OUTSOURCING

You are going to hear a lot about ‘outsourcing’. It’s changing our economies and will be the focus of political attention. Essentially, the internet and the communications revolution has abolished time and distance. Therefore any job that is not ‘shop front’ can be moved anywhere. There’s no difference in sending information upstairs or a continent away. In the 1980’s, heavy industry and manufacturing jobs moved to developing countries. creating rust belts and restructuring in OECD countries. Now, the same is happening to white collar jobs. Call Centre jobs are the most obvious, with India alone gaining 500 new jobs every day. But there’s more to this wave of outsourcing than phone-banks.

Doctors are sending blood samples and x-rays for diagnostic testing. Legal and accounting firms, researchers and software developers are also migrating offshore for non face-to-face services.

The same old anti-Japan speeches of the 1980’s are being dusted off in the U.S. Presidential campaign to play on the real fears of workers. Many of these made redundant from textile and manufacturing jobs had retrained for the modern economy, learning IT skills that are now under threat from highly educated, motivated competitors in India and China. India’s labour market is insatiable - Bangalore has 30,000 more IT engineers than Silicon Valley. When Indian software developers employed 10,000 workers, they received over 900,000 applicants. The service sector, long insulated from international competition, is now outsourcing on a global scale. Management consultants, McKinsey, report that the value of services in-house is now 90%, and that within 10 years this will decline to 60%. For every $1 that is offshored, the company gains 58 cents in cost-savings with no drop in quality. Sierra Atlantic, a U.S. software company, claim that a majority of venture capitalists in Silicon Valley require that start-up companies subcontract some work offshore. India’s share of this work has grown at 60% a year since 2000.

The U.N. and development agencies have been running great symposia and conferences for the last decade to debate the ‘digital divide’. Now it seems the divide is turning on its head. However, it’s also true that the digital divide remains an issue within societies such as India, where households and businesses have only 11 million computers and under 5 million internet connections. But 30 million people do have internet access and India has 300,000 internet cafes. The growth potential is enormous.

More than 2.5 million jobs have disappeared under President Bush, but so much of the huge productivity gains have been the result of outsourcing. This is a tricky dilemma and is touching a raw political nerve. Senators who normally support free trade are voting for preventive measures. Leading Democratic Presidential hopeful, Senator Kerry, has long supported NAFTA, trade with China, and the WTO, but is now urging changes on government outsourcing and a ‘right to know’ law to force call centres to disclose their locations. The U.S. Senate has passed laws, as have a number of State Governments, to control outsourcing government contracts.

Economic history, and the laws of competitive advantage have not been abolished. IT, biotech, nanotech, or pharmaceutical research companies cannot afford to lose their competitive edge or they will lose out and disappear. Protectionism can save jobs in the short term, but that’s at the expense of better new jobs; long term, you will end up with neither. Jobs are already moving to Africa from China because of higher wages there. That’s the system working, wealth spreading from country to country, from the developed to the developing.

Consumers gain because of cheaper prices, companies gain due to lower input costs, and developing countries gain new jobs and new wealth, and their middle-class are our customers of the future.

A study by British think-tank, the Centre for Economic and Business Research, concluded that outsourcing will have a net positive impact on the British economy by reducing costs and creating higher skilled and paid jobs. Aviva, HSBC, and Lloyds TSB have announced that 7000 jobs will go to Asia. It is predicted 200,000 U.K. jobs will migrate there over the next five years.

But the CEBR’s recent report suggests outsourcing will boost the U.K. economy by $16 billion in that same period, and narrow the productivity gap the U.K. faces.

CEO of CEBR, Doug McWilliams, states “even if the only result of outsourcing is to cut costs, this gets passed on through lower prices and gives consumers more purchasing power. And if inflation is lower, this creates a lower interest rate environment which will also benefit consumers.” In the same study, nearly all people who lost jobs to outsourcing were re-employed, with 388 in every 500 going on to higher paid and higher skilled jobs.

But as a politician who knows the language of the street corner meeting, and door-to-door canvassing, one recent ‘TV grab’ featuring a South Carolina voter haunts me. A middle-aged man explained how he had lost his textile job to China, had retrained himself in IT only to lose that to India. Now, he explained, he was studying real estate because “that’s the one job that can’t go offshore.”

It’s a big task trying to explain the theory of creative destruction, or how infrastructural inefficiencies are a tax on every other job to an unemployed 50-year old. And that’s the one reason I was New Zealand’s shortest-serving Prime Minister. But not the only reason.