Outsourcing, offshoring and the movment of jobs in the world economy.

"From Outsourcing to Offshoring"
March 23, 2004

Huck Gutman

Outsourcing is not a new phenomenon in the US economy; millions of Americans
have lost their manufacturing jobs to Mexicans, for instance. The reason for
the current uproar is the loss of professional service jobs to India, writes

This is the first of a three-part commentary on economics and global politics from the Indo-US perspective.

            We begin with a law of international relations: No action
involving two countries has equal effects on each. This is certainly true of
the new economic interdependence of India and the USA. For in addition to a
new closeness between the governments of these two great democracies in
recent years - including shared concerns about terrorism, the nuclear
capacity of Pakistan, the possibility China will dominate all of Asia -
there are also significant emergent economic linkages between them. These
linkages may yet prove to be the most important event in their recent
bilateral relationship.

            The new economic interdependence of the two nations is the
result of the intersection of several modern phenomena. One is the movement
toward globalisation. Another is the operating principle of modern
corporations, in particular MNCs, that fiscal efficiency is absolutely
necessary for corporate success. (It should be noted that corporate
"success", as used here, refers to the growth of profits.) A third is the
strategy, originally brought to its highest level of practice in Japan as a
mode of productive efficiency, of outsourcing.

            Outsourcing refers to work done by people other than a
corporation's full-time employees; the outsourcing we will refer to
henceforward is that in which a corporation divests itself of those elements
in the process of production which bring in modest or little profit in terms
of the capital invested. These less-profitable or peripheral activities can
be performed, supposedly more efficiently, by other, usually smaller,
corporations, which gain efficiency by concentrating on the activity itself,
honing the productive process so that it can create new efficiencies, making
profits which the larger corporation would not be attentive enough to

            For example, a large automobile manufacturer might want to
purchase headlights, or speedometres, rather than produce them. That way, it
could pay attention to assembling and merchandising automobiles, and could
leave the process of designing and producing the headlight to a supplier. As
the Japanese rediscovered, outsourcing means the headlight can be provided
for the same (or often lower) price by a supplier as the car manufacturer,
with its inefficiencies of scale, can provide it. With less capital
investment, since no capital is required from the auto manufacturer to
produce the headlights, as each car is sold the return on invested capital -
which if the company is well managed should remain relatively constant -
rises. In other words, if you invest fewer dollars (or yen, or rupees) for
each item sold, and the profit on each item stays the same, you get back a
greater percentage return on your investment. Still simpler: less invested,
higher profits.

            That is the theory, and Japanese manufacturers made it work.
They concentrated on core business; they outsourced, reducing their need for
capital; they developed a "just-in-time" strategy for ordering, cutting the
cost of maintaining inventory, thereby passing on the cost of maintaining
inventory. Inventory, after all, is merely product just sitting there, the
physical embodiment of invested capital, and earns no return as it sits
waiting to be used.

            The potency of the Japanese model, which was so economically
successful in the 1980s, was not lost on European and US corporations. Over
the course of a decade, US corporations downsized, outsourcing less
profitable aspects of their production, creating greater administrative
efficiencies in the process. At first, they followed the Japanese model:
outsource within the domestic economy.

            The intersection of liberalised trade policies, the need for
efficiency in production as a motor for increasing profits, and the strategy
of outsourcing, created a global movement of jobs. Once the decision that
outsourcing to reduce costs and improve return on investment is made, there
is powerful impetus for major corporations to move jobs around the globe. If
labour is less costly in one nation than in another, it makes economic sense
to produce labour-intensive products where the labour cost is lower. When
outsourcing involves sending labour-requiring work, whether in manufacture
of services, to another country, it is known as offshoring.

            In the USA, for instance, many hundreds of thousands of jobs
were offshored to Mexico after the signing of the North American Free Trade
Agreement in 1993. Manufacturers in the USA were accustomed to paying $15-25
an hour, with health care and retirement benefits, to US workers. Nafta
enabled them to hire Mexican workers in the Maquiladora zone - the mile-wide
strip of Mexico just across the US border - to do the same jobs for a dollar
or a dollar and a half an hour, without benefits.

            With the 1994 US acceptance of the General Agreement on Trade
and Tariffs (now subsumed into the World Trade Organisation), a new aspect
of outsourcing emerged. Since a worker in Mexico would do for a dollar an
hour what a worker in the USA did for $25 an hour, corporations laid off
millions of US workers and sent their jobs to Mexico. But then it transpired
that Mexican labour at $1 an hour was a lot more expensive than labour in
China, where production workers work for of a fifth or a quarter of the
Mexican wage. The Maquiladora zone, built from almost nothing into a major
economic engine in Mexico, began to lose jobs by the tens and hundreds of

            The emergence of China as a major economic power is almost
completely dependent upon this phenomenon of outsourcing, as well as
producing finished products for resale by multinationals, in a world of free

            While the pundits of capitalism speak of the huge market
comprised by China's 1.2 billion people as an economic territory in which
foreign producers are eager to sell, there is a reason that Chinese
consumers have disposable income: a great deal of money has been generated
in China by the outsourcing there of manufacturing for the MNCs. It is worth
recalling that it is not the low wage Chinese workers who have disposable
income. Huge numbers of Chinese workers are labouring at starvation wages:
often locked in factories to keep them working long hours at difficult
tasks, they are disproportionately female (being more easily bullied into
following the orders of management, being more patient at doing the endless
routine tasks of production) and are among the lowest paid labourers on
earth. In the Chinese government's desire to keep wages competitively low,
it encourages corporations to move ever farther inland where wages are even

