Outsourcing: Myths And Realities

In the words of Daniel Drezner, a University of Chicago professor: “Believing that offshore outsourcing causes unemployment is the economic equivalent of believing that the sun revolves around the earth; intuitively compelling, but clearly wrong.” That statement on its own should be powerful enough to debunk the myths that surround off-shoring / outsourcing. But, policy makers wanting to garner votes, the unemployed or those who lost their jobs to the trend will lay the blame for a failing, stagnant economy, rising unemployment, anaemic job growth and worse at the door of the capitalistic trend of off-shoring / outsourcing. Before sending it to perdition, it is important to examine the facts of sound economics in order to kill the myths that won’t let common sense prevail.

2.Myth 1 = American / European Jobs are being Exported

Fact: Absolutely erroneous, the fact is a greater number of Americans / Europeans are in more gainful employment than ever before. Off-shoring / outsourcing may result in a few lost jobs, but it is barely 0.6% of the unemployment figures. With a projected US workforce of 165.3-million by 2012 and 3.3-million jobs off-shored/ outsourced that is less than 2% of American jobs that might go overseas.

In the past 3-years, roughly 100,000 to 170,000 jobs found themselves to be off-shored / outsourced. Despite an expected increase to 200,000, the figure represents just 1% of the estimated 15-million jobs that are lost in the USA in a typical year. These jobs are not lost due to off-shoring / outsourcing, but as a result of changes in business and economic sectors.

Every economic study carried out repeatedly proves that a minute fraction of lay-offs or job losses are to be laid at the door of off-shoring / outsourcing. Study results show real earnings are up, unemployment numbers are down, jobless numbers are 10% below the 25-year average, and 2.2-million more Americans are employed now than before the recession. Never before in the history of North America have 138.6-million of the population been so very gainfully employed.

3.Myth 2 = A One Way Flow of American Jobs going Overseas

Fact: While some jobs get transferred overseas, global trade has been responsible for generating millions of high-end jobs for Americans as off-shoring / outsourcing foreign firms source work from the States. Up 31% from 1991, more than 6.4-million Americans work for firms that have set up off-shoring / outsourcing offices in the States. A proven fact as from 1997 to 2001 in-sourcing outpaced outsourcing by 68% as US citizens employed by non-US firms increased by 4.7-million, while non-Americans working for US-firm affiliates rose to 2.8-million.

America racked up a service trade surplus of $60-billion by 2003, while the trade surplus in IT services has grown each year since 1996. The increasing economic activity that followed off-shoring / outsourcing of IT functions created 90,000 new jobs in 2003, a number that is expected to rise to 317,000 by 2008.

4.Myth 3 = Free Trade, Free Labour, Free Capital are harming US economy

Fact: It is a myth that economic freedom will result in a curtailment of benefits and lower wages for American workers if they are to compete with the low cost labour in other countries. The truth is that greater economic freedom is essential for growth of the economy, for new jobs to be created, and higher standards of living. Rather than protecting our markets, we should invite more trade in as the economy will suffer from too little trade rather than too much.

From 2000 to 2003, while manufacturing employment fell by 2.8-million, manufactured goods imports rose only by a miniscule 0.6%. Ironically, the current debate about the trend of off-shoring / outsourcing of white collar services revolves around an issue where US has a $60-billion trade surplus compared to the rest of the world. According to a Morgan Stanley report, a strong US dollar and lack of growth / demand in our trade partners were the two factors responsible for reduced export growth in the States, not off-shoring / outsourcing. Cheap imports, e.g. IT equipment, computers, machinery, etc. have led to an increase in productivity, thereby adding $230-billion to the American economy between 1995 to 2002 and continue to do so.

Embracing economic freedom i.e. free trade, free labour and free capital fuels a stronger economic growth than if we indulge in protectionist measures such as policy restrictions and regulatory hurdles.

5.Myth 4 = Cost Reduction the only Reason US firms Outsource Globally

Fact: Cost reduction is part of the equation but not the whole equation, off-shoring / outsourcing results in greater efficiency, which is why firms are happy to follow the trend. A global workforce allows them to access growing markets and offer better services to non-US customers, enable 24 x 7 and streamline global operations, while accessing the best and brightest of global talent.

Further, efficiency in company functioning lowers the burden on taxpayers, as private companies that off-shore / outsource are able to provide better services at lower costs than the government. Sourcing a component externally from the end producer leaves a business free to focus on resources, their best use and the producing and selling of products or services.

Case in point, for semi-conductor companies that manufacture, wages represent less than 3% of the total production cost. Confronted by fierce global competition, they often invest where host nations offer considerable financial incentives, innovative capacity and ability to protect intellectual property.

The are visible in the form of lower prices, a higher standard of living e.g. computers and televisions that cost a fraction of what they did in 1980, thanks to a relentless process of efficiency-driven change. Off-shoring / outsourcing to foreign shores may be taking place, but Americans are gaining from lower.