Outsourcing Once Again

Trade Diversion writes:

Trade Diversion: Globalization & Disaggregation: The Economic Council of Finland published a number of papers on globalization last week. Here's the summary of the lead article by Richard Baldwin:

Three eminent economists from Princeton University have recently argued that globalisation has entered a new phase that requires a new paradigm understand. This paper examines what is new in the new paradigm and considers the policy implications for Europe. Roughly speaking new-paradigm globalisation differs from the old in that it is occurring at a much finer level of disaggregation. Due to radical reductions in international communication and coordination costs, EU firms can offshore many tasks that were previously considered non-traded.

This means that international competition -- which used to be primarily between firms and sectors in different nations -- now occurs between individual workers performing similar tasks in different nations. The really new feature is that deeper new-paradigm globalisation will seem quite unpredictable from the perspective of firms and sectors. Since individual tasks can be offshored, globalisation may help some workers in a given firm while harming others. Moreover, old-globalisation's correlation between skill groups and winners and losers breaks down. Certain highly skilled tasks may turn out to be offshore-able, while other highly skilled tasks are not. Increased offshoring will therefore not systematically help or hurt skilled workers in the EU. In particular, many %"Information Society" jobs are prone to offshoring so EU policies aimed at moving workers into Information Society jobs may be wasted since those jobs are only "good jobs" because they do not yet face direct international competition.

The paper argues that this has important implications for the EU's competitiveness strategy, education strategy, welfare states, and industrial policy. The underlying theme is that the increased unpredictability should make EU leaders more cautious about moving workers or skills in a particular direction. Flexibility is, as always, the key to allowing Europe to seize the opportunities of globalisation while minimizing the adjustment costs.

The three economists at Princeton cited by Baldwin are Gene Grossman, Esteban Rossi-Hansberg, and Alan Blinder. The two Grossman and Rossi-Hansberg papers on offshoring are available at Grossman's website. Blinder's article is his March Foreign Affairs article, with which most readers of this blog are probably familiar.

Comments

[anon]

People in low-wage states such as India and China are just as intelligent as people in the developed world. The only difference is that they cost less to hire. There are no economic reasons for any knowledge-based jobs (i.e. anything that doesn't require physical work on-site) to remain in the global north. The south has an absolute advantage due to its low wage rates.

There are not enough on-site, non-exportable, jobs to keep the northern workforce employed at anywhere near even current levels, much less those seen during the golden age of Fordist capitalism. There are simply not enough non-exportable economic niches to keep the north employed. We can't all be retail slaves, construction workers, nurses, emergency workers, politicians or business leaders--and pretty much _everything_ else can be outsourced.

There is not enough demand for products and services to consume the surplus labor pools in China and India to the drive up wages to the extent that hiring northerners becomes economic.

Imposing protectionism on the transfer of knowledge is damn near impossible. Just ask the RIAA.

Put all this together, and a _massive_ decline in northern standards of living appears inevitable as global living standards average out to somewhere between those of Mumbai and Oslo.

Better get used to the idea of living in a one room shack and calling it luxury.

[DILBERT DOGBERT]

Maybe our nitch will be providing for the newly rich in the developing world a safe place to park their persons, wealth and children. Doesn't sound like mass employment to me.
The world is not predictable to the point of knowing what will transpire in a couple of years. What looks like a convergence of wealth between the 1st and 3rd world just may not happen just as things did not turn out as predicted in 1900. I hope for convergence instead of a repeat of ww1 and ww2, the cold war, korea, viet nam and Iraq.

[Jon Fernquest]

"...new-paradigm globalisation...is occurring at a much finer level of disaggregation...firms can offshore many tasks that were previously considered non-traded....This means that international competition ... now occurs between individual workers performing similar tasks in different nations...Since individual tasks can be offshored, globalisation may help some workers in a given firm while harming others."

Thanks for the article references.

This sort of disintermediation has been happening for a long time.

Anyone who has worked for a small consulting firm knows what this entails. It favors those with work hours billable to the client or who are closing sales, it harms those sitting on the flat firm-supported portion of their monthly compensation schedules.

The powerful reputable establishments, the traditional pillars of IT consulting like IBM, Price Waterhouse, Ross Perot's EDS will be reduced to even more of a more apprentice-educational role. Ross Perot even used to send employees an education bill if they left early, so common was this. These large institutions have always served as training grounds for entrepreneurs who leave to set up their own consulting services to poach off some smaller portion of the whole.

