Giving Thanks for Offshoring


By Christopher Farrell Ah, Thanksgiving. It's a day for giving thanks for family, friends, and food. It's also a good time to reflect on 2004 and think about what we're grateful for when it comes to the economy. (This is BusinessWeek Online, after all.) Record homeownership is on my list. So is an improving job market. Others: Corporate America's durable productivity gains, or New York State Attorney General Elliot Spitzer and his crusade against malfeasance in the financial-services industry.

Still, my No. 1 spot is reserved for the offshoring of skilled-service jobs by American corporations. Yes, you read that right. Americans should be deeply thankful for the emerging trend of American (and European) companies outsourcing software development and other skilled tasks to India, Ireland, the Philippines, and other developing-world havens.

FORCES OF HISTORY.Nothing I have written about over the past year generated as many angry e-mails as my comments defending the free trade of offshoring despite a weak U.S. job market. And nothing that I say now can comfort the millions and millions of Americans looking for work and a paycheck, pounding the pavement, sending out résumés, and scouring the help-wanted ads online. Yet before sending a searing e-mail condemning me to all kinds of damnations, consider the following: Offshoring is a wake-up call to America.

Companies may have gone to India to save money on back-office operations, such as payroll, order fulfillment, and customer service. But they're continuing to do business with Indian high-tech companies because of the quality of the work being done. So, those jobs aren't coming back, and that means we have to create new ones here.

Offshoring is a result of three simultaneous and independent events at this juncture in economic history. First, education levels are rising throughout the developing world -- the payoff from decades of investment. Second, many developing nations have been liberalizing their economies, especially after the collapse of communism toward the end of the 1980s. Last is the information-technology revolution, which made it possible to link developed nations' companies with developing nations' workers -- and do it cheaply.

WANTED: CREATIVE IMPULSE.In general, rising economic prospects in much of the developing world is good, a force for expanding opportunities and eliminating poverty. But the competition for investment money and corporate profits in the global economy is now growing faster than many economists thought possible even a few years ago. To be sure, the rapid integration into the developed-world labor market of some billion workers in China and India is opening up new opportunities to sell cars, washing machines, software, and many other commonplace goods made by American multinationals.

Still, workers overseas will only spend a portion of their low-income earnings on U.S. products. And Americans will continue to lose jobs because of cheap skilled labor overseas. The upheaval is causing havoc all over the U.S., from skilled U.S. programmers in Silicon Valley to textile workers in the American South.

So why cheer offshoring? The main reason is that the offshoring challenge focuses attention on what spurs job creation: The formation of new markets and the meeting of new wants. Joseph Schumpeter, the great economist of entrepreneurship and innovation, captured the dynamic in his magisterial 1942 book, Capitalism, Socialism, and Democracy: "The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates."

SOME CHILDREN LEFT BEHIND? Amar Bhide, professor of business at Columbia University and author of The Origin and Evolution of New Businesses, more recently expressed the same idea: "The long-run prosperity of the West depends on the capacity of its entrepreneurial individuals and firms to create and satisfy new consumer wants."

That means the major institutions of society -- government, education, and business -- need to focus a lot more money and effort on educating the American workforce. For instance, the Bush Administration took a step in the right direction with its No Child Left Behind legislation. But now the Administration needs to back the legislation with enough money -- lots of it. The same goes for fundamental research at America's major universities and institutes.

Sadly, in the name of budget rectitude, many in Congress would like to keep spending increases at the National Institutes of Health at the rate of inflation and even cut federal support for education. To be sure, the mammoth federal budget deficit makes if hard to call for more investment. Yet, there are many places where spending could be cut to allow for greater investment in human capital. How about cutting back on lush farm subsidies, for starters?

CUT THE RED TAPE. However, it will take time for substantially higher investments in education from the preschool years through university to pay off. In the meantime, America should keep the welcome mat out for educated, skilled immigrants. The American economy is a major beneficiary of the entrepreneurship diaspora that has grown up between Silicon Valley and India, and between and Silicon Valley and Asia.

But in the post 9/11 world, it's getting harder and harder for skilled Chinese and Indian professionals to come here to work and study. While the current bias toward saying no is understandable, the economic price is too high. The Administration could devote more management talent and political capital in getting rid of bureaucratic obstacles that are denying entry to skilled foreign workers.

The way economists look at the world, the efficiency gains of offshoring free up resources in the U.S. The key question is what do we do with those resources. The offshoring challenge says invest in human capital and open borders. That's how we'll generate the good middle-class jobs of the future -- and give more people something to be thankful for. Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Sound Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online


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