The dimensions of the service shift are only just beginning to come into focus. We can discern the trend but not the strength or size of the move. The collapse of the tech bubble and the weak recovery are leading a growing number of U.S. bank, insurance, credit-card, accounting, investment banking, high-tech, engineering, and design companies to outsource white-collar work.
This is likely to prove to be more than just a cyclical phenomenon. The Internet, digitization, the spread of white-collar skills abroad, and the big cost savings of outsourcing will probably make the shift of services a permanent feature of economic life. The good news is that the sloughing off of commodity-like service work will increase the profits and efficiency of American corporations and set the stage for the next big growth-generating breakthrough. Innovation is the driving force of the U.S. economy, not mass production of low-value goods or services. The painful loss of manufacturing in the '70s and '80s paved the way to the high-tech gains of the '90s. The same forces are at work today.
For their part, India, China, and other countries are gaining large numbers of well-paying jobs, expanding the middle class, and reducing poverty. As a result, China is emerging as a locomotive to world growth. American exports to China in November were up 30% year-over-year at an annual rate of $24 billion, matching what the U.S. exports to France.
Yet the global migration of services presents potential problems. Deflation is blowing out of China as manufacturing moves to low-cost producers. So far, the much larger service sector has been able to retain pricing power, but the shift of services to low-cost countries could change that. Deflation and unemployment could accelerate sharply if the U.S. economy does not re-accelerate soon.
It's a difficult time for developing countries as well. The Philippines has been exporting educated, English-speakers for decades, because it has not been able to build a working civil society with credible legal, financial, and political systems. Unless developing countries construct the institutional framework for stable growth, they may find themselves with the white-collar equivalent of maquiladoras, islands of cheap service work that do not transform their economies. India is especially vulnerable, with religious strife between Hindus and Muslims and a corrupt political system.
The U.S. must act as well. It should do what it has done in the past--move up the value-added ladder to create new products and services. That means promoting better education, completing the job of reforming the capital markets, and reducing business and investor risk at home and abroad. If it can restart its growth engine, the U.S. has nothing to fear from the great white-collar migration. If it doesn't, there may be serious trouble ahead.