With open source and scripting languages like PERL (the Swiss Army Knife of programming languages) some kinds of projects, like data conversion for instance, can be done by anyone with some basic knowledge rather quickly, these projects are reduced to the couple of hours that they always should have been. Gone are the days when Price and Waterhouse gets a over-priced contract to do relatively simple data conversion work just because business IT is inherently conservative.

There's still the sales function though, sales and tech skills don't always go hand in hand, can you disintermediate the intermediator too and there's also just plain bureaucratic inertia and lack of imagination, for instance I wanted to teach data conversion with Perl at the Thai university I worked at, but the bureaucrats were perverse rent-seeking $$&%!!s, as an assistant manager at the country's leading English language daily newspaper, I later had the joy of reading an article done by one of our IT reporters on exactly this developing business niche, never underrate human intransigence and propensity to prevent other people from innovating and succeeding, often with their own advancement in mind, the French even have a word for it, "arriviste", POWER TO THE LITTLE GUY! particularly the poor and powerless ones!

[Jon Fernquest]

Sorry for above emotional outburst, but the paper by Baldwin paper (p. 41) has a wonderful example of how adjustment to this almost innevitable eventual outsourcing shock to western economies is likely to happen, inevitable in the sense of how is anyone going to block, monitor, or tax work sent over an internet connection. I know people who have supported themselves very well doing computer work from one country x in another country y that technically violated country y's employment laws and would have made anti-outsourcing advocates in country x angry and lobby for controls, but how would you control it?

The Baldwin example of specialized surgery by EU surgeons done on a patient in another room, actually another country, shows how powerful outsourcing could be. The adaptation to this outsourcing shock to the remote country that is receiving thje surgery is the exposure to new technology and the education this implies. The EU surgeons become essentially educators, because third country surgeons will view, record, analyse, and master how the surgery was done. They could assert intellectual property rights and bar filming or looking, but why? The EU surgeons hold the advantage that their skills are not static, they can dynamically improve them over time, lifetime continual education is a feature that is literally built into their profession, to bar filming or looking might even be considered a violation of their hippocratic oath, since this extra knowledge would require no extra cost and save lives, a model for all professions, this is the way it should be and I would argue will eventually be when bureaucratic inertia is broken with some innovative people and the internet, i.e. vision and persistence
Baldwin paper: http://www.vnk.fi/hankkeet/talousneuvosto/tyo-kokoukset/globalisaatioselvitys-9-2006/en.jsp

[wjd123]

"Roughly speaking new-paradigm globalisation differs from the old in that it is occurring at a much finer level of disaggregation."

"This means that international competition -- which used to be primarily between firms and sectors in different nations -- now occurs between individual workers performing similar tasks in different nations. The really new feature is that deeper new-paradigm globalisation will seem quite unpredictable from the perspective of firms and sectors. Since individual tasks can be offshored, globalisation may help some workers in a given firm while harming others."

A finer level of disaggregation does not constitute a new paradigm in globalisation. There is no new pattern here or new set of assumptions or values. Everything that is happening with globalisation as practiced today can be deduced from factor price equalization.

Definition of Factor Price Equalization: Factor price equalization is an effect observed in models of international trade --that the prices of inputs to ("factors of") production in different countries, like wages, are driven towards equality in the absence of barriers to trade.

http://economics.about.com/library/glossary/bldef-factor-price-equalization.htm?terms=slaughter+hanson

Today's globalisation is what you get when the economic sphere doesn't come under the sway of the moral sphere. It's the necessary evil done by Adam Smith's invisible hand.

A paradigm shift in globalisition would be international governments with the power to enforce standards to mitigate the necessary evil Smith was willing to tolerate in order to produce a greater good.

The one organization that made a paradigm shift in trade away from Smith's necessary evil was the EU's Common Market with its standards. However it is being engulfed by the necessary evil of the WTO.

[John Emerson]

I've never shared the economists' enthusiasm for creative destruction, but I guess that's my tough luck. No one has ever explained to me why I should not expect wages to race to the bottom until global full employment is reached. Under these conditions I don't see how democratic politics can survive anywhere.

These trends are supposedly objective and irresistable, and supposedly benevolent too (in the long run and on the whole, when we're all dead), but I still will never understand the monomaniac enthusiasm of the Democratic Party's globalizers. They had no doubts at all, and they gleefully ridiculed their adversaries in the party and gloated after they had defeated them.

There's a lot of fat in the American consumer lifestyle, but the adjustments will be painful, especially for those who are already resident at the thin end of the distribution.

[a]

Certain highly skilled tasks may turn out to be offshore-able, while other highly skilled tasks are not. Increased offshoring will therefore not systematically help or hurt skilled workers in the EU.

