World Student Community for Sustainable Development

Import Workers or Export Jobs? Bend it WITH Beckham!

by Javier Arias I.

Forrester, a technology research and trend analysis firm, predicts the loss of some 3.3 million jobs by 2015 (200,000 per year) to outsourcing in the US alone. [1] The numbers, which are enough to inject fear and doubt in even the most hard-core free-market advocates, let you understand why there are so many emotions linked to the subject. The current debate, however, has been misplaced. Too much is focused on jobs and not enough on value creation or increases in standard of living. The current debate responds more to this imbalance than the real core problems with outsourcing. The discussion should be focused on the benefits accrued from outsourcing, which could be used to offset the negative effects that arise from it. It is important to focus on creating win-win solutions, working with, rather than against, the tide.

I’m not a big football fan.

But there is something hypnotic about watching Real Madrid play. Something truly magical fills the air when you see titans like Zidane, Figo, Roberto Carlos, Raul, and Ronaldo executing beautiful ballet moves at breakneck speeds, chasing after a soccer ball. The Champions League was in its final stages when I started this article about outsourcing (or offshoring), and the moment Figo made a pass to Ronaldo it hit me: Almost the whole team is made up by immigrants.

Beckhamâ€^TMs jersey is almost always sold out, yet Iâ€^TMve never heard Spaniards protesting that their soccer teams are made up of foreigners. You never hear of a Brazilian politician recommending some type of protectionism to prevent the “brain drain†of their soccer teams, though the country as a whole is very proud of its football heritage. These points might seem absurd and childish, but the moment you extrapolate them into auto workers or computer programmers, you have every politician with a pen protesting about the great injustices being made. Outsourcing is a direct effect of globalization and Real Madridâ€^TMs hiring policy just points out that not even soccer escapes its grasp. Even though heâ€^TMs English, Real Madrid chooses to bend it WITH Beckham.

There has been a lot of upheaval recently surrounding what National Journalâ€^TMs CongressDaily calls “a national dirty word.†[2] Itâ€^TMs almost like being in a Harry Potter film, where He-Who-Must-Not-Be-Named is the main culprit of the loss of jobs, wages, and opportunities that people in developing countries like China and India are supposedly taking away from developed countries like the US and Britain.

The term “outsourcing” usually refers to a company relocating labor-intensive service-industry functions to another country. Forrester, a technology research and trend analysis firm, predicts the loss of some 3.3 million jobs by 2015 (200,000 per year) to outsourcing in the US alone. [3] The numbers, which are enough to inject fear and doubt in even the most hard-core free-market advocates, let you understand why there are so many emotions linked to the subject.

According to the US Department of State, Immigration, and Nationality, most immigrants arrive in the prime of their working years and more than 70 percent are over the age of 18 when they arrive. The savings to the US for obtaining this human capital at no expense to American taxpayers has been estimated at $1.43 trillion.

I once read an article about a man who, in his normal cycling routine, came across a group of Hondurans standing at the corner of a busy intersection. When the man came up to ask what was going on, the Hondurans explained that prospective employers would drive by that particular corner every day to hire workers. This is a classic example of spontaneous order, a labor market with no overhead popping up to satisfy the needs of employers, workers, and consumers. Workers similar to these are the ones accused of stealing jobs from Americans, and more recently, from skilled Americans.

Harvard professor George Borjas, one of the top experts on the subject, agrees that unskilled migrants lower the wages of native workers who are competing with them for jobs like catering, child-care, and cleaning. Nevertheless, he says that “the size of the effect is difficult to calculate, and is partly offset by the gains made by employers who can make higher profits because of the lower wages.†Borjas adds that skilled migrant workers who fill jobs where there are genuine shortages provide real benefits. [4]

History is filled with good experiences about immigration, but there is one matter of concern: the movement of skilled workers from developing countries to developed countries. This emigration, often referred to as “brain drain,†can have a harmful effect on the donor countries, who lose the resources invested in the training of these people when they emigrate. This is especially problematic when the donors are developing countries, as they lose the skilled labor they so desperately need.

Some scholars, however, cite positive effects stemming from such emigration. They claim that because of this phenomenon, donor countries have an incentive to further invest in human capital. According to Jean-Pierre Vidal, [5] the level of human capital in a source country can be correlated positively with the probability of emigration, which in turn can lead the country out of the poverty trap.

In a more direct fashion, emigrants from developing countries can help their homelands in various ways, such as sending money home to relatives. El Salvadorâ€^TMs case is interesting. Remittances sent from Salvadorans working in the US to family members in El Salvador represent a major source of foreign income and help offset the country’s substantial trade deficit. In the last decade, remittances saw a steady climb to an all-time high of $2.1 billion in 2003, representing approximately 14 percent of El Salvador’s GDP. During the 1980s in India, remittances were large enough to finance up to 40 percent of the country’s massive balance-of-trade deficits. Unfortunately, this high level of remittance is far from reliable, and in the case of India, did not continue. Nevertheless, these examples serve to highlight the potential impact of remittances on developing countries, making the case against those accusing these as unfair practices for the donor. These “offshore†Salvadorans would not be able to provide for their families in the same manner if they had stayed in El Salvador, and they obviously give a lot back to the economies of their adopted countries. [6]

Donor countries also benefit from emigrants through bank deposits, purchase of real estate, holding securities of the donor country, technical collaboration, and specifically constructed schemes whereby emigrants could return to the donor country for up to three months (for example) as part of a project called “transfer of knowledge through expatriate nationals.†[7] Although the combined effects of remittances and these other measures have not had a long-lasting effect on the Indian economy, for example, these measures could be applied by policy-makers in an attempt to mitigate the adverse effects of a brain drain.

