Thursday, November 4, 2004

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Tyler Cowen reports from Bangalore

The good economist's assessment of the capital of offshore outsourcing:

Apparently production costs are rising out of control in a city that accounts for a third of India's software exports. The major culprit is congestion; a seven-kilometer commute can now take ninety minutes. Population has grown by a third since 1995, and the new metro and airport are badly behind schedule. Bombay has had similar problems.

The remedy? Madras (Chennai) is rising in popularity as is Calcutta, despite its propensity to elect communist governments.

The bottom line: Indian infrastructure is chaos. This economy has only a limited ability to absord outsourcing ventures.

Megan McArdle has further thoughts on this. Key line: "Trendline extrapolation is a silly business in almost any economic situation, but never more so than where trade is concerned."

posted by Dan on 11.04.04 at 02:53 PM


Infrastructure is certainly an issue in India, but I dispute the notion that there is only a 'limited' ability to absorb outsourcing ventures (assuming limited means, well limited).

For one, there is the development of ancilliary town centers and other second-level towns for outsourcing. This is actually good for INdia, because it means the gains of outsourcing spread out from the major cities. Also, most Indians learn to cope with infrastructural problems [ Heavy traffic ? Have company buses ferry people around, or develop a campus with housing].

The Bush victory was greated with some elation by the software and outsourcing majors in India.

posted by: erg on 11.04.04 at 02:53 PM [permalink]

Perhaps you're right, but is that capacity to absorb more outsourcing greater than our capacity to absorb job losses?

posted by: Jonathan Dresner on 11.04.04 at 02:53 PM [permalink]

An incredibly smart, incredibly financially successful guy I know who invests a lot in India was delighted by the election results because it will help lock in a very rosy future for the Indian economy for a long time. The chief reason was not what you might think (that Bush would be less hostile to outsourcing than Kerry). It was that Bush's economic policies were so disastrous that they would end up screwing the dollar and undermining American competitiveness, thus making India even more attractive and fueling the boom. (i.e., Pete Peterson is right, and India will be a prime beneficiary.) The infrastructure problems you're talking about are real, but are not apt to be disabling...

posted by: lamont cranston on 11.04.04 at 02:53 PM [permalink]


The way Bush is botching the economy suggests a plunge in the dollar, rather than a strong dollar that would help out India. Unless your guy is big into currency trading, he might find himself sorely disappointed.

posted by: Appalled Moderate on 11.04.04 at 02:53 PM [permalink]

Jonathan -- I'm afraid it will require someone more skilled me than to make an exact assessment of how many more jobs India can absorb and what the net impact on the US economy will be.

I can tell you from what I know -- that ancilliary towns and smaller cities in India are trying to set up sattelite towns and training young people in computers and English. Also, the biomedical industry is going quite well. There are certainly infrastructural issues, but you'll be surprised at workarounds that people can devise. This is a country that has millions of young people joining the workforce every year.

As an Indian-born American citizen, I have mixed feelings about this. I think this is great for India, and will help its economy immensely. On the other hand, I think there will be definitely be major classes of jobs that will be outsoruced aboard from America, and despite all the theories about comparative advantage, there will be very real pain in the US in many areas.

"LamontCraston" -- Sorry, I just cannot believe that statement. A bad US economy hurts India as well.

On the political front, here's an interesting bit of irony. After a long battle with terrorists in kashmir, which has led to 10s of thousands of deaths, India ousted a government which had several ties to Hindu fundamentalism in favor of a secular government with a Sikh Prime Minister, a Muslim President (okay, he was there earlier) and a Catholic woman as the power behind the scenes. In the US, a government with several ties to Christian fundamentalism was retained.

posted by: erg on 11.04.04 at 02:53 PM [permalink]

Stating the obvious:

A declining dollar makes it harder to outsource from america to india. Why pay an indian IT expert $60,000 when you can get an american IT expert for $45,000?

A declining dollar also makes it easier to outsource from europe to america.

A devastated american economy means there won't be much work available here to outsource to india. (I spent some time in Birmingham AL during the Reaganomic's crash. 50% unemployment. 25% across the country. But there was bread on the shelves at the grocery stores, we weren't exporting the wheat to get foreign exchange. I didn't hear of anybody starving in Birmingham.) But there might be more european outsourcing to india because they wouldn't be sure the work would get done in a chaotic USA.

posted by: J Thomas on 11.04.04 at 02:53 PM [permalink]

"50% unemployment. 25% across the country."


posted by: MnZ on 11.04.04 at 02:53 PM [permalink]

Perhaps I should have made the point more clearly. Investments in India that are denominated in rupees will benefit directly from dollar depreciation, so people who are already heavily invested there in non-dollar assets will profit.

Outsourcing, meanwhile, usually increases when there is pressure on results because then corporations focus even more on costs. The best scenario for India, of course, is a good U.S. economy, neither great nor collapsing. Even if there is a collapse, though, india and china will do pretty well, since they are primarily domestic economies and not export driven so they are far more insulated from US slowdowns than other emerging economies.

posted by: lamont cranston on 11.04.04 at 02:53 PM [permalink]

Lamont, thank you. There's a contradiction I want to ask you about. Many people have said that china has to eat ever-increasing US debt so they can keep exporting to the USA, which is the only available market to drive their economy and provide jobs in china.

You say that they're primarily a domestic economy and not so export-driven.

Your view of it makes much more sense to me. If they just wanted jobs they could pay people to do whatever and use the results themselves for whatever value they could find, rather than ship them to the USA for more depreciating dollars.

So my question is, assuming the other side is mostly wrong, why have these people gotten away with presenting it so often for so long? I've never seen a rebuttal of it on any blog where it came up, except my own. And I've never seen any supporting evidence either. Why would that be?

Alternatively, maybe they're somehow right?

posted by: J Thomas on 11.04.04 at 02:53 PM [permalink]

I'm no expert on the Chinese economy, but from what I gather it it has such vast domestic potential that it is not nearly as dependent on exports in general, and exports to us in particular, as other developing countries. india too, for similar reasons of scale. I'm sure one could find figures to track this, in both absolute and relative terms, but I don't have to hand at the moment...

posted by: lamont cranston on 11.04.04 at 02:53 PM [permalink]

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