No, it will not systematically help. But hurt it will.

[a different chris]

>globalisation may help some workers in a given firm while harming others

Heh, I got a mental image of a few co-workers that I would gladly have traded for a nice Indian on the other end of the Internet who wasn't more concerned about what was and wasn't his/her responsiblities* and just worried about getting the sucker in question done.

In any case, big economic dislocations always seem to lead to war, don't they? But we seriously can't survive another world war, even a low-level slow burning one. Our environment just can't take the beating our weapon systems are now capable of, even without nukes.

Ugh.

*Those responsibilities usually so narrow that a third dimension would be unnecessary to graph them.

[juraj]

I don't see what is so complicated about what outsourcing and offshoring and globalisation do. Its not really done to source better goods or to improve people's lives, its really a new lever employers have found to force employees to accept ever DECREASING real wages (SEE http://robertfico.blogspot.com/2006/09/how-growth-in-usa-does-not-mean-growth.html ). It started in earnest around 2000. This is now affecting all jobs apart from higher management jobs. However whatever is not packaged up and sent to India, then is done by Indians on special VISAs in the US or UK.
Of course India and China benefit from this and ordinarily the living standards of the indians and chinese would rise and the offshoring would not be so attractive any more from a cost saving point of view. EXCEPT of course that China & India together represent 50% OF THE POPULATION OF THE PLANET. In other words by the time this geographic arbitrage becomes less extreme the author (i am 31) will be long dead of old age (if there are pensions and a free health system by the time i am old that is... )

I believe that we will see a great reversal in how societies look like. The small rich club followed by a large and prosperous middle class, followed by a relatively small poverty class (which in many cases consists of people with low skills education or in some cases intelligence) will change. The poverty class is supported by social safety net and minimum wages and free healthcare ensuring a decent minimum for everyone.

All this will be replaced by a crony capitalist climate resembling pre-1930es USA. Robber barons in digital businesses owning media, many more Murdochs manipulating governments. A sizeable uber rich elite, and a vast insecure and poverty stricken middle class which is not really that different than the poverty class except that it will desperately try to join the rich club without ever looking back.

I don't think we should join the US in this future... We should keep our redistributative policies, and high taxes and stable societies without the gated communities...

I might be wrong but i fear i am not...

[Economists claiming to be logicians]

Were I to invoke logic, however, logic clearly dictates that the needs of the many outweigh the needs of the few.

[Overly rational engineers that understand systems can be studied AND manipulated safely]

Because the needs of the one... outweigh the needs of the many.

[jerry]

Free trade -- Underdamped system.
Fair trade -- Critically damped system.

Economists are stupid gits -- not being able to model or measure an entire system, they pretend the system consists of only the things they do know how to model or measure -- so don't be surprised that they optimize the wrong factors.

Personally, I would like to see some prankster remove the brakes on any economists car. I would also place an spring loaded automatic door closer on any econ professor's door, but I would exchange the spring arbitrarily for one whose new k' is 10k or one whose k' is -10k, and then I would remove the hydraulic spring dampers in the mechanism.

Economists don't need brakes, and presumably would never understand why the door kept slamming into their face or pulling their arm out of their sockets.

And get rid of tenure too.

[andres]

"We are proud to have such enemies."

Brad--either accidentally or intentionally, you turned off comments for the previous post on Enemies of Economics: Thomas Carlyle. If you don't mind, I'll comment here and copy the comment to the original post when comments there are enabled again.

It is too easy to claim pride in having Carlyle as an enemy, and by implication, to say that economics is a progressive, compassionate social science. It ain't necessarily so, and such _complacency_ isn't worthy of any serious social science. Carlyle was a fossilized relic of the 16th century (the same 16th century that idealized knightly chivalry on one hand and started the mass slave trade on the other), living in the 19th. But many of his contemporaries and near-contemporaries were also deeply suspicious of both classical political economy and neoclassical economics.

Is the economics profession also proud to have Charles Dickens as an enemy? Mohandas Gandhi? Leo Tolstoy? John Ruskin? Eugene Debs?

For that matter, is it proud to have Thorstein Veblen as an enemy? Karl Marx (the writer of Capital, German Ideology, etc, _not_ the deified Divus Julius Caesar of the totalitarian communist regimes)? And again, is the economics profession proud to claim John Maynard Keynes as an enemy, given that he rejected the atomistic, optimizing conception of individual markets which all mainstream economists consciously or unconsciously accept?

With regards to Veblen, Marx, and Keynes and all their followers, it is too easy to coopt them as fellow economists, given that they reject the hypotheses which are needed to make today's economic profession have any sort of cohesion as one single social science rather than as group of different, mutually antagonistic conceptions of the same social phenomena.

