Thursday, December 11, 2003

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Catherine Mann on globalization and outsourcing

The Institute for International Economics' Catherine Mann has a great policy brief on the globalization of IT services. There's a lot of interesting info, but the discussion of employment effects is particularly interesting:

[S]tories that report dramatic movement of jobs offshore need to be put into the current economic perspective. First, these citations frequently use the peak of the economy and technology boom as the base for their analysis, thus ignoring the business cycle, trend decline in manufacturing employment, dollar overvaluation, and technology bust. Second, data on international trade do not corroborate the frequent citations but rather point to sustained international competitiveness of US service providers.

Table 2 shows developments in the US labor market from 1999 to October 2003. These data cut through the technology boom and peak of the business cycle but also clearly show the slow recovery in employment so far. Data confirm disproportionate and continuing employment losses in manufacturing (2.7 million or 16 percent since 1999), including production jobs in the IT sector. Among occupational categories, there similarly has been a trend decline in “management occupations,” where 1.1 million jobs have disappeared since 1999 (a 14 percent decline). In contrast, employment in the private service–providing sector increased throughout the period and is 1.5 percent higher in October 2003 compared with 1999.

Employment in white collar occupations related to IT or deemed vulnerable to IT-enabled international trade, is stable and recovering (architecture and engineering occupations) or higher (computer and mathematical occupations is 6 percent higher and business and financial occupations, 9 percent higher) in October 2003 compared with 1999. Without a doubt there is offshore job activity, and the domestic labor market situation remains subdued, but job growth in many white collar occupations at home deemed particularly at risk to offshore operations is expanding, not contracting. (emphasis added)

By all means, read the whole thing.

UPDATE: Cold Sping Shops has further thoughts.

posted by Dan on 12.11.03 at 06:24 PM


Your post doesn't note this, but Dell recently closed a customer support call center in Bangalore, India (I have a link to this in the most recent post on my site). The article says Dell rerouted the calls back to US call centers. The reason was heavy accents and clearly scripted questions from the personnel (as someone who's done field engineering, I've got to say there's nothing worse than talking to someone with a heavy accent who's saying "have. . . you. . . opened. . . the. . . error. . . log?" It wastes my time to plod through their lists of questions, and it really undermines my sense that the person is eventually going to solve my problem.

However, US-based firms also employ people with heavy accents using scripted responses at US-based support centers. They've been exactly as effective in wasting my time and not solving my problem as offshore call centers (and I've gotten in much more trouble pointing out the problem to my superiors). There are many, many ways to screw up IT, and going offshore is just one variable among many.

However, the experiments with offshore programming and support I've seen haven't been promising, and are often discontinued. People in the Phillipines, people in India, and people in the US may all theoretically speak fluent English, but a conversation among the three may be nearly impossible to follow. There are better ways to spend time than trying to track back misunderstandings.

posted by: John Bruce on 12.11.03 at 06:24 PM [permalink]

This debate is slightly dated. First the "overvaluation" of the US dollar since this article's submission has been unwinding significantly, and may well push past the 1.21 Greenback-Euro level to new lows. Note this is as Europe is having Constitutional hiccups and a total lack of across nation-state fiscal discipline on spending. This is saying something as the markets are implying that even with these issues, essentially they are betting that the value and stability of the European common market is better than the prospects for the American one.

Second, these productivity debates as we've already established are mixing hard numbers with soft ones. There is no doubt that IT has produced some productivity gains. There is also little doubt that some of those gains are inflated because they represent people working more hours. Any argument that there is going to be a second globalization driven productivity surge is rather optimistic. Almost certainly there is going to be a surge in foreign productivity as they go hi-tech from low-tech or no-tech.

Those cost savings are not necessarily however passed on to the US economy. As Dan himself has noted that the developing countries such as India, China, and others will in a few years become preminent in sheer economic size compared to the Paris club much less the US alone.

So far in the process of globalization, the US has (unevenly distributed it is true) disproportionately benefited economically because of the US position as the largest consumer market, it's hi-tech leadership, and it's unique preminent Economic role reinforced by the use of the Greenback as a standard commodity pricing currency.

This preminent position is now being threatened. There is no reasonable forward projection that says that the benefits of globalization will flow primarily back to us, when Europe, Russia, and the developing Third World are becoming bigger economic competitors. This is the subtle but incredibly important factor missing in Catherine's otherwise intellectually brilliant peice. Even her job gain statistics while impressive are not reliable as future guides. That would rely on the assumption that job creation will be driven by wealth trickle-down redistribution from the gains of globalization driven productivity, that she assumes will continue to flow to us.

For a brief time, a few years and no more, this will continue to be true. But even now the center of gravity is noticably shifting. There is no expectation that real domestic IT growth at that future time will be sustained. These numbers cannot even be relied upon as they do not take into account economic deceleration. What do I mean by that? If we look at economic growth as a measure as crude as GDP we immediately see that these employment numbers are lagging GDP. Once they led them. In other words the clip is still fast-paced but it is sloooowwwwwwinnnnggggg down. It is this decelleration or drop in comparative economic activity between the sector and employment in it and national economic activity that is key to understanding the perception that "jobs are being lost overseas in the IT sector."

Another economic analysis in obscure but critical issues courtesy of the oldman.

posted by: oldman on 12.11.03 at 06:24 PM [permalink]

This is the first thing I've read about IT outsourcing that makes any sense to me as a small-business software developer. Because enterprise software products (e.g. Oracle databases) are so expensive, small businesses do not adopt them; it's cheaper to just keep using inefficient old systems. If the prices of these products come down due to globalization, many jobs will be created for people who know how to install, support, and customize them.

posted by: br on 12.11.03 at 06:24 PM [permalink]

I use a popular payroll software program. I tried to get help from their support department and the person they connected me to couldn't understand me. I found a local independent company that came in and trained us on the system. These big companies are going to lose their customer base to smaller competitors with their drive to cut costs at the expense of customer service and support.

posted by: Lynne on 12.11.03 at 06:24 PM [permalink]

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