Outsourcing and Its Impact on
National vs. Global Economy
Willie James Fitzpatrick III
Michael Aldo Armella
FIU – EGN 1033
Technology Humans and Society
Shifting jobs to lower-wage countries—a form of what is known as outsourcing—
is an increasingly popular practice among U.S. businesses seeking to cut operating costs.
For some, outsourcing is about opening up free trade between countries – increasing
globalization helps to create opportunities for nations and benefits workers in both rich
and poor countries. For others, outsourcing is yet another way for the rich to line their
pockets at the expense of the poor – a non-sustainable system that excludes developing
nations. Whichever opinion, there is much history for globalized trade. Back in the early
years of US History, the making of America's covered wagon covers and ships' sails was
a job outsourced to workers in Scotland, with raw material imported from India.
England's textile industry became so efficient in the 1830s that eventually Indian
manufacturers couldn't compete, and that work was outsourced to England.
More recently, in the US in the 1970s, it was common for computer companies to
export their payrolls to outside service providers for processing. This continued into the
1980s, where accounting services, payroll, billing, and word processing all became
outsourced work. But most of this work was outsourced to service providers only as far
away as another state, not overseas, and the reasons for outsourcing had more to do with
small efficiencies than reshaping the economy. It wasn't until the late 1980s that
outsourcing began to emerge as a potentially powerful force in transforming global
economies. Meanwhile, in technology circles the focus on outsourcing turned from its
efficiency to its economy and productivity.
The current trend of outsourcing makes it a big business, generating global
revenues of $298.5 billion in 2003, according to Gartner Inc. Many now associate
outsourcing with call centers in India. However, Forrester Research estimates that by
2015, as many as 3.3 million US jobs and $136 billion in wages will move not only to
India, but also to China, Russia, Pakistan, and Vietnam. Europe has taken a central role
in outsourcing as well, and is soon expected to reach nearly 25 percent of total global
outsource spending. Carlos Watson, political analyst for CNN, observes that
globalization affects where businesses set up shop. He notes that while media attention
has focused on the corporate exodus to India, "three to four times [as] many jobs have
moved to China in the last 15 years." The difference may be in the kinds of jobs – the
majority of jobs outsourced to China are in manufacturing. Chinese goods are cheaper
for American companies to buy because of currency rate differences – the US had a $120
billion trade deficit with China in 2003, and it is expected to be even higher in 2004.
Some 70 percent of the U.S. economy is not vulnerable to outsourcing because it
is composed of services such as retail, restaurants and hotels, health care and other
services that necessarily take place locally, according to a McKinsey analysis that
examined the economic impact of offshore outsourcing. Among those workers who are
vulnerable to trade-related displacement, however, not all end up with new or improved
work. Between 1979 and 1999, the Bureau of Labor Statistics found that 31 percent of
workers displaced by trade—mostly in the manufacturing industries—were not fully reemployed. Only 36 percent of workers soon found jobs that matched or increased their
wages. Twenty-five percent saw pay cuts of 30 percent or more. “These concerns are
real and need to be addressed,” says Diana Farrell, the director of the McKinsey Global
Institute. But she argues that rather than trying to stop “offshoring”—a practice that she
argues increases wealth in the U.S. economy—“leaders should focus on its distribution
and help workers who are disproportionately hit.”
Economists say that these job losses are relatively small. The United States
employs some 130 million non-farm workers, according to the U.S. Department of Labor.
Over the past 10 years, even factoring in the recent economic downturn, the U.S.
economy created an average of 3.5 million new private-sector jobs a year, according to a
McKinsey analysis. On the other hand some analysts argue that, in the longer term, the
latest wave of outsourcing will lead to a significant shift in the kinds of U.S. jobs, even as
the total number of jobs continues to increase. Just as the loss of U.S. manufacturing jobs
to overseas markets has caused layoffs and difficulties for millions of American workers,
so will this latest round of outsourcing cause thousands of white-collar service employees
to lose their jobs and seek new ones.