As a simple thought experiment, think of all the commonly accepted schools of economics: Marxian, Sraffian, Post-Keynesian, Austrian, Neoclassical/New Classical, Neoclassical/New Keynesian, Institutionalist, Evolutionary, etc. Now ask yourself is there any broad set of propositions about human economic behavior (not political outlook; it's too easy to be against Carlyle and co.) that is shared by _all_ of these different economic theories? Lastly, if the answer is no, ask yourself--is it correct to refer to economists as "We"?

Sorry about the rant, but I tend to be allergic to anything that remotely resembles complacency in the area of social thought/analysis.

[jerry]

Sorry, last rant:

It took us roughly 5700 years to get to wear some individual laborers on the planet had some modicum of safe and humane working conditions and a clean environment.

Some of us think that was a hard fight, worth savoring, and that we are morally obligated to do what we can to bring the other laborers on the planet up to this level as quickly as reasonably possible.

The economists fight for their belief system that "quickly as reasonably profitable" is about 20-40 years, and then everyone, from Afganistan to Zanzibar including the USA will have cell-phones, clean air, 40 hour weeks, computers, OSHA, health-care, education. "Comparative advantage will lift all boats!"

Non-economists realize the majority of the planet has not made a phone call, and that 20-40 years is short to bring the planet up to our level and that what the economist advocates will turn out to be disastrous for humane working conditions, fair wage agreements, clean environments, worker safety, etc.

In the meantime, the capitalists that donate money to the schools that employ the economists stifle their "bwa-ha-ha"s on the way to the bank. Pwned!

[save_the_rustbelt]

This will make all of us more prosperous.

How do I know that?

Economists said so.

Ooops.

[an]

BLS statistics on the 10 occupations with the largest job growth through 2014:

Retail salespersons
Registered nurses
Postsecondary teachers
Customer service representatives
Janitors and cleaners, except maids and housekeeping cleaners
Waiters and waitresses
Combined food preparation and serving workers, including fast food
Home health aides
Nursing aides, orderlies, and attendants
General and operations managers

http://stats.bls.gov/news.release/ecopro.t06.htm

Note the pattern here. All except two categories require hands-on service and can't easily be outsourced. The two categories most highly paid of the top ten--postsecondary teaching and management--are the most vulnerable to outsourcing. Lose those to distance education and telepresense and there awill be *no* fast growing, well paid, professions left.

Policymakers can talk about retraining and education all they want, but education won't create well-paying jobs that don't exist. It's a simple fact of the economic pyramid: not everyone can teach university or be an upper-level manager.

Every structural indication at present is that it will be impossible to maintain even current middle class living standards, much less make up the relative decline of the middle class seen over the past few decades. I challenge any economist (note: propaganda mouthpieces need not apply) to demonstrate otherwise.

[John Emerson]

Ari, I've been asking similar questions for a year or more.

No answer is the answer. It's a race to the bottom. The only people safe are owners of patents and copyrights and certain kinds of capital which will maintain value. What those are, I don't know. And RNs and managers will do pretty well.

[JonF]

Meanwhile back in the real world there's an old adage to the effect "Buy something cheap, get something cheap."
A company I worked for tried hiring Indian consultant-programmers rather than local talent for a big project. Language barriers, the time zone difference, and the utter inability of those Indians to innovate or even research questions they had on their own proved to be a huge drag on the project, and brought an end to the offshoring experiment in a mere three weeks. I suspect other companies have had the same experience.
Behemoths like Microsoft which can actually afford to set up shop abroad and ship American managers overeas will of course be able to benefit from offshoring. But the average small-to-mid-size company will find it's far more trouble than it's worth-- and doesn't really save anything in the long run.
As for IT jobs, guess what-- the numbers of such jobs in this country, are still increasing and are expected to continue doing so, albeit not at the torrid pace of the 90s.

[raboof]

For at least five years, this hasn't been news to anyone in IT. It's just common sense.

It's nice that economists are having a road-to-Damascus moment, but it's far, far, too late.

[raboof]

And as to RNs doing well:

there's supposedly a "nursing shortage" in America, thus producing panic calls for importing (much lower paid and less argumentative, of course) foreign workers. Meanwhile current nurses still say wages are shit and working conditions worse.

[save_the_rustbelt]

And as to RNs doing well:

Actually, wages are doing better. Working conditions, specifically nurse-to-patient ratios, are ugly.

Stay out of the hospital if at all possible. Your nurse may be too busy, or she may be an import from the Philipines.

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