Delivered-To: dfarber+@xxxxxxxxxxxxxxxxxx
Date: Tue, 28 Oct 2003 11:00:41 -0300
From: Claudio Gutierrez <cgutierrez@xxxxxxxxxxxxxx>
Subject: Who wins in offshoring?
To: dave@xxxxxxxxxx
A totally different view on offshoring from the McKinsey Quarterly:
"Offshoring, far from being bad for the United States, creates net value
for the economy."
http://news.com.com/2030-7341-5096283.html
Widely cited figures predict that by 2015, roughly 3.3 million U.S.
business-processing jobs will have moved abroad. As of July 2003, around
400,000 jobs already had.
Other research suggests that the number of U.S. service jobs lost to
"offshoring" will accelerate at a rate of 30 percent to 40 percent
annually during the next five years. Vast wage differentials are
prompting companies to move their labor-intensive service jobs to
countries with low labor costs: For instance, software developers, who
cost $60 an hour in the United States--the country that does the most
offshoring of jobs--cost only $6 an hour in India, the biggest market
for offshore services.
Such projections have caused alarm in the United States. In February
2003, the cover of Business Week asked, "Is your job next?" In June, the
U.S. House of Representatives' Committee on Small Business held a
hearing called "The globalization of white-collar jobs: Can America lose
these jobs and still prosper?"
Several U.S. states are considering legislation to prohibit or severely
restrict their state governments from contracting with companies that
move jobs to low-wage developing countries, and labor unions, notably
the Communications Workers of America, are lobbying Congress to prevent
offshoring.
Yet pandering to protectionism would be wrong. Many people believe that
money spent to buy services abroad is lost to the U.S. economy, but such
views are easily disproved. Companies move their business services
offshore because they can make more money, which means that wealth is
created for the United States as well as for the country receiving the
jobs. A McKinsey Global Institute study reveals the extent of the mutual
benefits.
As the study shows, for every dollar that was previously spent on
business processes in the United States and now goes to India, India
earns a net benefit of at least 33 cents, in the form of government
taxes, wages paid by U.S. companies and revenues earned by Indian
vendors of business-process services and their suppliers. What of the
impact on the U.S. economy? First, it is important to put the figures in
context, since fear of job losses makes many people overstate the
effects of offshoring. Some 70 percent of jobs in the United States are
in service industries such as retailing, catering and personal care.
This work, by its very nature, cannot be moved abroad.
In addition, any job losses must be seen as part of an ongoing process
of economic restructuring, with which the U.S. economy is well
acquainted. Technological change, economic recessions, shifts in
consumer demand, business restructuring, and public policy (including
trade liberalization and environmental regulation) can and frequently do
result in job losses. Even when the economy is growing, mass
layoffs--usually from restructuring--are much higher than the job losses
predicted from offshoring.
In 1999, for instance, 1.15 million workers lost jobs through mass
layoffs, out of a total of 2.5 million lost. Liberalized, competitive
economies with flexible labor markets can usually cope with such
restructuring; the U.S. economy, the world's most dynamic, certainly
should be able to do so. Indeed, history suggests that, over the medium
to long term, a flexible job market and the mobility of U.S. workers
will make it possible for the United States to create new jobs faster
than offshoring eliminates them.
The United States today has more than 130 million employed workers.
According to the Organization for Economic Co-operation and Development,
the United States has the highest rate of reemployment of any member
country by a factor of almost two. Over the past 10 years, 3.5 million
private-sector jobs a year have been created, on average, for a total of
35 million new jobs, so most workers who lose their positions find
another within six months. Jobs lost to low-cost foreign competitors are
not so easy to replace.
Nonetheless, from 1979 to 1999, 69 percent of the people who lost jobs
as a result of cheap imports in sectors other than manufacturing were
reemployed. The mean wage of those reemployed was 96.2 percent of their
previous wage.
Finally, remember that the population of the United States is aging. At
current productivity levels, the country will need 5 percent, or 15.6
million, more workers by 2015 to maintain both its current ratio of
workers to the total population and its living standards. By 2015,
despite current fears about job losses as a result of offshoring, the
U.S. economy will need more, not fewer, workers. Offshoring is one way
to meet that need.