Outsourcing is clearly not just about payrolls and call centers. Take a look in
your medicine chest. It could be that the research and development of your daily dose of
medication was outsourced to Indian chemists who were originally schooled in the US.
Your insurance company which covered the cost of your medication also outsources -shifting the processing of your claim forms to a Pakistani transcription mill. And your
neighborhood medical clinic outsources the administration of your confidential medical
records to Russia.
Many economists argue that outsourcing is just another form of free trade, which
increases wealth in the economy. They say that employing workers at lower cost allows
U.S. companies to be more efficient and productive, permitting them to create the same
amount of goods with fewer resources. In turn, this lowers the price of the goods in the
United States, strengthening U.S. companies and freeing workers for other tasks. The
savings allows U.S. companies to stay afloat and expand in a highly competitive global
market, says Jagdish N. Bhagwati, the André Meyer senior fellow in international
economics at the Council on Foreign Relations and the author of the recently published
“In Defense of Globalization.” “Outsourcing is not destroying American jobs. These jobs
are going anyway, because otherwise the goods would be too expensive to produce” and
the companies that make them would no longer be competitive, he says.
Other than the economists how does globalization affect the public's perception of
job insecurity and how it should be resolved? At first glance it would seem that
outsourcing has the potential to make jobs at home less secure, and so global trade
organizations ought to be responsible for resolving employment problems where and
when they occur. However, a 2002 overseas study reveals a slightly less global focus on
perceptions of how to frame and resolve job insecurity. According to this study, the
European and Asian public indicated that they preferred national solutions to
unemployment, and global solutions to other kinds of problems, such as the environment
and human rights. In the same study, it was shown that an individual's attitude about
outsourcing was decided less upon status of employment than by political values and
other values-driven criteria. But there are many studies, and the results more often
conflict than agree. In North and Central America, a different kind of study shows that
globalization is impacting workers negatively, and will soon have the potential to move
many. This study concludes that US Latinos are realizing ill effects on their job security,
health, and environment in the wake of the North American Free Trade Agreement
(NAFTA). And the responsibility for the damage rests on governments who crafted
outsourcing trade agreements that were biased towards "big corporations, not workers,"
said Jaime Martinez, president of the Texas Labor Council for Latin American
Advancement, at an August 2004 press conference regarding NAFTA. Since NAFTA
was signed ten years ago, workers' wages in the US, Mexico and Canada have decreased,
the US/Mexico border manufacturing sector has lost more than 2 million jobs, and many
US apparel plants have closed down, causing a displacement of workers on both sides.
Further displacement is predicted if a new agreement, CAFTA (opening up Central
America to free trade) is signed. Meanwhile, China has begun wooing plants away from
Mexico.
With the U.S. economy still in recovery from a recession, many people argue that
now is not the time to be sending jobs overseas. In addition, the kinds of jobs that are
vulnerable to offshore outsourcing—also known as “offshoring”—have increased
dramatically over the past five years. Advances in technology and low-cost
telecommunications now mean that a computer programmer, data entry specialist, or
help-desk operator answering calls for a U.S. company can work as easily from India or
the Philippines as from Iowa—and save parent companies some 30 percent to 70 percent
in costs, analysts say. This has led to considerable anxiety in some segments of the U.S.
workforce that feel vulnerable to competition from well-educated workers abroad willing
to work for, in some cases, one-tenth of the wages paid to Americans. Which leads too
question what future advancement can we expect for outsourcing?
Innovations in outsourcing have yet to be exhausted and outsourcing can boost
developing world economies. But the world is a finite space with limited natural
resources, including human resources. Ironically, it is humankind’s ability to innovate
that may account for the eventual demise of outsourcing, as we mechanize more and
more work – technology is changing manufacturing and retail jobs dramatically. Hands-
on work is being outsourced now, but new innovations may eventually make the
workplace as we currently understand it obsolete. “We may one day be able to punch out
and go home, forever.”
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