Terry Vaughn
School of Information
The University of Texas at Austin
INF 380K - Doty
February, 13 2004
1. Introduction
2. Economic Conditions
3. Economic Impact
4. Conclusion
A new anxiety has been brewing among information technology workers over the past year. Rooted in a fear of long-term job loss and deprived of an understanding of the benefits of free trade, the movement against offshoring – the "exportation" of IT jobs to foreign countries – has garnered notice beyond the tech sector and will likely be a prominent issue in this presidential election year. Flames of protectionism burn nightly on cable news programs and Democratic presidential candidates consistently decry offshoring in stump speeches. Political demagoguery notwithstanding, lower salaries coupled with the lagging job recovery have only heightened anxiety among IT workers.
For decades now we have heard the grumblings of manufacturing workers as their jobs are lost to third-world countries where costs are dramatically lower than those in the United States. But now blue-collar workers are no longer the lonely voices maligning global competition as well-paying knowledge worker positions are outsourced to countries like India and China, where labor in particular is cheap, abundant, and increasingly well-educated. Aligned with their labor counterparts, IT workers have united to lobby legislatures and corporations against offshoring. In response, lawmakers around the country have introduced legislation that restricts foreign outsourcing.
As the political backlash against offshoring re-ignites the age-old debate over free trade, its proponents are forced to refute the same old fallacies. It seemed as though the debate might have ended in the early 1990s when, in spite of strident protectionist opposition (recall Ross Perot's "giant sucking sound"), both political parties backed the North American Free Trade Agreement (NAFTA). But the old albatross has returned, nesting with Democrats and Republicans alike.
Much like the fears that surrounded NAFTA, those related to offshoring are mostly unsubstantiated. But in spite of this knowledge, our public amnesia has come back to haunt us and threatens to stifle key components of economic growth – free trade, investment, competition, and innovation – which in turn will leave American consumers with fewer goods and services at higher prices.
In response to the recent recession, companies have been under immense pressure to reduce costs. A programmer in India, for example, whose annual salary is $11,000 can do the same job of a programmer in the United States who is paid $70,000 per year (Pink, 2004, p. 1). Such savings are hard to resist in this competitive economic environment. In an interview with Daniel Griswold, an economist at the Cato Institute, Risen (2004) reports that outsourcing is an absolute necessity for some firms. Those firms would go out of business if outsourcing were not an option.
Technological improvements have also enabled offshoring. Mann (2003, p. 6) credits the widespread adoption of the Internet, while Reich (2004) points out advances in broadband infrastructure, which enhance global communication and collaboration. Mann also claims that the standardization of business processes and the disaggregation of software and services have contributed to job losses to offshore firms. Leveraging the Internet to transfer and integrate information resources, software and services that do not need to be developed contiguously can be produced in modules anywhere in the world.
The issue of offshoring has been effervescing for over a year now, but tech professionals took particular notice earlier this year when internal documents from IBM were exposed by The Wall Street Journal. The company plans to export over three thousand high-paying jobs over the next year (Bulkeley, 2004). This development is significant because it reveals a new trend of sending mid-level management and engineers overseas. Schumer and Roberts (2004) also take account of this trend and express concern "that the United States may be entering a new economic era in which American workers will face direct global competition at almost every job level – from the machinist to the software engineer to the Wall Street analyst." They argue that the case for free trade – based upon David Ricardo's principle of "comparative advantage, "where entire nations specialize on various enterprises and all nations benefit from the trade of cheaper, specialty products – does not work in today's information economy where technology, resources, and ideas can move around the world in the blink of an eye, causing America to lose its comparative advantage overnight.
Schumer and Roberts fail to adapt the principle of comparative advantage to today's global business environment where previously non-tradable services are now on the global market. Instead they frame the debate according to the antiquated notion that nations compete like large corporations to maintain their comparative advantage. Considering the direction of today's free markets, the role of the state is marginalized while the many individual corporations pursue their own comparative advantage. Anderson (2004) asserts that IT firms today spend too much money testing and maintaining products. He notes that less than 30 percent of research and development spending at mature software firms goes to true innovation, according to consulting firm Tech Strategy Partners. If IT firms outsourced the common tasks of testing and maintenance, they could apply their savings to the pursuit of their own comparative advantage: innovation.
Throughout history this scenario has played out time and again. What is happening today in the IT software and services industry has already happened in hardware. Take for example memory chips. Back in the 1980s, anxiety ran high as Japanese firms began undercutting American chip maker prices causing a fierce policy debate (Postrel, 2004). Industry leaders argued that the United Stated government should protect American chip makers to maintain our competitive edge. Postrel goes on to cite Charles Ferguson, then a postdoctoral associate at the Center for Technology Policy and Industrial Development at M.I.T., who wrote a famous 1988 Harvard Business Review article that denounced the "fragmented, 'chronically entrepreneurial' industry" of Silicon Valley. He warned that "most experts believe that without deep changes in both industry behavior and government policy, US microelectronics will be reduced to permanent, decisive inferiority within ten years." Despite his dire predictions, American companies bought low-cost memory chips and other components – like keyboards and disk drives – overseas, passing on the savings to American businesses and consumers. Mann (2003) estimates that "globalized production and international trade made IT hardware some 10 to 30 percent less expensive than it otherwise would have been." These savings translated into a productivity boom as all sorts of businesses found new, productive ways to implement technology.
