"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
HUCK GUTMAN
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
generate.
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
thousands.
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
trade.
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
lower.
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.)