The offshoring crisis that never happened
Clay Risen has a worth-reading article at TNR on the subject of offshoring. This subject reached a fevered pitch last year, as an underperforming economy and election had people looking for scapegoats. Risen points out two major factors that have alleviated the “problem”.
One is that wages in India are skyrocketing (11.4% in 2004, 14.5% in the IT sector), and incredibly the country is facing labour shortages. Firms with experience offshoring are finding that they need a wage spread of 300 to 400 percent for offshoring to be profitable, given other costs. For many IT positions, this has already been eclipsed. This is buttressed by the fact that India was a perfect offshoring destination, with its english, common law courts, mature education system, and large middle class. Malaysia, China, and the Philippines just don’t cut it yet. Basically, most of the excess labour has been used up rather quickly. In a market economy, even a worldwide one, this is exactly what you would expect and desire to happen. The last two years can be viewed as a righting of excesses with all the short-term dislocations and long-term benefits that accompany such a necessary event.
The second major point of Risen’s article is that the efficiency losses of offshoring are becoming more and more apparent. There was an assumption by some over zealous pundits that a vast array of jobs could be digitized, but of course few jobs can, completely. Risen quotes Catherine Mann: “Not all jobs can be codified and digitized, Face-to-face interaction is still required at many points in product development, marketing, delivery, and maintenance.” Where only a small amount of non-quantifiable work is required in a job, there is a smaller loss of efficiency. But there is clearly a point where the costs of remote management are too great to bear.
None of this, of course, means that outsourcing, or even offshore outsourcing, is dead. In a global economy where there are firms specializing in every back-office operation (imagine entire companies that do nothing but accounts-receiving for hospitals) it is simply bad business to keep those operations in-house. But as the cost advantages begin to recede and the management drawbacks become more apparent, the decision of whether to send jobs overseas becomes more complex–and opens the door for American companies to compete on a level playing field with foreign firms for work that is being outsourced. If current trends continue, Indian workers will have to find something other than low wages to offer–that is, specializations, or things they do better than Americans. Maybe Ricardo was right after all.
Risen’s article is welcome in the face of the hysteria surrounding offshoring, but it shouldn’t have been necessary. Treating the offshoring of certain information economy jobs as a new phenomenon, when offshoring of manufacturing and textile work has been occurring for decades is also pretty delusory. Yes, as technology improves the opportunity to deliver information intensive products over a great distance emerges, but is it so different from the technological innovation that spurred the economical movement of manufactured goods: container shipping.
Offshoring ought neither be discouraged nor encouraged. As it occurs it benefits rich nations over the long term by delivering more efficiency and profitability to our firms, as well as less expensive consumer products. It also delivers such enormous benefits to poorer countries by opening capital inflows, exporting technological and management knowledge, and rapidly raising living standards, that to oppose it out of short term self-interest is immoral.