The Indian Economy Blog

July 16, 2005

Much Ado About Nothing!

Filed under: Outsourcing,Trade — Prashant @ 1:16 pm

Suketu Mehta, essayist and author, laments the “primal fear in the Western public” that stories about outsourcing have engendered, and attempts to dispel these fears in an op-ed piece in the New York Times.

I agree with Mehta that Americans’ “fears” of Indians swallowing American jobs are misplaced, and commend his attempt to clear the air. However, I think that Mehta’s op-ed is partly guilty of the same mistakes as the very same stories that started (and stoked) the outsourcing controversy in the first place.

Mehta cites anecdotes or solitary statistics as evidence of the impact of outsourcing.

According to a confidential memorandum, I.B.M. is cutting 13,000 jobs in the United States and in Europe and creating 14,000 jobs in India.

First of all, are the job cuts in the US & Europe related to the job creation in India?
Secondly, the number of jobs lost because of mergers, poor management decisions and other missteps by management are many multiples of those moved offshore — as BlameIndiaWatch has often pointed out. Check this post on GM.

From 2000 to 2015, an estimated three million American jobs will have been outsourced; one in 10 technology jobs will leave these shores by the end of this year

This ominous statistic is a guaranteed fixture in any of the outsourcing alarmist creeds. However, that number has no significance without context. Such as

a) The size of the US economy — total employment of 140 million, wherein 3 million over 15 years works out to only about 200,000 jobs per year or less than 2%.

b) The number of job losses in a dynamic economy like the US, even at full employment is 18.7 million per year. That sounds far more ominous than the 3.million over 15 yrs. However, more than 18.7 million Americans find jobs, which is why the unemployment rate continues to fall.

Lo and behold, the unemployment rate for computer industry professionals here has just hit a four-year low.

And it’s a really low, low. Last week, my colleagues Eric Chabrow and Marianne Kolbasuk McGee reported that unemployment among IT workers averaged 3.7% for the four quarters ended March 31. That’s according to the latest data from the U.S. Bureau of Labor Statistics. And 3.7% is a good bit less than the national unemployment rate for all workers, which stands at 5.2%

c) The total volume of America’s outsourcing to India is approximately $10 billion (India’s total exports were approx $15 billion last year and 70% of that was that to the US, as per Nasscom)

This $10 billion include everything — IT services, call-centers, specialized business-process outsourcing.. the whole shibang! The US GDP is approximately $12 trillion, which means India’s share is less than 0.1%. In reality, outsourcing to India will have a small impact on the US economy, and it’s time Lou Dobbs and his ilk found another voodoo doll.

By the way, Indian triumphalists can stop their chest-thumping. We’re no IT superpower or knowledge superpower — not yet. $15 billion is peanuts — the worldwide market for IT services and products alone is $800 billion+. India’s come a long way, but let’s not get ahead of ourselves.

I agree with Mehta when he decries the “perverse hypocrisy” of the rich countries, who can’t have it both ways. However, he loses the plot somewhat when he points to colonialism and agricultural subsidies as the ultimate causes of outsourcing. To me, the real hypocrisy of the rich countries lies in their double-standards when it comes to trade. As Nandan Nilekani points out

“You (the West, especially the US) asked us to liberalise our economies, you preached the virtues of globalisation, you invented the business practice of outsourcing. We have merely followed your advice and used the tools that you gave us.”

Even more so, if the US were to build walls against outsourcing, they’d be hurting themselves the most. Brink Lindsey notes that

– The United States runs a trade surplus in the IT services most directly affected by offshoring (in the categories of “computer and data processing services” and “data base and other information services”).

– The United States is a major exporter of services generally and runs a sizable trade surplus. In 2002, for example, services exports accounted for 30 percent of total U.S. exports, and exports exceeded imports by $64.8 billion.

Sidebar: Mehta, like the alarmists, has the obligatory dig at the American educational system — in this case, vis-a-vis India’s.

When I moved to Queens, in New York City, at the age of 14, I found myself, for the first time in my life, considered good at math. In Bombay, math was my worst subject, and I regularly found my place near the bottom of the class rankings in that rigorous subject. But in my American school, so low were their standards that I was – to my parents’ disbelief – near the top of the class. It was the same in English and, unexpectedly, in American history, for my school in Bombay included a detailed study of the American Revolution. My American school curriculum had, of course, almost nothing on the subcontinent’s freedom struggle. I was mercilessly bullied during the 1979-80 hostage crisis, because my classmates couldn’t tell the difference between Iran and India. If I were now to move with my family to India, my children – who go to one of the best private schools in New York – would have to take remedial math and science courses to get into a good school in Bombay.

There may be problems with the American educational establishment. Regardless, this belief about the “wonderful” Indian educational system is pure myth! A very, very tiny percentage of schools and colleges are even half-way decent. India’s literacy rate is lower than many countries in sub-Saharan Africa!

Hat tip: Sepia Mutiny, where I’ve got a comment or two as well.

