Outsourcing in the Developing and Developed World
Part Two: The Age of India Cometh
For a good number of years, India has invested heavily in education, in what economists call human infrastructure. There are, at the present moment, large numbers of Indian engineers, architects, computer programmers, scientists, mathematicians and students of management. Thus, India has major resources in intellectual capital; nor is this an accident, since it's a direct result of decisions made regarding support for education in general and higher education in particular.
Additionally, India is also a nation whose advanced training is done in English. No one wants to apologize for the historical reality that led to the primacy of English: Britain's imperial hegemony over the subcontinent in the 19th and 20th centuries propelled English as a national language and made it the primary the language of university instruction. Today, the world's business is done in English. English is the primary language of the world's economic superpower, the USA.
The importance of English can clearly be seen in the first influx of US jobs to India. These were lower-level service jobs: some were low-paying in the USA, like answering calls from those who have questions about, say, a billing for a credit card transaction, while some were moderately professional jobs, at higher salaries, as in providing technical services over the telephone. Clearly, English is required for these telephone call center jobs, so India, with its highly trained and completely fluent English-speaking work force, is the site of choice for the relocation of US call centers.
But US and European corporations were quick to understand that if labor-cost savings were to be had by answering telephones in Mumbai or Bangalore instead of New York or San Francisco or London, even greater savings could be had by making use of the internet. If an architect works on a project in Philadelphia, for instance, the highly-skilled and laborious process of making drawings and establishing specifications for every aspect of the project can be done by a trained architect or engineer in Chennai for a small fraction of the cost that such architectural support work would cost in the USA.
The USA's Fluor Corp, for example, according to Business Week, "employs 1,200 engineers and draftsmen in the Philippines, Poland and India to turn layouts of giant industrial facilities into detailed specs and blueprints. For a multibillion-dollar petrochemical plant Fluor is designing in Saudi Arabia, a job requiring 50,000 separate construction plans, 200 young Filipino engineers earning less than $3,000 a year collaborate in real time with elite US and British engineers making up to $90,000 via Web portals."
And there is no reason, none at all, why a skilled financial analyst in Mumbai cannot do investment research as well as one in New York -- at a fifth of the cost.
According to figures from the International Labor Organization and the Paaras Group, while a software engineer in the USA makes an average of $66,100 a year, in India she or he makes $10,00 a year. Mechanical engineers: $55,600, India $5,900. IT managers: $55,000, India $8,500. Accountants: $410,00, India $5,000.
According a CNN report, Bangalore alone is "home to 1,00,000 high tech workers, many of them employed by US companies. Across all of India, one million people work for US based companies, like GE Capital and Microsoft." It is estimated that eight billion dollars in services are exported from India to the USA each year. The future will see more of the same.
It is not just the USA that is offshoring professional employment. A recent study by the McKinsey & Co. estimated that in 2002 MNCs moved nearly $35 billion in white-collar job spending offshore. Yet more significant, it estimated that the offshoring of such jobs would grow by an astonishing 30 and 40 per cent each year though 2008. Recently, Business Week reported a reputable prediction that "By 2008 in India, IT work and other service exports will generate $57 billion in revenues, employ 4 million people, and account for 7 per cent of gross domestic product."
In looking at what the outsourcing of white-collar jobs to India means, it is at first hard to see anything but cause for optimism about the economy of the subcontinent. Money for wages will flow into India in significant amounts, much of it directly into the pockets of India's growing middle class. A whole stratum of the population will earn salaries which, by US or British standards, are low and therefore competitive, but which by Indian standards are, if not princely, more than comfortable. (Some may even be princely!)
This inflow of money into wages has positive implications for the Indian economy as a whole. Ever since the pioneering work of economist John Maynard Keynes, it has been clear that adding money into a system has a "multiplier" effect. Most of the lakhs (in new salary) that call center employees earn will be spent, and what is spent will be spent again. The telephone service center employee in Bangalore will buy, say, a new cooking pot. The seller of the pot takes his profit -- and spends it, as does the corporation that made the pot. Both those profits, and the pot-workers' wages, will be spent in turn, perhaps on buying soap. The seller of the soap and the maker of the soap, will in turn receive rupees -- which they, too, in turn, will spend. The number of times this money is turned around and spent creates the multiplier -- a figure measuring the velocity of money, the degree to which each additional rupee brought into the system will create economic activity. (The money from this string of transactions, beginning with the salary of the call center employee, that is not spent ends up in savings. And unless those savings are kept under the mattress or put into gold jewelry, they become available as capital, to fund new investments in the Indian economy. Some of the money earned, especially since outsourced jobs are not part of an underground economy, will go to taxes, which are a tangible form of social capital.)
This inflow of money into wages has another positive effect. The "back office" jobs in managing its accounts receivable that an MNC sends to an Indian company, must be remunerated. The pay for this work enters India in dollars, even though the employees in Mumbai are paid in rupees. Thus, there is a new inflow of dollars into India -- a current accounts balance, as it is called. India, as a nation, now has money it can use in the international economy. It can buy advanced technological equipment, so that its own native industries can compete against foreign corporations to make the best cars or telephone equipment in the world. It can pay to meet current needs -- for petroleum imports, food, or upscale foreign automobiles. It can "bank" the money by holding gold, American Treasury notes or Swiss francs, and so have a reserve fund for future needs.