The gloomy predictions espoused by Ferguson also illustrate society's perennial shortsightedness regarding economic growth. In his definition of economic growth, Romer (n.d.) describes a curious flaw in human nature:
Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered (¶ 10).
Ferguson failed to envision the American IT industry beyond what he could grasp. He never imagined that firms would shift resources to higher value products like microprocessors, network systems, software, and services. Like memory chip fabrication, routine knowledge work like programming, maintenance, testing and upgrades will be done overseas. Pink (2004) claims that "jobs with any lasting potential in the U.S. won't be classically high tech. Instead, they'll be high concept and high touch."
What's more, offshoring stimulates entrepreneurship. In an interview with Yogen Dalal, a partner at the Silicon Valley venture capital firm, Mayfield Ventures, Hawn (2004) notes that two-thirds of the firm's portfolio companies already have offshore operations. Mayfield Ventures will not even consider funding a new company without an offshore strategy. "All startups need to be as efficient as possible in getting their developments to market with the least amount of money," says Dalal. "If they can do that by utilizing talent overseas, so much the better."
There is also a potential market opportunity for other American firms. Pink (2004) cites an example where an Indian programmer makes $11,000 a year -- more than 22 times the per capita annual income in India. Programming jobs have helped create a middle-class that owns apartments, cars, computers, and televisions in an otherwise impoverished country. When consumers in India get higher wages from these new jobs, they end up buying American products.
Beyond the short-term pinch of job loss, the long-term benefits of offshoring are clear. Most economists would argue that job cuts were beneficial, because they allowed companies to structure their operations more efficiently. Outsourcing low-level work also frees up domestic IT talent to work on higher-level problems like system design and integration. The savings realized from outsourcing can also fund new research and development. Some firms have no choice but to outsource, which results in a net savings of jobs when firms stay in business. Additionally, offshoring enables entrepreneurship. Many firms cannot get investment without an offshore strategy. Finally, there are ancillary benefits to the overall American economy. The increased standard of living in India has increased demand for American goods and services.
The ongoing challenge for policymakers is how to mitigate the short-term social and economic duress that offshoring imposes on American society. In the past, major economic shifts occurred over greater expanses of time. Generations had more time to cope with the change. The current developments in the IT industry have occurred within individuals' careers. Imagine the existential grief of a recent college graduate with a computer science degree already facing obsolescence. On the other hand, consider a similar Indian college graduate facing a promising new career. Isn't it a triumph to bring prosperity to a place where once there was squalor? Furthermore, who ever said those IT jobs belonged to Americans in the first place?
Instead of hobbling our economy with trade sanctions, Americans should take advantage of this opportunity to advance the IT industry. In spite of all the grim predictions by economists and politicians alike, America has prospered as its economy moved from agriculture to manufacturing and onward to the current information economy. Now is the time to think beyond the information economy and imagine a time where the majority of knowledge jobs are overseas, much like the manufacturing sector of today. No longer encumbered by common and repetitive tasks, IT firms can focus on creativity and innovation, the hallmarks of the next economy: The Idea Economy.
Anderson, C. (2004, February). The Indian machine [Electronic version]. Wired Magazine, 12(2). Retrieved February 1, 2004 from, http://www.wired.com/wired/archive/12.02/india.html?pg=6
Bulkeley, W. M. (2004, January 19). IBM data give rare look at sensitive 'offshoring' plans [Electronic version]. Dow Jones Business News. Retrieved January 19, 2004 from Yahoo! Finance Web site: http://biz.yahoo.com/djus/040119/0053000033_1.html
Hawn, C. (February, 2004). Offshore storm: the global razor's edge [Electronic version]. Fast Company, 79. p. 27. Retrieved February 8, 2004 from, http://www.fastcompany.com/magazine/79/razorsedge.html
Mann, C. L. (2003, December). Globalization of IT services and white collar jobs: the next wave of productivity growth (International Economics Policy Brief No. PB03-11). Washington, DC: Institute for International Economics. Retrieved February 1, 2004 from, http://iie.com/publications/pb/pb03-11.pdf
Pink, D. H. (2004, February). The new face of the silicon age [Electronic version]. Wired Magazine, 12(2). Retrieved February 1, 2004 from, http://www.wired.com/wired/archive/12.02/india.html
Postrel, V. (2004, January 29). Economic scene; a researcher sees an upside in the outsourcing of programming jobs. The New York Times, p. C2.
Reich, R. B. (2003, November 2). High-tech jobs are going abroad! But that's okay. The Washington Post, p. B03.
Risen, C. (2004, January 26). Missed target [Electronic version]. The New Republic Online. Retrieved February 8, 2004 from, https://ssl.tnr.com/p/docsub.mhtml?i=20040202&s=risen020204
Romer, Paul M. (n.d.). Economic growth [Electronic version]. The Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved February 2, 2004 from, http://www.econlib.org/library/Enc/EconomicGrowth.html
Schumer, C., & Roberts, P. C. (2004, January 6). Second thoughts on free trade. The New York Times, p. A23.