Full disclosure: Just so you know, my day job entails running a small outsourcing firm.

Update: Dan Drezner has a solid, facts-based take on offshore outsourcing, while Tom Friedman comes up with (some more) howlers. When will journalists realize that anecdotes may make for good journalism but are terrible for policy prescriptions?

Update deux: Via Rediff and tipster Reuben Abraham

India and China together account for only 1.6 per cent of total employment of American multinationals by way of outsourcing, the government’s figures have revealed, dispelling notions spread by critics of offshoring that the two countries are swallowing American jobs.

In 2003, US MNCs employed 344,000 workers in China, up from 252,000 in 2000. They employed 131,000 in India, up from 71,000 in 2000.

However, combined, India and China amounted to just 1.6 per cent of the total employment of US multinationals, of which India’s share was 0.6%.

The United Kingdom was home to about nine times as many workers as India.

11 Comments »

  1. Prashant, you might be interested in Richard Florida’s numbers. He says the US imports at least 2 jobs for every 1 that it loses through offshoring. So, effectively, twice as many jobs are being offshored *to* the US than away from the US. Needless to say, this is never actually called offshoring in the current debate. I don’t have his source handy, but could look it up if you want.

    Comment by Petra — July 17, 2005 @ 3:00 am

  2. I work for IBM and if you check your referrer log you will notice the IP address is from the UK. I work for the Services arm of IBM. In recent months many IBM’ers under the guide of ‘a bad quarter’ have been offered a redundancy package.

    The ‘Package’ was offered site wide for ‘Services’ and enforced for a few individuals. Thereafter we had a work ‘buddy’ from India, assisting us. Now before you get all defensive, the Indians made up very few of the ‘work buddies’. Most of our work buddies were from South Africa, so may that whole operations for ‘Royal Sun Alliance’, ‘Royal Bank of Scotland’, ‘LLoyds TSB’ are now run from South Africa.

    When we asked why south africa, the reply we got was unexpected.

    Indian companies have been inflating prices at 15% per annum, and the lack of skilled (Yes skilled, not just read a book ‘There have been terrible problems with the can-do attitude’) I.T workers leading to inter-company attrition rates of close to 30% has meant that South Africa which IBM has been working with for the last few years now has a core of certified Engineers ready to take the work.

    Most shocking of all, South Africans are cheaper than Indians, and there is apparently not the same stigma with outsourcing to South Africa, as there is with Outsourcing to India.

    So there you have it, India has always played the ‘low cost’ game, and this is a game in which there are no winners. Unfortunateley Outsourcing will still go on, and yes everyone will blame it on India, apart of course from those of us who have been there and seen where it is going.

    Comment by IBM'er — July 25, 2005 @ 6:33 pm

  3. It is ludicrous to try & equate India with South Africa when the former does twice the volume of outsourcing in a WEEK that SA does in the entire YEAR. In fact, India singlehandedly does more in outsourcing than the next 15 countries combined, including Canada, China, Ireland, Russia, Poland, Philippines, SA, Pakistan etc. There is simply no contest. Any country (i.e. Canada @ 30% of India) approaches India’s outsourcing volume, it finds its cost structures soon becoming progressively & prohibitively expensive.

    Nor is India’s services outsourcing limited to IT with total services exports touching $51.3 billion in ’05. Assuming a cost arbitrage of 30% means that India has displaced almost $170 billion in white collar earnings in the West. Since income is related to GDP by a factor of 2-2.5, the total GDP impact is $350-$400 billion. More than the GDP of Switzerland or Saudi Arabia.

    Sanjay

    Comment by Sanjay — August 16, 2005 @ 11:48 pm

  4. Sanjay says

    “Nor is India’s services outsourcing limited to IT with total services exports touching $51.3 billion in ‘05. Assuming a cost arbitrage of 30% means that India has displaced almost $170 billion in white collar earnings in the West.”

    Er, what exactly do you mean by “displaced”, Sanjay?

    Sanjay – Since income is related to GDP by a factor of 2-2.5, the total GDP impact is $350-$400 billion. More than the GDP of Switzerland or Saudi Arabia.

    Not sure if I understand your calculation or the point you’re trying to make… can you pls explain

    Comment by Prashant Kothari — August 17, 2005 @ 1:39 am

  5. Prashant,

    “Displaced” means that when the West outsources a package of services to India, then that particular part of the value chain moves to india i.e. someone is no longer earning that income in the West. Second, since cost arbitrage (at 30-40%) is the primary motive involved with outsourcing, the value of the outsourcing should be grossed up to arrive at the true income loss to the West. Finally, income has to be converted to GDP to avoid comparing apples with oranges.

    Sanjay

    Sanjay

    Comment by Sanjay — August 17, 2005 @ 9:01 am

  6. [...] ’ve said earlier, I’ve always regarded the sturm und drang over outsourcing is much ado about nothing . I’m not trying to diminish India’s (or China&#8 [...]