But focusing the offshoring debate on job losses misses the most
important point: Offshoring creates value for the U.S. economy by
creating value for U.S. companies and freeing U.S. resources for
activities with more value added. It creates value in four ways:
Cost savings
For every dollar of spending on business services that moves offshore,
U.S. companies save 58 cents, mainly in wages. Offshore services are
identical to those they replace--and at times better because offshore
workers, enjoying higher-than-usual wages, tend to be motivated. Reduced
costs are by far the greatest source of value creation for the U.S.
economy.
New revenue
Indian companies that provide offshore services need goods and services
themselves, ranging from computers and telecommunications equipment to
legal, financial, and marketing expertise. Often, they buy these from
U.S. companies. We estimate that for every dollar of corporate spending
that moves offshore, suppliers of offshore services buy an additional 5
cents worth of goods and services in the United States. Exports from the
United States to India stood at $4.1 billion in 2002, compared with less
than $2.5 billion in 1990.
Repatriated earnings
Many Indian offshore service providers are in fact U.S. companies that
repatriate earnings. Such companies generate 30 percent of the revenues
of the Indian offshore industry. Thus an additional 4 cents of every
dollar spent on offshoring creates value for the United States.
Redeployed labor
Beyond the direct benefits to the United States in the form of savings,
new exports, and repatriated profits, offshoring can indirectly benefit
the economy: Capital savings can be invested to create new jobs, for
which labor will be available. Indeed, this is exactly what has happened
over the past two decades as manufacturing jobs moved offshore.
The Bureau of Labor Statistics reports that overall manufacturing
employment shrank by 2 million jobs in the past 20 years. But workers
have found it easy to locate jobs in other areas, such as educational
and health services. These service jobs, on average, pay more than the
manufacturing ones they replaced, helping to increase the population's
standard of living.
The same thing could well happen again. As jobs in call centers,
back-office operations and repetitive IT functions go offshore,
opportunities to train labor and invest capital to generate
opportunities in higher-value-added occupations such as research and
design will appear.
The Bureau of Labor Statistics estimates that from 2000 to 2010, there
will be a net creation of about 22 million new jobs in the economy,
mostly in business services, health care, social services,
transportation, and communications. How much value will be created in
this way depends on the country's future economic performance.
Historical trends can serve as a guide. If we use the statistics on
reemployment and wage levels already noted--69 percent of
nonmanufacturing workers are reemployed at 96.2 percent of their
previous wages--and bear in mind that 72 cents of every dollar that goes
to offshoring had previously been spent on U.S. wages, the indirect
benefit to the U.S. economy would come to an additional 45 to 47 cents
for every dollar spent on offshoring.
That is a conservative estimate because workers in IT and business
services tend to find jobs more quickly than do workers in the service
sector as a whole, and the demographic shift will increase the demand
for workers.
In this way, offshoring, far from being bad for the United States,
creates net value for the economy. It directly recaptures 67 cents of
every dollar of spending that goes abroad and indirectly might capture
an additional 45 to 47 cents--producing a net gain of 12 cents to 14
cents for every dollar of costs moved offshore.
The total possible wealth creation does not, of course, ease the plight
of people who lose their jobs or find lower-wage ones. The statistics
showing that 69 percent of those who lost jobs in the nonmanufacturing
sector were reemployed also show that 31 percent were not fully
reemployed. And while, on average, those who found new jobs secured
similar wages (96.2 percent of their previous wage), 55 percent took
lower-paid jobs. As many as 25 percent took pay cuts of 30 percent or
more.
These issues must be addressed. Training programs and generous severance
packages, perhaps accompanied by innovative insurance programs, are
among the measures that could mitigate the effects of the transition
without great cost to the economy. And while many people will
undoubtedly suffer short-term disruption, it should be set against the
consequences of resisting change: If U.S. companies can't move work
abroad, they will become less competitive--weakening the economy and
endangering more jobs--and miss the chance to raise their productivity
by focusing on the creation of jobs with higher value added.
The openness of the U.S. economy and its inherent
flexibility--particularly that of its labor market--are two of its great
recognized strengths. The current danger is that public policy will make
its economy less flexible. To do so would endanger the economic
well-being of the United States.
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Claudio Gutiérrez
http://www.improvement.cl