But letâ€^TMs face it, immigration as an effect from outsourcing happens because there is a need that is being satisfied, pure and simple. The number one reason a company is in business is to make money. Using every resource available to cut down costs and be more efficient and profitable is therefore an obligation the corporation has towards its shareholders in an environment where only the fittest wins.

In this light, going “offshore” makes a lot of sense. According to the McKinsey Global Institute (MGI), US companies that outsource to India save an estimated 45 to 55 percent in the cost base and 60 to 70 percent of initial costs by reengineering the whole process design. Setting up shop offshore also creates new revenues through the demand for high-tech items and US products in destination countries. Of the $1.45 to $1.47 of value MGI concludes is created globally from every dollar a domestic company chooses to divert abroad, the US captures $1.12 to $1.14 while the receiving country captures, on average, 33 cents. In other words, the US captures 78 percent of the total value. [8]

Businesses are able to remain profitable and preserve other US jobs through the cost savings afforded by outsourcing. The increase in productivity that this produces enables companies to invest more in cutting-edge technologies and new business ideas that create jobs. New revenues are created by the demand that “outsourced” countries have for US products. [9] According to MGI, 70 percent of US workers who lose their jobs to outsourcing will take up other jobs, which will in turn generate additional value for the economy. [10] Companies can then pass the savings from outsourcing to the consumer in the form of lower prices and new and better types of products and services.

Although in the bigger picture we have a win-win situation, the problem is that not everybody wins. Some of those that lose their jobs to outsourcing will not be able to find employment in other sectors due to their lack of education and maneuverability. Some of these people will add their voice to pressure groups that make it difficult for those in public office to make decisions that, although good for the economy as a whole, make their re-election impossible. Much of the current commotion has been a response to these groups, who indeed have a lot to lose and apparently nothing to gain.

So what should we do?

Should we follow the example of Germany and promote more protectionist measures for the labor market? In this respect, German companies benefit less than US companies because language and cultural issues add extra management costs to their outsourcing projects. The curious thing is that these extra costs also come in the form of high levels of taxation - the highest in Europe - as well as cumbersome and expensive labor laws designed to “protect jobs.†Darmstadt, a local company that wanted to lay off 200 staff in Germany at the beginning of this year, endured three painful months, compared to the four weeks in Britain and two weeks in the US that this process would have lasted. [11] This lack of flexibility inhibits the hiring of new personnel due to the unnecessary costs companies have to endure there.

Because of these key differences, re-employment rates in Germany are as low as 40 percent, meaning that Germany recaptures only €0.80 of every euro outsourced instead of the €1.05 that it would garner if it had the same rates as does North America. [12]

Germany’s case should be a red flag for other economies that share similar labor issues. To ensure that countries win from outsourcing, policy-makers must make labor markets more flexible and rethink regulations that stifle competition and innovation. [13] It therefore appears that protectionism is not the economic or even the ethical answer we are seeking, since it would generate a bigger problem in itself.

The fact is that the global labour market, like other aspects of international trade, draws benefits to nations by making the economic pie bigger and raising the standard of living.

The current debate has been misplaced. Too much is focused on jobs and not enough on value creation or increase in standards of living. The current debate responds more to this imbalance than the real core problems with outsourcing.

The discussion should be focused on the benefits accrued from outsourcing, which could be used to offset the negative effects that arise from it. An example of such a solution might be targeted insurance products that would provide wages for a particular period of time to those that lose their job due to outsourcing. It is important to focus on creating win-win solutions, working with, rather than against, the tide.

Consumers are the biggest group of all but lack sufficient organization to create pressure and demands on government. By framing the issue of outsourcing accurately, taking the necessary actions to offset the negative effects, and ensuring that a country has adequate labor policies (amongst other things), we stand a much better chance of helping this unorganized group to whom we all belong, do better.

- Javier Arias I., Panama City, Panama; MBA student at the Instituto Centroamericano de Administración de Empresas (INCAE), San José, Costa Rica
Footnotes

[1] Martin N. Bailey and Diana Farrell, “Exploding the Myths of Offshoring,” The McKinsey Quarterly, 1 July 2004, http://www.mckinseyquarterly.com/links/13927.

[2] Keith Koffler, “Business Coalition Rewrites Lexicon For Jobs ‘Outsourcing’,” National Journal’s CongressDaily, 2 March 2004, http://nationaljournal.com.

[3] Martin N. Bailey and Diana Farrell, “Exploding the Myths of Offshoring,” The McKinsey Quarterly, 1 July 2004, http://www.mckinseyquarterly.com/links/13927.

[4] Steve Schifferes, “Analysis: Who Gains from Immigration?,†BBC News Online, 17 June 2004, http://news.bbc.co.uk/1/hi/business/2019385.stm.

[5] Jean-Pierre Vidal, “The Effect of Emigration on Human Capital Formation,” Journal of Population Economics, December 1998, http://springerlink.metapress.com.

[6] B. Khadria, The Migration of Knowledge Workers: Second Generation Effects of India’s Brain Drain (Sage Publications, London), 1999.

[7] Ibid.

[8] “Offshoring: Is it a Win-Win Game?,†McKinsey Global Institute, August 2003, http://www.mckinsey.com/knowledge/mgi/rp/offshoring/perspective/.

[9] Ibid.

[10] Ibid.

[11] “How to Pep up Germanyâ€^TMs Economy,†The Economist, 8 May 2004.

[12] “Can Germany Win from Offshoring?,†McKinsey Global Institute, http://www.mckinsey.com/knowledge/mgi/rp/offshoring/german_summary.asp.

[13] Ibid.