of information technology hardware. Global sourcing reduces prices of hardware, and the benefits of these reduced prices are diffused through the economy as businesses purchase more IT systems. In total, these processes added at least $230 billion to US GDP between 1995 and 2000.

There are several sectors—wholesale, securities, and banks among them—which bought a lot of IT hardware and also hired a lot of IT workers, providing jobs for US workers. These sectors also export more than they import, helping the US balance of trade. These three factors—high IT investment, high IT hiring, and high exports over imports—provide a "win-win-win" situation for the US, as Dr. Mann put it. She noted that IT employment moves both cyclically (with IT investment) and structurally (as time goes on, the economy demands higher-skilled domestic IT workers).

She then presented a two-pronged strategy, both prongs of which must be present for "American innovation and growth." The first strategy is a domestic one, emphasizing wage insurance for displaced workers, a human-capital investment tax credit through firms (to encourage investment in domestic worker skills), and health care and pension portability (to mitigate the costs of adjustment), as well as better information on new job opportunities. Externally, Dr. Mann argued for policies to increase foreign demand for US exports, including exchange rate policy shifts, reduced tariffs for capital goods exports, and two-way trade in services.

Dr. Mann concluded by emphasizing the gains that come from global sourcing and noted that lagging sectors will eventually be able to benefit from cheaper software as well, increasing US output. She reiterated the challenge to the US IT sector and argued for better policies for increasing worker skills and dampening the shocks of adjustment.

Dr. Shivraj Kanungo, Professor of Management Sciences, George Washington University argued that we must "develop a reasonable discourse" in the area of IT. He noted that investing entirely in IT is not efficient and argued that division of investment between IT and other capital inputs would lead to higher productivity. Most of the value in organizations, Dr. Kanungo observed, comes at the end of the value chain. Regarding the political economy of outsourcing, he commented that the attention being devoted to outsourcing is related to the fact that computer programmers are more vocal than factory workers.

He then explored the business climate in India, noting that the mood there is "very upbeat." Investment has been up in recent years, which has improved infrastructure in the country. He then asked the question of whether the US government should take action to limit outsourcing, and concluded that the opposing sides of the debate will probably "meet somewhere in the middle," and that is where government action will align itself.

Dr. Kanungo then provided numerical estimates of outsourcing, stating that 20% of all low- and medium-end jobs will be outsourced eventually. He noted that outsourcing makes a variable cost into a fixed one, something that is very appealing for firms. Even with the benefits, however, business process outsourcing (BPO) will face "limits to growth," according to Dr. Kanungo. He argued that only the largest companies—the Fortune 2000—are able to outsource, limiting its impact. In closing, Dr. Kanungo noted that India is beginning to experience a "wage spiral," with high demand for Indian workers leading to increased compensation. This will effectively make outsourcing more expensive, and companies will likely begin to look to other countries for lower-paid workers.

Harris Miller, President, Information Technology Association of America centered on the refutation of the "Four Myths of Global Sourcing." The first myth is that global sourcing will lead to a net loss of US jobs. Citing a recent report from the ITAA, where Mr. Miller is president, he dispelled this myth by noting that outsourcing has actually created US jobs and will continue to do so.

The second myth is that any new jobs created will be low-paying ones. Using the same statistics, Mr. Miller observed that outsourcing actually leads to higher-paid jobs for Americans. It is the lower-paid and lower-skilled jobs that are outsourced, while sourcing creates jobs here that require more skills and provide higher remuneration.

Number three on the myth list was that all the IT jobs in the US are going to disappear because of outsourcing. Mr. Miller noted that there have been 400,000 IT jobs lost in recent years. Of those, only 25% can be attributed to outsourcing. Of all US IT jobs, only 2.3% have been outsourced; by 2008, that figure will rise to only 6.8%, which amounts to about one IT job in 15. He also noted that while there will be shifting among sectors, the total number of IT jobs in the US will increase.

Finally, Mr. Miller addressed the claim that the government should pass laws banning federal funds from being used for outsourcing. He cited the Dodd Amendment, recently passed in the Senate, which performs precisely that function. How would we feel, Mr. Miller asked, if other countries did that very same thing? Considering how much we sell overseas, it would be a disaster. Mr. Miller expressed concern that such legislation could start a trade war and negatively affect many countries engaged in the global economy.

Mr. Miller closed by noting that the ITAA recommends adjustment assistance for displaced UT IT workers, as well as government retraining programs.

Ron Blackwell, Director of Corporate Affairs, AFL-CIO began by asking the audience to raise their hands if they agreed that "American companies have a moral responsibility to hire American workers." Only about 5% of the audience raised their hands. Mr. Blackwell then observed that, according to a recent poll, 66% of Americans agree with that statement.

Mr. Blackwell outlined four important aspects of the outsourcing debate. First, there is the human dimension. Many American workers are unemployed for a number of reasons, including the "jobless recovery," and outsourcing simply exacerbates unemployment. Second, outsourcing threatens even the most educated workers. Mr. Blackwell noted that when manufacturing jobs were going overseas in the 1980s, Americans were told that a good education would keep them employed at home. Now that promise is being broken, argued Mr. Blackwell. Third, the effects of outsourcing are more political and social issues than economic ones. While there may be economic benefits, the social and political costs are huge. Finally, Mr. Blackwell noted that this round of globalization is different from previous ones. Trade, capital flows, and immigration have been present in every "era" of globalization. What is new is that production is now global. This gives corporations more power vis-‡-vis workers and governments, argued Mr. Blackwell.

He then noted that globalization must be done correctly, or backlash may lead to increasing protectionism. Mr. Blackwell suggested that companies considering outsourcing should ask five questions:

  • Is this good for the company?
  • Is this good for the workers?
  • Is this good for the global community?
  • Is this good for the national economy?
  • Is this good for the global economy?

Companies should base their competitive strategies on the quality of their products, argued Mr. Blackwell, not the cost of their inputs. In closing, he mentioned the recent deal between California grocers and workers, noting that worker health plans were cancelled in the deal. Mr. Blackwell inquired as to whether that was good for the companies involved, and strongly suggested that it was not.

Question & Answer

Q: Will outsourcing stop in India, or will it spread to other countries?
Mr. Miller: Outsourcing will not stop with India and is already being undertaken in other countries.
Dr. Mann: While outsourcing is likely to increase as it moves to other (cheaper) countries, the US health services sector is just beginning to utilize IT. In upcoming years, as that sector develops and invests in more IT, it will become a major source of US IT jobs.
Dr. Kanungo: India is already experiencing wage increases that will likely price it out of many markets.

Q: Wages have been stagnant in the US for years; will outsourcing lead to falling US wages?
Dr. Mann: For the average American worker, wages have not improved. However, the average American worker only has a high school education. Jobs in the future will likely require higher education levels, and those jobs will pay well.

Q: Outsourcing is just a new way of doing trade, and all reputable economists agree that trade is good. The important question is: How do we mitigate the economic adjustment that results?
Mr. Blackwell: Trade needs to work for workers. Right now, trade only works for corporations and capital.
Dr. Mann: Trade makes the entire economic pie bigger for the whole world. What needs to happen is that the pie needs to be divided up differently. It is very important that we don't make the pie smaller by stopping economic integration; then there will just be less pie to go around.

Q: Doesn't the United States, as a very rich country, have a moral obligation to help poor countries? And doesn't outsourcing provide good, well-paying jobs to poor people in those countries?
Mr. Blackwell: The US does have a responsibility to other nations, but the way that globalization is functioning right now is bad for workers. We should find other ways to help poor countries.