            In 1817, British economist David Ricardo propounded a principle
that he said governed capitalist production. "The natural price of labour is
that price which is necessary to enable the labourers to subsist and to
perpetuate their race, without either increase or diminution. When the
number of labourers is increased, wages again fall to their natural price,
and indeed from a reaction sometimes fall below it." Ricardo's Law was true
then, and is true now: unless there is a scarcity of labour, wages tend to
drop lower and lower, till they reach a point where they equal the minimum
amount required to keep a worker alive. On an international scale, which is
clearly in operation today, Ricardo's Law is the dynamic behind the
phenomenon known as "the race to the bottom." Everywhere, MNCs seek lower
and lower wages. If Mexico pays more than China, send the jobs to China. If
China begins to pay more than Vietnam, send the jobs to Vietnam. And pay the
Vietnamese worker only what is required for him or her to have sufficient
strength to show up at the factory gate tomorrow.

            The only way to counteract Ricardo's Law within a domestic
economy that has more workers than jobs is when workers organise labour
unions, and use their collective strength to provide a counterforce to the
race to the bottom in their place of work. (Strong labour unions in middle
third of the 20th century is the reason US manufacturing jobs paid as well
as they did, $20-25 an hour.) The only way to counteract Ricardo's Law in a
global economy where there are more workers than jobs, is by putting
protections in place, nationally and internationally, which recognise the
right of labour to organise unions, and which establish fair labour
practices to abet the rights of workers in every country.

            Here are some remarkable statistics. In the past three years,
the USA has lost 2.7 million jobs, some to automation and productive
efficiency, but many to job flight to low-wage China. In that number were 15
per cent of the USA's manufacturing jobs - 15 per cent!

            But for a variety of reasons the haemorrhaging of jobs was not
of immediate public concern in the USA. Those reasons are worth listing.
First, of course, there are huge financial benefits to the owning class who
outsource jobs. The owning class, the USA's wealthiest citizens, along with
the large corporations, pour huge amounts of money into funding political
campaigns, with the result that most elected officials pay more attention to
undergirding the corporate drive for profit than to the needs of "ordinary"
US workers. Along similar lines, the US media choose to focus on small
scandals, individual acts of violence, and gossip, since the handful of
giant corporations which own the media have no interest, literally no
interest, in bringing corporate downsizing and offshoring to the attention
of the public.

            Additionally, the majority of the job loss has been in
manufacturing, in what are called "blue collar" jobs. But in the USA union
membership, once concentrated in the manufacturing industries, has been in
decline for many years. Because of declining worker solidarity, when jobs in
manufacturing disappear, there is less public outcry at the closing of
economic horizons than one might expect. And Americans have been, up until
recently, and not without some justification, gripped by a new "great
American dream".

            The USA has always prided itself on being a land of upward
mobility. Since World War II, and ever more strongly in the ensuing decades,
that dream has not only been of greater financial rewards for each
generation, but also of movement from blue collar jobs to white collar jobs
- from workers to professionals, from the assembly line to the office suite.
Thus, if manufacturing jobs are lost, it may not necessarily seem of great
consequence: Americans believe their children will be able to get better
jobs, jobs in offices, jobs in the new knowledge and information based
economy. For that world of technology and information is, Americans have
been told, the economy of the future.

            The first huge job losses were in labour-intensive low-pay work
such as textiles and making shoes. The textile and clothing industry is, in
terms of employment, a behemoth of manufacture. It was textile manufacture
and processing, more than anything else, that created the modern
proletariat: low-pay jobs, long hours, men and women working to the
unceasing demands of machines. Although industrial manufacture helped create
a huge middle class in Europe and the USA, it was never textile manufacture
which did this. Those who made the cloth, sewed the clothes, stayed poor. So
one could argue that making clothing in low wage countries was just another
chapter of the continuing history of the first great sector in the
industrial revolution. Movement upward has always been the dream of the
working class: into better jobs, better work. Thus, losing jobs in the
textile and clothing industries could be seen as relatively benign: there
were always jobs making cars, in construction, in government service, which
paid better and offered more opportunities.

            Even when the job losses were in high-paid manufacturing, there
was a sense that goods could be produced elsewhere, because the vital
sectors in the economy were not in making things, but in "mental" work.
Deciding how things were to be manufactured, moving and sorting information,
developing new knowledge: Americans thought, not without justice, that the
emergent economy of the late 20th and 21st century would demand computer
programmers, accountants, scientists, architects. All of whom would be well
paid, and work at satisfying jobs.

            White collar jobs were the future of the USA, and US workers.
But today there's a new phenomenon that has appeared in the global
marketplace. The same forces - globalisation, fiscal efficiency, and
outsourcing - that transformed manufacturing have now reshaped the nature of
white collar jobs. Job flight from the USA (and Europe) has begun in the
professional services. In consequence, whereas five years ago the major
threat to US workers was seen to be China, today the major threat appears as
India. India.

            The movement of white-collar jobs - in service, in information
technology, in professional expertise - has created a new relation between
India and the USA. For while the massive job loss to China, mostly in
low-skill manufacturing, has had major consequence for both nations, it has
not created as much political tension in the USA as the loss of professional
service jobs to India. What is happening in the interaction of the Indian
and US economies seems one of the most publicised issues in US politics
today; indeed, it is not beyond possibility that it will emerge as one of
the central issues in the election forthcoming next November, when Americans
will choose a president and the large majority of the federal legislature.

To be concluded.

(The author, a Visiting Fulbright Professor at Calcutta University, teaches
at the University of Vermont.)