Global Trends by Martin Khor

Monday 8 March 2004


It’s Election campaign time in many countries.  In the United States, job losses have emerged as a big issue.  An unfair target has been the developing countries, which are accused of taking away office jobs from Americans as US companies increasingly “outsource” work functions to India and other countries.  The rise of protectionism at the expense of the poorer countries may be an unfortunate effect of the US election campaign.

Election fever is gripping many countries this year. Besides Malaysia, countries that will hold either Presidential or General Elections include the United States, Indonesia, the Philippines, and India.

In the US Presidential elections, the issue of jobs has emerged as a hot topic.

That’s because over two million jobs have been reported lost since President Bush took office more than three years ago.

Unfortunately, the developing countries have become a convenient target for presidential candidates in decrying the causes of job losses.

For years, developing countries were blamed for taking away factory jobs as US manufacturing companies invested abroad.

The latest salvo is in respect of the white-collar sector, with the complaints reaching fever-pitch that US companies are “outsourcing” jobs involving services such as computer software design, call centers (replying to phone enquiries made to companies and airlines), and accountancy.

With the internet revolution, it is now possible and cheaper for companies in rich countries to hire people in poorer countries to undertake many office tasks.

For example, US tax consultancy firms are contracting out part of their business to Indian firms, whose accountants are sent the tax data of the clients of the US company through the internet. 

The Indian accountants fill in the data on tax forms and send them back to the US firm.  The US accountancy firm saves a lot of money as it pays the Indian accountants much less than it would have to pay accountants in the US.

In another case, a European airline company diverts the calls it receives in Europe (for enquiries or even booking tickets) to a Third World country, where trained personnel armed with the latest information make replies and bookings.

This relocation of work functions can boost jobs and incomes in developing countries. According to one report, some 400,000 American service jobs have moved overseas since 2000.  Another report predicts that by 2008, information technology and back-office work in India will grow five times, providing 4 million jobs. 

But there is a strong backlash now in the US. During the campaign for the Democratic presidential candidate, outsourcing was a big issue.

According to Nayan Chanda of the Yale Centre for the Study of Globalisation, the eventual winner, John Kerry, even called US firms that outsourced their jobs “Benedict Arnold companies”, after the most despised traitor of the American war of independence.

Kerry said he would, as President, require the administration to collect data of jobs sent abroad and have them reported annually to Congress.

In several states, laws discouraging out-sourcing have been introduced.  The US Senate itself will consider banning the outsourcing of government-funded projects.

We can expect that such protectionism will get more nasty, and there will be more measures proposed to prevent business being contracted out to the developing world.

That would prevent the developing countries from receiving a potentially important source of growth and jobs. That would also be unfair.

As Chanda points out, tough immigration policies have kept millions of job-seekers from developing countries out of the developed world’s labour market, but the challenge of a global, virtual labour force will require new global strategies.

“Building protectionist walls may be attractive as a quick election-year fix, but post-industrial age problems cannot be addressed by solutions devised for another era,” he says.

Chanda suggests that the US needs a whole new approach to make its workers more competitive, and it should rely on technology invention to create new industries and spheres of jobs for Americans in the future. And that the developing countries must grow, pushing up wages and their demand for US products, thus creating more jobs for the US exports sector.

Another critic of the fear of outsourcing, Dresdner Bank chief economist Michael Heise, says that in the 1980s Germany also faced intense competition in manufacturing, even in sectors where it had been a world leader.  Some branches, like consumer electronics, virtually disappeared.

But rather than retreating into protectionism, German industry was made more competitive, with only those firms and products that could compete internationally surviving.  Germany’s adjustment process was painful but worked.

“The US is now being tested not only to see whether its actions match its rhetoric, but whether it can take politically difficult steps that will ultimately benefit its economy, and its claim to global economic leadership.”

Recently, Rubens Ricupero, Secretary General of the UN Conference on Trade and Development (UNCTAD) said that outsourcing has opened up new trade avenues for developing countries.   

Offshoring was a legitimate part of global trade liberalisation and this enabled developing countries to leverage their comparative advantage - abundant, competitive labour and lower cost environment. 

He also quoted the British Trade Secretary Patricia Hewitt (on the myth behind offshoring fears in the UK) who had said: “We cannot argue liberalisation abroad and practice protectionism at home.   However strong the short-term costs appear to be, the long-term costs are greater - for consumers and for jobs”.

Despite much excitement about its significance to North-South trade, the share in offshoring of frontline countries like India (3 per cent of global IT spent) in this business is small and fears of a big wave of offshoring to poor countries swallowing up rich country high skill jobs appear misplaced.

The approaches suggested Chanda, Heise and Ricupero are certainly more enlightened than knee-jerk protectionist measures.  But they are not being given a chance to be considered in an election year in which Kerry will try to win votes through populist promises to protect jobs.

And President Bush will likely play the same game too.  When his chief economic advisor made a statement that there should not be concerns about outsourcing of jobs since it would on balance benefit the US economy, it did not go down well with public opinion, and he was pressurized to withdraw that view. 

As can be expected, India is not taking the outsourcing phobia lying down.  When the US Trade Representative Robert Zoellick visited Delhi in mkid-February, the Indian Commerce Minister Arun Jaitley raised his concerns about the protectionist tide against outsourcing.

He also told Zoellick that India cannot be expected to open up its markets further through the World Trade Organisation talks if the US were to practice protectionism in outsourcing.