    Pingback by The Indian Economy Blog » Blog Archive » Don’t Try Kicking Sand In America’s Face… — December 19, 2005 @ 6:29 pm

  7. —————-
    Psst: Want to Know a ‘Dirty Little Secret’?
    From THE NEW YORK TIMES, Dec 18th, 2005.

    The prevailing wisdom on skilled work being shifted abroad – outsourced – is that it is anecdotally alarming but not really a big deal economically. Sure, the thinking goes, some software engineers and others are losing their jobs to low-cost workers in India, but there is always churning in the dynamic American job market of 130 million people. It’s what makes the United States economy competitive.

    Last Monday, at a dinner at the Waldorf-Astoria in New York, Mark R. Anderson, editor of The Strategic News Service, a technology newsletter, sounded like a traitor to his class. He was speaking to a group of technology executives and venture capitalists, fans of Mr. Anderson but also champions of outsourcing.

    The current research on outsourcing, Mr. Anderson said, tends to be static and understates the trend. “The actual outflow of jobs is huge and growing,” Mr. Anderson said. “I call this the C.E.O.’s dirty little secret.

    “When people really find out what’s happening,” he added, “our view of India will change dramatically.” Steve Lohr
    ———-

    Prashant,
    Can we do a Type-M argument for a change – Atanu favors Type-M over Type-C for the real world, & I do as well.
    So, What might be the motivation of a hypothetical Prashant to relocate from USA to India & head an outsourcing firm ? Lets forget about the type-C issues ie. increased prosperity for Indian BPO employees, improving infrastructure in metros etc. Just the type-M issue. What is the motivation ? If outsourcing were really much ado about nothing, a noise in the signal, a nuisance value, then your average technocrat would just stay put in the US & wait for the signal to clear up. If it is that insignificant, neither would Nasscom tout the large number of expats who returned to India from the US as a positive for India, nor would Lou Dobbs tout the same number as a negative sign of impending doom, that this many US Green Card Holders & Citizens are voluntarily walking away from the US back to India to set up companies because they are PIO. If a PIO finds India more attractive than the US despite having a green card or a citizenship, and there are a million such PIOs, are all these million people completely foolish ? There are a million idiots mistaking a mirage in the desert for an oasis ?? I just find that incredible hard to believe.

    Comment by Kya yaar tu bhi — December 19, 2005 @ 11:17 pm

  8. [...] pical and relevant as over-excited Internet revolution articles from 1999. As we’d predicted. Greg Mankiw , who’s experienced some of the outsourcing sturm und [...]

    Pingback by The Indian Economy Blog » Blog Archive » No Bang, Not Even A Whimper… — April 24, 2006 @ 7:43 am

  9. Not by long now and the Indian economy together with china will be twice the size of US. Think about that..

    Comment by Frans Holenberg — October 18, 2007 @ 10:45 pm

  10. [i]“You (the West, especially the US) asked us to liberalise our economies, you preached the virtues of globalisation, you invented the business practice of outsourcing. We have merely followed your advice and used the tools that you gave us.”[/i]

    Best quote in the whole piece for me. I don’t think anyone has to apologize or justify the issue. Outsourcing or job creation in countries in India are well within the context of capitalism and globalization.

    Comment by Nikhil Nayak — October 19, 2007 @ 12:46 am

  11. Sanjay, your math is wrong. “Nor is India’s services outsourcing limited to IT with total services exports touching $51.3 billion in ‘05. Assuming a cost arbitrage of 30% means that India has displaced almost $170 billion in white collar earnings in the West.” What are you going to do with that $51.3 billion in dollars? Frame it and put it on the wall? “Look at us! We’re rich!” No, of course not. You’re going to SPEND it. So at most you’re displacing $118.7 billion. Maybe you’re going to buy $51.3 billion worth of stuff made in the US. Or maybe that money never comes home, in which case our government has exported $51.3 billion worth of green paper products, the profit margin for which is very high.

    Let’s say that Indians hated the US and wanted to destroy our economy by causing US companies to outsource everything to India. Let’s say that Indians could (and would) perform all business services at half the cost. All of them. Everything. And since we’re imagining things, let’s imagine that it takes no time to set up a business. So Indians immediately put half the US business service workers out of work. Boo hoo for them! Waaaahhhhh! But we’re imagining that it takes no time to set up a business. Companies in America are saving 50% on their business services. They’re flush with cash. They immediately set up new services and hire back the US workers to do different things.

    Ultimately with this set of assumptions, every job that CAN be done by Indians WILL be done by Indians, and yet there will still be plenty of money to hire Americans in America to do the jobs Indians can’t do.

    No worries, mate.

    Speaking of setting up services, how about “Call A Doc”, where somebody in the west gets to call up an Indian doctor who’s moonlighting, and actually talk to an experienced doctor at length for a reasonable price. When a doc is available, he signs in, and becomes part of the pool of available docs. When she needs to stop taking calls, she logs out. Could even make a USB device which takes patient vitals: pulse, temperature, and blood pressure. Patient history is available.

    Comment by Russell Nelson — October 22, 2007 @ 5:59 am

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