Economics Project

SY-3
Group Members
Roll No. Name
400 Nishant Shrimali
401 Shaili Shroff
402 Vidhi Shroff
403 Namrata Shukla
404 Bhasha Singh
405 Ronak Singh
406 Prateek Singhi
408 Shreeda Sisodia
409 Chitral Solanki
410 Mit Solanki

Outsourcing Outcry - West Should Compete, Not Whine

T K Bhaumik, TNN, Feb 16, 2010

The recent outcry in the US and Europe against outsourcing is implicitly a protest against
globalization. In the late 80s, the developed countries had been advocating globalization
to developing countries in a bid to exploit the low-cost advantages inherent to such
countries. At that time, the advocates of globalization did not realize how it could
boomerang on them, and instead be advantageous for developing countries. Perhaps they
did not imagine that globalization would not remain confined to manufacturing alone but
spread to the entire gamut of business activities.

Under globalization and in the era of fierce competition, global companies had begun
with outsourcing of manufacturing processes and components from low-cost developing
countries. But soon they could see the advantages of outsourcing business processes as
well from low-cost but highly skilled manpower in developing countries such as China
and India. In this, the IT revolution was found to be helpful. Business Process
Outsourcing (BPO) had emerged as a popular competitive strategy for MNCs, resulting
in the proliferation of call centres in many developing countries and creating huge
opportunities for the educated unemployed and youth in these countries.

The developed countries now realize that this dimension of globalization is not good for
them. They had problems in the field of manufacturing, where their companies were
losing out against low-cost producers from the East, but they found a way out by
thrusting large-scale liberalisation-cum-globalisation measures on developing countries.
Ideas like global networking, global interdependence, outsourcing, etc could be sold well.
Their core strength, they believed, was in the services sector which accounts for over 70
per cent of gross domestic product in their economies.

The next strategy, therefore, was to pressure developing countries to open up their
services sector market by using the WTO platform. The General Agreement on Trade in
Services (GATS) provides for liberalization of trade in services through four modes,
namely (i) cross-border supply (flourishing BPO and call centres fall in this category) (ii)
consumption abroad (e.g. tourism), (iii) commercial presence (e.g. investment by foreign
service companies, also allowing investment in call centres) and (iv) movement of skilled
personnel (e.g. movement of our IT engineers to foreign countries for off-shore jobs).

As it has turned out, GATS, which was pushed into GATT/WTO by the developed
countries, proved to be of significant benefit to developing countries with skilled
manpower. It is ironical that in spite of their comparative advantage, the service economy
in developing countries remained undeveloped. But globalization is opening up huge
opportunities with the flourishing of BPO/outsourcing business.

The advocates of globalization did not expect such a fall-out of globalization. They can
see their people losing jobs. They see it as a phenomenon of developing countries
stealing their jobs and have made it a political issue.

The reality, however, is that their own people are not competent and are high-cost vis-a-
vis their counterparts in the developing countries. Why should their own companies give
jobs to people in developing countries if there were no advantages in doing so? Why
should their companies discriminate against their own people? When competitiveness is
the sole concern, patriotism and nationalism get secondary priority. It may be mentioned
that even Indian companies are now on the look-out for efficient managers and don’t
mind if such managers are foreign nationals.

Underlying the rising backlash against outsourcing is the harsh reality of globalization
and a competitive market economy. The developing countries seem to have accepted this
reality. It is now important for the developed countries to understand the problem of
outsourcing in the right context. Growing unemployment is not a welcome development
anywhere. It tends to create huge political problems and disrupts social equations. But
then, banning outsourcing is not, and cannot be, a lasting solution.

If the US moves legislation on banning outsourcing, US companies are likely to suffer on

account of impaired competitiveness. Overall, the US economy is likely to pay a heavy
cost for keeping jobs at home and denying the benefits of outsourcing to its economy.

Protectionism cannot be a solution to the current problem. On the contrary, it can drag
them into difficult conflicts with those very countries and their emerging economies with
whom they can do profitable business. The developed economies have run out of steam
and their growth engines are virtually clogged. This is a problem of post-industrial
economies.

In addition, with a greying population, the young are feeling the effects of a shrinking job
market since retirement ages have been pushed up.

A long-term sustainable solution to the current problem lies in re-inventing their

economies. What this means is that the developed economies must constantly upgrade
themselves to higher, value-added activities. Besides riding the wave of technology, they
would need constantly to focus on re-skilling their people. This is a neglected aspect of
their human resource policy. The developed economies must take measures for a
thorough renewal of their stagnant economies.