Thus, on both the individual level for the worker, within the economy as a multiplier, and in the international economy as positive returns on the current account balance: on every level, the movement of white-collar jobs into India is a boon.
But while an expanding and affluent middle class, a richer nation, and a new eminence in the international economy will result from the offshoring of jobs from the developed world to India, there are also potential dangers that deserve mention. First is a problem that afflicts the USA, even though its government and corporate leaders rigorously avoid mention of it. As money flows into the upper middle class, the gap between the haves and have-nots can dramatically widen, a situation particularly true when the wealth is generated by the expropriation of profits rather than through wages. In this regard, India is extremely fortunate. The service sector jobs that are coming to India in increasing numbers are good paying jobs.
The offshoring of jobs to China has meant vastly increased employment for Chinese workers. The great majority of these workers labor in low-wage jobs, at the bottom of the international labor scale. The gains from this kind of low-wage employment flow to the major corporations, which have cut their labor costs immensely; and to an owning class in China, which operates sweatshops for the large corporations. Thus, it is increasingly common for the wealthy "new class" to drive their immensely expensive automobiles through streets where impoverished workers live in dire poverty.
Under the regime of Mao Tse-Tung, China 20 or 30 years ago, though less developed, was relatively egalitarian. Today, in a remarkable and distressing turn of events, its disparity in wealth is so great that it quite literally approximates that of the USA -- which has the most unequal division of wealth in the industrialized world.
Parenthetically, it should be noted that as China trumpets its remarkable economic progress, it is silent about job losses. Between 1995 and 2002, China lost 15 per cent of its manufacturing jobs: while low wage manufacture for foreign customers was rising, state enterprises were closing down in large numbers, laying off more workers than were hired in the private sector. For instance, over 25 million Chinese employees lost their jobs in the public sector between 1998 and 2002. Likewise, a dark side of "free trade" is the havoc wrought on agricultural employment in developing nations: China estimates WTO reforms will cost that nation 20 million farmers. Under NAFTA, Mexico has lost 1.3 million farm jobs.
With well-paying jobs pouring into India, the stark stratification taking place in China will likely not occur: though there may be increasing number of wealthy owners, there will be a large, growing, affluent middle class. Still, in an India where 72.2 per cent of the population live in rural communities, the increasing differences between a growing urban professional middle class and a similarly growing (because of higher birth rates) impoverished class, will severely test the democratic principles which have been India's bedrock foundation since independence.
There is another danger besides that of increasing economic stratification. As economist Harry Magdoff demonstrated in The Age of Imperialism almost five decades ago, the movement of money in the new imperialism that replaced colonialism is still from the periphery to the center. As nation after nation has discovered (often delivered the news by the bludgeon of the International Monetary Fund), money may flow in from the developed nations, but when the total account is tallied -- interest charges, repatriation of profits, costs of technology -- more money flows back to the centers of imperial finance than flows out.
The international banks and MNCs, even more than the Indian people, are likely, in the final analysis, to be the great beneficiary of the economic activity that is outsourcing service sector jobs to India. It is easy to lose sight of the fact that imperialism does not exist to enrich the periphery. There may be benefits -- and in the case of professional service job movement to India there are many -- but much of the profit, and indeed much of the international flow of capital, will not remain in India, but will flow back to centers in New York, London, Paris, Tokyo, Frankfurt and Zurich.
A third danger should be mentioned. The first large outsourcing of US jobs was, under NAFTA in the early 1990s, was to Mexico. But manufacturers quickly discovered that Mexico's low-wage workers were more costly than the low-wage workers of China, Indonesia or Malaysia. So the jobs in assembling computers, in making shoes and electrical appliances that had moved to Mexico were soon lost. MNCs moved jobs to wherever labor costs were lowest: the race to the bottom.
Again, as our world moves into the future, other developing nations will follow India's example (many, indeed, are already doing so) in training large numbers of engineers and scientists and managers; and already everywhere the importance of fluency in English is taking its place in national educational priorities. So the race to the bottom, unexpected as it may seem at the present moment, will likely in due course have an impact on the service-sector and professional jobs that have come to India. If a call center. in Indonesia can provide employees who will do equivalent work for half the Indian wage, Indian workers will either see their wages halved or their jobs disappear to Indonesia. (The Philippines, for example, already has an abundance of accountants trained in US accounting standards: today one of the largest MNCs, Proctor and Gamble, employs 650 employees in Manila to assist with the preparation of its global tax returns.)
Notwithstanding these dangers, the present moment is a bright one for India: for its economy, for its educated citizenry. Good jobs at good pay will continue to flow into India, enriching the overall economy as well as solidifying the economic well being of those who gain those jobs. India's economy will not only prosper, but will see spectacular growth. New horizons will open, new possibilities will beckon, for a whole generation of India's young professionals and university students. The second half of the first decade of the 21st century, and the second decade as well, hold great promise as the coming-into-prominence of India on the world economic scene. These next 15 years may well be the "Age of India."
Copyright 2004 The Statesman