Unknown Knowns About Outsourcing

Updated: Apr 1 2004, 05:30am hrs
As the backlash against outsourcing of jobs continues unabated with Australia joining the bandwagon there is not much clarity in the public debate beyond the fact that it is bad economics. The reasoning of eminent economists like Jagdish Bhagwati or the hapless Gregory Mankiw are only voices in the wilderness, while the political mood in the US as the electoral drumbeats get louder is increasingly protectionist in nature.

The democrat frontrunner John Kerrys railing against US executives who outsource services as Benedict Arnold CEOs is hardly different from Ross Perots fears of hearing a giant sucking sound of US jobs vanishing south of the border, down Mexicos way due to NAFTA. With this mood, even the US President George Bush cannot afford to be seen as a liberal on outsourcing! This, we are told, is the politicisation of economics in an election year.

As India has been targeted, it is important to forge a suitable response to this growing US protectionism. The Confederation of Indian Industry talks of a strategy to address the outsourcing question with sensitivity and effectiveness. So far, there are no indications of what the necessary ingredients of this strategy are. There are also suggestions doing the rounds of lying low and quietly working behind the scenes.

For starters, the Indian response must be based on a hard-headed recognition that this problem wont blow away after the US elections; that there is a need to better understand why it is good politics but bad economics. Towards this end, it may not be inappropriate to understand the problem better through a delightful bit of jabberwock uttered by the US secretary of defence, Donald Rumsfeld, in the context of the Iraq conflict.

To paraphrase his immortal quote, he stated that there are known knowns. These are things we know that we know. We also know that there are known unknowns. That is to say, there some things that we know we dont know. But there are also unknown unknowns the ones we dont know we dont know. The first of these known knowns is, of course, that the problem will persist even after Mr Bush gets re-elected or if Mr Kerry is the new US president.

Why this is so, was explained in an evocative chart used by Morgan Stanleys chief economist, Stephen Roach, in a luncheon seminar organised by the CII in the Capital. This illustrated the outbreak of jobless recovery in the US economy showing that, even after 23 months after it had bottomed out in November 2001, private non-farm payrolls were down by 1.1 million workers, relative to the hiring that would have occurred in upturns of the past.

All of this translates into a cyclical shortfall of nearly 7 million jobs. Naturally, much of the US protectionist ire is against the loss of manufacturing and services jobs. As for manufacturing, Americas depressed level of factory sector payrolls are fully 2 million workers below what is implied by cyclical norms. Similarly, 4.5 million service sector jobs are in the hole compared to what would have occurred in a normal cyclical upturn.

The vanishing world of work thus is a fact of life, but US politicians queer the pitch by arguing that someone else is stealing these manufacturing and service sector jobs. No doubt, it is true that affected workers express these sentiments as well, but the reality is that banning outsourcing will not save jobs either. Technological changes are largely responsible for these trends but it is electorally expedient to look out for scapegoats.

One forceful counter-response is to highlight that foreigners, including Indians and others from the developing world, are not only outsourcing but also insourcing jobs into the US economy. That they are also creating jobs in America through outsourcing. The possibilities in this context became evident when a colleague passed on to this writer former CEO of Citicorp/Citibank Walter Wristons article in The Wall Street Journal.

This drew attention to a website of the Organization of International Investment a Washington-based business association representing US subsidiaries of international companies which talks about the contribution that foreign companies are making on the insourcing front. The $82 billion of FDI into the US economy last year translates into 400,000 additional American jobs in manufacturing and services.

In this context, the news that Bharti outsourced $750 million of business to IBM didnt quite make the waves it ought to have. As a unknown known, it does take the sting out of the US charge that Indians are only stealing their service sector jobs. As there is no single place where such details may be gathered, there is a warrant for collating such information and disseminating it widely in the US.

Casual empiricism suggests that other Indian companies outsourcing jobs to foreign companies, including the US, is taking place by the day. Bharti earlier had outsourced some its telecom work to a Swedish company, Ericsson. Hewlett Packard has also secured outsourcing business worth $150 million from Bank of India. Dabur similarly gave some of its work to Accenture. There is talk of the Godrejs taking over a call centre in the US.

Besides outsourcing, there are indications that Indian companies are investing globally in a big way. Indian pharma giants like Ranbaxy and Dr Reddys Laboratories lead the pack with a series of acquisitions of foreign generic companies. Auto majors like Mahindra and Mahindra have made inroads into the US with two tractor assembly units. The Indian entry into the below 60 horse power US tractor market is an interesting story in its own right.

Back to the Rumsfeld quote, the unknown unknowns in this story is how all of this will play itself out. Professor Bhagwati does allude to the possibility in his latest book In Defense of Globalization that outsourcing may result in easing of pressures on immigration. But the reality of jobless growth will make it a live issue for a long time. Besides exposing the bad economics, India also needs to counter US pressure by widely disseminating evidence that outsourcing and insourcing balance themselves out and present a win-win situation for both countries.