Tuesday, May 02, 2006

Outsourcing on the macroeconomic scale

The United States in particular, and most of the industrialized world in general, enjoys a far higher standard of living than other places like India, China, or Africa. How did we get there? Well, first, we started with incredibly rich natural resources. We used the wealth they provided as an investment, combined with hard work, to build up our advantage, by building an infrastructure: both in the usual senses of that word (transportation, communication, industry) and more pervasive ones (education, a culture that supported science and research and invention, economic forces spurring innovation and efficiencies, a social safety net, etc.).

The list of things that contributed to the growth of the industrialized economy, and the incredible standard of living it supports (compared to the rest of the world), could fill books (and has); I don't mean to present an exhaustive picture here. I just mean to point out that a key element in it is a progression of investment, where returns on early wealth are used to generate larger amounts of later wealth. The abundant natural resources were just our "thin end of the wedge".

Along the way, as our standard of living rose to remarkably high levels, we "spent" some of it on things that our forefathers would have considered impossibly luxurious, but which we now see as necessities. I don't mean DVD players here. I mean things like worker's rights, environmental protections, advanced healthcare, strong education, a social safety net, a powerful military, and all the other amenities that contribute so much to the cost of running a business in the industrialized world today.

Meanwhile, in other parts of the world, grinding poverty and glaring social inequities catch the eye, and sometimes those of us in the cushier parts of the world might feel guilty about enjoying our big-screen TVs while other people can't get penicillin. But we like to imagine there's a way they can be lifted up to our level without bringing us down. There is, sort of... but it will cost us something. A big cost in the short term, and a smaller cost in the long term. Outsourcing and immigrant labor are exactly what this transition looks like.

Why can a company in India so vastly underbid any company in the US, leading to tons of outsourcing and thousands of jobs lost? Because they don't have all those "luxuries". Their laborers will work absurdly long hours for ridiculously low pay under dangerous conditions without good medical care, and dump pollution into their rivers cheerfully. And that builds up their economy; it becomes the thin end of their wedge, this competitive advantage (combined with the fact that technology makes it possible to get into global markets competitively with small investments). But can this last?

No. Just like we did, only much more quickly, they will progress to embracing those same "luxuries", and like we did, gradually come to realize they are necessities. They will demand fair labor practices and safe workplaces. They'll see their natural resources despoiled and insist on environmental protections. They'll expect their fatter wallets will buy better healthcare, and soon costs associated with ubiquitous healthcare will rise. They'll want better education for their children, better roads to take vacations with, and a stronger military to protect the wealth they are gradually coming to have. All these costs will erode their competitive advantage, and eventually, like a wave that's crashed high on the shore, the jobs will flow back to the US and other industrialized nations, not as many as departed, but most of them. Things will "level out".

And the final result will be another nation added to the "industrialized" category, enjoying a higher standard of living, while ours has been knocked down a peg or two. The worldwide baseline of standard of living will have gone up, and the disparity between rich and poor nations will have gone down. Eventually, if this process continues, if every nation eventually finds a thin end of the wedge to get the process started with, the result will be a relatively balanced global economy. The US won't be quite as rich, nor will be quite as much richer than everyone else, but we'll all still be cushy and comfortable. Plus there'll be a reduction in the worldwide depradations of the environment -- though we'll have had to go through it getting worse to get to where it gets better, since nearly all those thin ends of wedges involve environmental depradations.

Admittedly, this scenario is very optimistic and not likely to play out quite like that. There are dozens of forces I haven't accounted for here, intentionally. War and conquest. Plagues and natural disasters. Running out of environmental resources to destroy along the way. And countless more. I don't mean this account to describe "what will be" or even "what should be" necessarily. And I also realize there are a lot of injustices in the way specific companies or people are handling shipping jobs overseas, which I'm also not trying to address.

Rather, my point is to suggest that the real cause of outsourcing is not some malevolent invasion which must be resisted. Forcing jobs to stay in the United States is no solution because the flow of jobs out is not really a problem in the long term. It's a discomfort that comes as a natural effect of losing our place as the rich kids amongst the poor, but it's one that will be self-correcting, and whose end result is reducing a global economic injustice that we happen to be on the good end of right now.

This is, of course, little or no comfort to the person who has lost his job to outsourcing. Macroscopic trends don't pay the bills. Transitions always come at some cost to someone. When the railroads died, it was no comfort to the people losing their livelihoods that new industries were springing up creating jobs; they still had wasted years learning a now-obsolete skill and had no way to put food on the table.

Fortunately, at least part of the wealth of being the richest nation on Earth has been used to make a social "safety net" (which Darth Rove hasn't completely dismantled yet) that helps make this cost less. But it's still hard, and I'm sympathetic with that. I wouldn't begrudge anyone being sour about their job moving to India, even if I don't begrudge the person who got it in India needing it too. I realize that it's easy for me to approach this question with detached, philosophical calculation; my job, after all, isn't moving anywhere.


litlfrog said...

I hope you're right. In fact, that's among my strongest hopes in the entire world. Nothing will slow disease, war, famine, and injustice quicker than widespread plenty. When people have enough, there's not so much call to try and take it from others.

I'm pessimistic about any kind of economic balance being achieved for many generations, though. What we now call the Western nations were the first to industrialize. The industrial revolutions were painful, fluid, organic, and relatively quick. Countries like India, China, the Phillippines, and the central Asian republics are in a very different position. The elites of those countries can live in all the luxury they want; the poor are at the mercy of cynical governments and untouchable multinationals. It's the multinational corporations who will most stand in the way of any improvement to the standard of living in developing countries. It's in their best interest to maintain a pool of very low-cost labor, and in a global economy they can simply go to any country in the world where the government is willing to suppress organized labor. General Electric, British Petroleum, Wal-Mart, Elsevier, etc. are far better at this than Standard Oil or Carnegie Steel ever were--and that's a frightening thought.

HawthornThistleberry said...

InfoWorld Editor's Letter, February 13: "An unnamed CTO recently told a group of InfoWorld editors that in Bangalore, developer poaching has become rampant. Companies fighting over programming talent keep leapfrogging one another’s salary offers, all to induce employees to jump ship. That practice is inflating Indian salaries and creating an increasingly transient workforce."