Toward a Progressive View on Outsourcing

22 Marzo 2004

  John Cavanagh

Toward a Progressive View on Outsourcing
Sarah Anderson & John Cavanagh

The Nation, 22 March 2004

"Don't worry; they'll get better jobs in the service sector". This used to be the mantra of free-trade supporters when confronted with the shift of auto or apparel jobs to Mexico or China. That line doesn't work anymore, since service jobs, including high-skill computer programming, financial analysis and X-ray reading, are going overseas as well.

Global outsourcing of service jobs is one of the most disturbing manifestations of the US government's corporate-friendly approach to globalization and requires a fundamental reorientation of policy that will aid workers at home and abroad.

Democrats have rightly seized on the issue. They are touting an array of anti-outsourcing proposals, mostly focusing on national measures, such as elimination of taxpayer subsidies. For example, John Kerry advocates banning foreign outsourcing of state and federal government contract work and would also eliminate tax breaks for firms that outsource, while giving tax credits to those that do not. Other US policies that encourage overseas investment could also be targeted. For example:

  • The relatively weak requirements for US firms, compared with European counterparts, to pay severance or negotiate with unions over plans to move jobs overseas.
  • Overseas Private Investment Corporation insurance for corporations investing abroad.
  • Treaties that protect US investors against host-government actions-including public interest laws-that diminish profits.

Changes in these and other areas could help chip away at the incentive to outsource. However, such domestic remedies do not address the main driving force: the extreme gap in wage levels. For example, the average wage gap between the United States and India, the top outsourcing destination in the developing world, is more than 12:1 for telephone operators and about 9:1 for medical transcribers, according to a University of California, Berkeley, study. The next biggest developing-country draw for service work is China (which has rock-bottom wages but lacks India's English-speaking advantage), followed by Mexico, where the wage ratio with the United States is about 8:1.

Overall, global pay gaps result in cost savings for outsourcers of at least 45-55 percent (after accounting for higher infrastructure and other costs), according to the management consulting firm McKinsey and Company. If this is true, figures in the Berkeley study suggest, companies could save around $300 billion a year if they outsourced all of the estimated 14 million US service jobs considered vulnerable to being shipped overseas. Given these vast potential savings, it will be difficult to reduce outsourcing incentives substantially-unless the pay gaps are narrowed.

Of course, this is no easy task. Economists often claim that productivity growth is the key to boosting wages, but this has not been the experience of many developing-country workers. The key impediments to rising pay appear to be rampant unemployment, labor repression and increased employer power to play workers off against one another in a globalized economy. While national governments are not without responsibility for these problems, international financial institutions and trade agreements have also played a role.

For example, the Chinese government estimates that reforms required by the World Trade Organization will destroy the livelihoods of 20 million farmers. Mexico has lost 1.3 million agricultural jobs under the North American Free Trade Agreement, according to the Carnegie Endowment for International Peace. Urban workers have also been squeezed, as governments, cheered on by the World Bank, have shed workers through privatization. Nearly 26 million Chinese public-sector employees lost their jobs between 1998 and 2002. Rather than foster domestic demand for locally produced food, goods and services, these policies insure an almost bottomless pool of cheap labor.

In this context, it is understandable that workers in these countries line up in droves to apply for positions with US firms. But this doesn't mean these jobs will deliver a better tomorrow. The export jobs on the Mexican border and in southeast China are often dangerous and pay below a living wage. Chinese workers' efforts to win improvements are stymied by an official ban on basic union rights, while in Mexico repression of independent unions in the export factories is unofficial but nearly as effective.

In India, jobs in the international service industry, especially those that are more highly skilled, tend to pay well by national standards. However, labor unions have not gained a foothold in these firms either, and there is a nagging fear that these jobs will evaporate as soon as better deals can be found in the Philippines or elsewhere. Mexico offers a haunting lesson, as the country has hemorrhaged several hundred thousand export jobs in the past few years, many of them to China.

In addition to promoting changes in global trade and finance policies, the US government could learn from the European Union's experience in using targeted aid and common labor and social standards to lift up poorer countries in that region. Living standards in Portugal and other poorer European countries have risen so much that the EU has been able to lift barriers to free-labor movement among member states. They have committed to doing the same for new Eastern European entrants.

The goal should not be to completely eliminate the far greater gaps between the United States and countries, like China and India, that are magnets for American jobs. The point is that the US government should begin to adopt a long-range view and recognize that it is in our self-interest to respond to the outsourcing scare with an approach that goes beyond domestic measures to tackle the global policies that are widening the economic divide. It should offer mechanisms for transferring resources to poorer countries, through debt reduction where appropriate, or aid that benefits the poorest instead of the Halliburtons. And the United States should be a leader in collaborating with other rich nations to expand debt reduction and effective aid programs. Finally, the new approach should include supports for internationally recognized labor rights as well as punishments for corporations that violate them.

Narrowing the global pay gap cannot be accomplished in the course of one or even two presidential terms. But if we do not begin the struggle, the pivotal battle for long-term economic health will certainly be lost.

Copyright 2004 Tne Nation


Sobre los autores

John Cavanagh

John Cavanagh es director del Institute for Policy Studies (IPS) de Washington desde 1998 y uno de los investigadores que fundaron el TNI. Ha trabajado como economista internacional para la Conferencia de las Naciones Unidas sobre Comercio y Desarrollo (UNCTAD, 1978-1981) y la Organización Mundial de la Salud (OMS, 1981-1982).

Es co-autor de diez libros y de numerosos artículos sobre la economía global, entre los que cabría destacar: Development Redefined: How the Market Met Its Match (2008, Paradigm Publishers), escrito junto con Robin Broad.John como tesis de licenciatura de Dartmouth College y tesis de máster de la Universidad de Princeton.