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Outsourcing in the Developing and Developed World - Part One: From Outsourcing to Offshoring
Published on March 23-25, 2004 by The Statesman / Kolkata, India
Outsourcing in the Developing and Developed World
Part One: From Outsourcing to Offshoring
by Huck Gutman

We begin with a law of international relations: No action involving two countries has equal effects on each. This is certainly true of the new economic interdependence of India and the USA. For in addition to a new closeness between the governments of these two great democracies in recent years – including shared concerns about terrorism, the nuclear capacity of Pakistan, the possibility China will dominate all of Asia – there are also significant emergent economic linkages between them. These linkages may yet prove to be the most important event in their recent bilateral relationship.

The new economic interdependence of the two nations is the result of the intersection of several modern phenomena. One is the movement toward globalization. Another is the operating principle of modern corporations, in particular MNCs, that fiscal efficiency is absolutely necessary for corporate success. (It should be noted that corporate “success”, as used here, refers to the growth of profits.) A third is the strategy, originally brought to its highest level of practice in Japan as a mode of productive efficiency, of outsourcing.

Outsourcing in the Developing and Developed World

Part One: From Outsourcing to Offshoring

Part Two: The Age of India Cometh

Part Three: The View from America: Losing Jobs is Grim
Outsourcing refers to work done by people other than a corporation’s full-time employees; the outsourcing we will refer to henceforward is that in which a corporation divests itself of those elements in the process of production which bring in modest or little profit in terms of the capital invested. These less-profitable or peripheral activities can be performed, supposedly more efficiently, by other, usually smaller, corporations, which gain efficiency by concentrating on the activity itself, honing the productive process so that it can create new efficiencies, making profits which the larger corporation would not be attentive enough to generate.

For example, a large automobile manufacturer might want to purchase headlights, or speedometers, rather than produce them. That way, it could pay attention to assembling and merchandising automobiles, and could leave the process of designing and producing the headlight to a supplier. As the Japanese rediscovered, outsourcing means the headlight can be provided for the same (or often lower) price by a supplier as the car manufacturer, with its inefficiencies of scale, can provide it. With less capital investment, since no capital is required from the auto manufacturer to produce the headlights, as each car is sold the return on invested capital – which if the company is well managed should remain relatively constant – rises. In other words, if you invest fewer dollars (or yen, or rupees) for each item sold, and the profit on each item stays the same, you get back a greater percentage return on your investment. Still simpler: less invested, higher profits.

That is the theory, and Japanese manufacturers made it work. They concentrated on core business; they outsourced, reducing their need for capital; they developed a “just-in-time” strategy for ordering, cutting the cost of maintaining inventory, thereby passing on the cost of maintaining inventory. Inventory, after all, is merely product just sitting there, the physical embodiment of invested capital, and earns no return as it sits waiting to be used.

The potency of the Japanese model, which was so economically successful in the 1980s, was not lost on European and US corporations. Over the course of a decade, US corporations downsized, outsourcing less profitable aspects of their production, creating greater administrative efficiencies in the process. At first, they followed the Japanese model: outsource within the domestic economy.

The intersection of liberalized trade policies, the need for efficiency in production as a motor for increasing profits, and the strategy of outsourcing, created a global movement of jobs. Once the decision that outsourcing to reduce costs and improve return on investment is made, there is powerful impetus for major corporations to move jobs around the globe. If labor is less costly in one nation than in another, it makes economic sense to produce labor-intensive products where the labor cost is lower. When outsourcing involves sending labor-requiring work, whether in manufacture of services, to another country, it is known as offshoring.

In the USA, for instance, many hundreds of thousands of jobs were offshored to Mexico after the signing of the North American Free Trade Agreement in 1993. Manufacturers in the USA were accustomed to paying $15-25 an hour, with health care and retirement benefits, to US workers. NAFTA enabled them to hire Mexican workers in the Maquiladora zone – the mile-wide strip of Mexico just across the US border – to do the same jobs for a dollar or a dollar and a half an hour, without benefits.

With the 1994 US acceptance of the General Agreement on Trade and Tariffs (now subsumed into the World Trade Organization), a new aspect of outsourcing emerged. Since a worker in Mexico would do for a dollar an hour what a worker in the USA did for $25 an hour, corporations laid off millions of US workers and sent their jobs to Mexico. But then it transpired that Mexican labor at $1 an hour was a lot more expensive than labor in China, where production workers work for of a fifth or a quarter of the Mexican wage. The Maquiladora zone, built from almost nothing into a major economic engine in Mexico, began to lose jobs by the tens and hundreds of thousands.

The emergence of China as a major economic power is almost completely dependent upon this phenomenon of outsourcing, as well as producing finished products for resale by multinationals, in a world of free trade.

While the pundits of capitalism speak of the huge market comprised by China’s 1.2 billion people as an economic territory in which foreign producers are eager to sell, there is a reason that Chinese consumers have disposable income: a great deal of money has been generated in China by the outsourcing there of manufacturing for the MNCs. It is worth recalling that it is not the low wage Chinese workers who have disposable income. Huge numbers of Chinese workers are laboring at starvation wages: often locked in factories to keep them working long hours at difficult tasks, they are disproportionately female (being more easily bullied into following the orders of management, being more patient at doing the endless routine tasks of production) and are among the lowest paid laborers on earth. In the Chinese government’s desire to keep wages competitively low, it encourages corporations to move ever farther inland where wages are even lower.