(The author is senior advisor, CII.)

Article Size- 833 words

Theory

International trade is exchange of capital, goods, and services across international

borders or territories. In most countries, it represents a significant share of gross domestic
product (GDP). While international trade has been present throughout much of history
(for eg- Silk Road) its economic, social, and political importance has been on the rise in
recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations,
and outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. Without
international trade, nations would be limited to the goods and services produced within
their own borders.
The main difference between international trade and domestic trade is that international
trade is costlier than domestic trade. The reason is that a border imposes additional costs
such as tariffs, time costs due to border delays and costs associated with country
differences such as language, the legal system or culture.
Another difference between domestic and international trade is that factors of
production such as capital and labour are typically more mobile within a country than
across countries. Thus international trade is mostly restricted to trade in goods and
services, and only to a lesser extent to trade in capital, labor or other factors of
production.
Free trade is a system of trade policy that allows traders to act and or transact without
interference from government. According to the law of comparative advantage the policy
permits trading partners mutual gains from trade of goods and services.
Import substitution or Protectionist Trade is a trade and economic policy based on the
premise that a country should attempt to reduce its foreign dependency through the local
production of industrialized products.
Under a free trade policy, prices are a reflection of true supply and demand, and are the
sole determinant of resource allocation. Free trade differs from other forms of trade
policy where the allocation of goods and services amongst trading countries are
determined by artificial prices that may or may not reflect the true nature of supply and
demand. These artificial prices are the result of protectionist trade policies, whereby
governments intervene in the market through price adjustments and supply restrictions.
Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as
regulatory legislation and quotas, etc.
Theory Size- 375 words

Analysis of the Article with respect to the above explained Theory

Introduction
The above article has been analyzed keeping in mind the various kinds of International
trade policies: Free-Trade Policy and Protectionist Policy; also Outsourcing as a by-
product of the phenomenon of Globalization.

Detailed Analysis

The article puts emphasis on the recent furor over the opposition by the developed
countries on the outsourcing phenomenon. The recent economic crisis seems to have
shaken the very foundation of the economies of the first world countries; leading them to
discourage a concept which they themselves had first advocated.
The process which initially began with the developed economies desirous to take
advantage of the low cost conditions by outsourcing manufacturing processes to these
developing countries, later on spread to the service sector in the form of BPO’s. They
labeled this development as globalization and promoted it in every way they could
through organizations like World Trade Organization (WTO).
This resulted in pushing the developed countries economies into the level. This led to
their businesses, and consequently their economy to flourish. They gained immensely
from the low cost advantage provided by this process, enabling them to shift a gear and
grow rapidly.
But the benefits of globalization were not just limited to the developed world; it ended up
doing a lot of good to the developing economies as well. a lot of employment
opportunities opened up for the people of these countries, enabling them to utilize their
potential. The main beneficiaries were the educated and skilled unemployed, especially
the youth who were unable to be absorbed in the work-stream of the country. Thus the
unemployment rate came down, leading to the economic growth of these countries.
But soon these countries (developed countries) realized that the process which was so
highly propagated by them had backfired. In the long run the real beneficiaries ended up
being the underprivileged economies.
The economic growth and the benefits accrued by their (the developed world) firms
masked the growing problems in their own countries. The unemployment rate could be
seen rising which sparked social and political unrest amongst the people of these
countries. This dissatisfaction of the people came to the fore in the form of racial
discrimination and various rallies being organized.
These countries failed to realize that what they saw as threat being posed by these nations
was actually a result of their own incompetence. Apart from this high cost conditions
prevailed in these countries. And this made developing countries favourable targets for
these MNC’s thus alienating their home countries.
The recent economic crisis did nothing to ease this situation, on the other hand
aggravating the issue. Unemployment rates were at an all time high and outsourcing was
believed to be the main reason behind it.
In their view banning outsourcing was the only feasible solution, causing uproar among
the developing countries. This was considered as resorting to double-standards, seeing
that the developed world were the initiators of outsourcing.
Suddenly free-trade was replaced by protectionism. Inward-looking trade policy was the
only thing to resort to.

Conclusion

Outsourcing is here to stay. What these countries should do is re-invent themselves.

Knee-jerk reaction to the economic crisis by way of closing their economies is not the
ideal solution. They need to work on re-creating their economic models and not use
outsourcing as an excuse to cover up their loopholes.
On the other hand this crisis should be used as an opportunity to bounce back by working
on, understanding and eliminating their drawbacks.
A healthy mix of protectionism and free trade policy is the best possible solution to the
crisis.

Analysis Size- 599 words