Don't Be Afraid of Offshoring

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China needs all the multinational-savvy graduates it can muster to satisfy its own growing domestic demand, let alone fuel the growing offshore sector. And India's domestic economy is still largely shielded from global competition, so few older graduates or middle managers have the international experience to switch to multinationals.

India has more experienced managers than China, but they are also more in demand because offshoring has grown so fast: Over the past decade, the number of middle managers it employs has expanded by more than 20% a year on average, and even more briskly in some cities.

MORE EACH YEAR.

New entrants often lure qualified managers from existing businesses, and sometimes poach across borders. Rapidly rising salaries in key offshore locations are evidence of middle managers' scarcity in India. Annual wages for project managers in India's export-oriented IT sector, for instance, have increased, on average, by 23% a year over the four years to 2005, while the salaries of programmers have risen by 13% a year.

Look closely at the dynamics of supply in China's and India's markets for graduate talent, and it soon becomes clear that the coming squeeze by no means spells doom for their offshoring sectors. To start with, both have huge surpluses of graduates in other disciplines suitable for employment at multinationals: India has around 370,000 quantitative analysts, almost as many as the United States.

China has around 200,000 young finance and accounting professionals. And they're turning out more and more suitable graduates every year. For instance, the number of qualified engineers in the United States is growing by 2% a year, compared with 6% a year in both China and India.

BENEFITS FOR ALL.

Their talent pools could fill much faster if policymakers were to concentrate on improving the quality rather than the quantity of graduates. China should invest more in raising standards in schools outside of Beijing and Shanghai, and to improve English-language instruction throughout the country.

India, on the other hand, needs more graduates with degrees that employers want, like engineering, rather than generalist degrees. Both countries can also call on the skills of former countrymen living around the world with their rich reserves of management talent. None of this should alarm white-collar workers in developed economies. Our study of the emerging global labor market found that only 11% of all service jobs could, in theory, be performed remotely, and that companies plan to offshore only 1.2% of service jobs now performed in high wage countries by 2008.

Though these are significant numbers, offshoring is a relatively small phenomenon in the scheme of total employment in any occupation, likely to have limited impact on average employment and wages in mature economies. Of course, this is of little comfort to those white-collar workers who do lose their jobs. But if companies and policymakers in developed countries help them retrain and find new work, the benefits of offshoring could be shared by all.

Diana Farrell is the director of the McKinsey Global Institute, McKinsey & Co.'s economics think tank.