In 1817, British economist David Ricardo propounded a principle that he said governed capitalist production. “The natural price of labor is that price which is necessary to enable the laborers to subsist and to perpetuate their race, without either increase or diminution. When the number of laborers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.” Ricardo’s Law was true then, and is true now: unless there is a scarcity of labor, wages tend to drop lower and lower, till they reach a point where they equal the minimum amount required to keep a worker alive. On an international scale, which is clearly in operation today, Ricardo’s Law is the dynamic behind the phenomenon known as “the race to the bottom.” Everywhere, MNCs seek lower and lower wages. If Mexico pays more than China, send the jobs to China. If China begins to pay more than Vietnam, send the jobs to Vietnam. And pay the Vietnamese worker only what is required for him or her to have sufficient strength to show up at the factory gate tomorrow.

The only way to counteract Ricardo’s Law within a domestic economy that has more workers than jobs is when workers organize labor unions, and use their collective strength to provide a counter force to the race to the bottom in their place of work. (Strong labor unions in middle third of the 20th century is the reason US manufacturing jobs paid as well as they did, $20-25 an hour.) The only way to counteract Ricardo’s Law in a global economy where there are more workers than jobs, is by putting protections in place, nationally and internationally, which recognize the right of labor to organize unions, and which establish fair labor practices to abet the rights of workers in every country.

Here are some remarkable statistics. In the past three years, the USA has lost 2.7 million jobs, some to automation and productive efficiency, but many to job flight to low-wage China. In that number were 15 per cent of the USA’s manufacturing jobs – 15 per cent!

But for a variety of reasons the hemorrhaging of jobs was not of immediate public concern in the USA. Those reasons are worth listing. First, of course, there are huge financial benefits to the owning class who outsource jobs. The owning class, the USA’s wealthiest citizens, along with the large corporations, pour huge amounts of money into funding political campaigns, with the result that most elected officials pay more attention to undergirding the corporate drive for profit than to the needs of “ordinary” US workers. Along similar lines, the US media choose to focus on small scandals, individual acts of violence, and gossip, since the handful of giant corporations which own the media have no interest, literally no interest, in bringing corporate downsizing and offshoring to the attention of the public.

Additionally, the majority of the job loss has been in manufacturing, in what are called “blue collar” jobs. But in the USA union membership, once concentrated in the manufacturing industries, has been in decline for many years. Because of declining worker solidarity, when jobs in manufacturing disappear, there is less public outcry at the closing of economic horizons than one might expect. And Americans have been, up until recently, and not without some justification, gripped by a new “great American dream”. The USA has always prided itself on being a land of upward mobility. Since World War II, and ever more strongly in the ensuing decades, that dream has not only been of greater financial rewards for each generation, but also of movement from blue collar jobs to white collar jobs – from workers to professionals, from the assembly line to the office suite. Thus, if manufacturing jobs are lost, it may not necessarily seem of great consequence: Americans believe their children will be able to get better jobs, jobs in offices, jobs in the new knowledge and information based economy. For that world of technology and information is, Americans have been told, the economy of the future.

The first huge job losses were in labor-intensive low-pay work such as textiles and making shoes. The textile and clothing industry is, in terms of employment, a behemoth of manufacture. It was textile manufacture and processing, more than anything else, that created the modern proletariat: low-pay jobs, long hours, men and women working to the unceasing demands of machines. Although industrial manufacture helped create a huge middle class in Europe and the USA, it was never textile manufacture which did this. Those who made the cloth, sewed the clothes, stayed poor. So one could argue that making clothing in low wage countries was just another chapter of the continuing history of the first great sector in the industrial revolution. Movement upward has always been the dream of the working class: into better jobs, better work. Thus, losing jobs in the textile and clothing industries could be seen as relatively benign: there were always jobs making cars, in construction, in government service, which paid better and offered more opportunities.

Even when the job losses were in high-paid manufacturing, there was a sense that goods could be produced elsewhere, because the vital sectors in the economy were not in making things, but in “mental” work. Deciding how things were to be manufactured, moving and sorting information, developing new knowledge: Americans thought, not without justice, that the emergent economy of the late 20th and 21st century would demand computer programmers, accountants, scientists, architects. All of whom would be well paid, and work at satisfying jobs.

White collar jobs were the future of the USA, and US workers. But today there’s a new phenomenon that has appeared in the global marketplace. The same forces – globalization., fiscal efficiency, and outsourcing – that transformed manufacturing have now reshaped the nature of white collar jobs. Job flight from the USA (and Europe) has begun in the professional services. In consequence, whereas five years ago the major threat to US workers was seen to be China, today the major threat appears as India. India.

The movement of white-collar jobs – in service, in information technology, in professional expertise – has created a new relation between India and the USA. For while the massive job loss to China, mostly in low-skill manufacturing, has had major consequence for both nations, it has not created as much political tension in the USA as the loss of professional service jobs to India. What is happening in the interaction of the Indian and US economies seems one of the most publicized issues in US politics today; indeed, it is not beyond possibility that it will emerge as one of the central issues in the election forthcoming next November, when Americans will choose a president and the large majority of the federal legislature.

The author, a Visiting Fulbright Professor at Calcutta University, teaches at the University of Vermont.

Copyright 2004 The Statesman


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